Before Judges Dreier, Keefe and Wecker.
The opinion of the court was delivered by: Dreier, P.j.a.d.
 Submitted: June 2, 1998
On appeal from the Superior Court of New Jersey, Chancery Division, Morris County
Defendant Joseph N. Sasso appeals from a summary judgment striking defendant's defenses in this mortgage foreclosure proceeding. Plaintiff, Sun NLF Limited Partnership, is the assignee of the Resolution Trust Corporation (RTC), which took over the assets of Prospect Park Savings & Loan Association. Prospect Park had loaned Sasso various sums to construct Phase I of a development known as Sun Rise at Marcella. Sasso had borrowed 1.5 million dollars to finance the development, and a year and one-half later the fifteen lots constituting Phase I of the project were sold to Prospect Development Corporation (PDC), a wholly-owned subsidiary of the bank, for 2.4 million dollars. As a result of the transaction, Sasso paid his loan down to $430,000 and executed a new note and mortgage modification agreement to reflect this reduction.
Sasso then negotiated with PDC for the purchase of Phase II of the project, consisting of fourteen lots. The negotiations on the part of the bank were handled by Russell Frignoca, who was president and chairman of the board of both the bank and PDC. This agreement, executed in September 1989, was signed by Frignoca and required PDC to purchase Phase II of the development for 1.8 million dollars, with the closing to be held after the final subdivision approval. The letter agreement was approved by the PDC board of directors and was maintained as an official record. Furthermore, the bank allegedly was aware of the letter and also maintained the information concerning the promised buy-out in its official files.
In reliance on the agreement, Sasso borrowed an additional $170,000 to complete the site work, and a new note and mortgage modification agreement was executed increasing the principal balance to $600,000 and extending the maturity date of the note. Defendant reduced the principal to $540,000 in October 1990, and again, a new note and a new modification agreement was executed. Neither modification referred to the September 1989 contract between defendant and PDC.
When the site approvals were completed, defendant demanded that the bank close on Phase II, but Frignoca would not respond to defendant's request. A few months later the bank went into receivership and was taken over by the RTC, which later assigned this note and mortgage together with many others to plaintiff.
Defendant concedes the validity of the note and mortgage. The balance due on the note is now $688,229.80, plus interest from November 30, 1996, and counsel fees. Defendant attempted to raise the agreement by the bank's subsidiary as a defense to this foreclosure, but the defense was stricken as non-germane, and as barred by federal and state law. Because defendant raised sufficient material factual issues with respect to plaintiff's claim that federal law bars the counterclaims, we reverse and remand for a hearing on those issues.
The motion Judge held that defendant's counterclaims and defenses were barred by state law because (1) plaintiff was a holder in due course, and (2) the claims and defenses were not properly assertable in a foreclosure action. Defendant contends that plaintiff cannot be a holder in due course under state law because the note and mortgage were overdue when plaintiff acquired them, and plaintiff had actual or constructive notice of defendant's defenses and counterclaims.
Plaintiff now concedes that it is not a holder in due course under state law ("It was clearly incorrect for the chancery court to base its decision upon state law"). Plaintiff's concession is appropriate. To be a holder in due course, the holder must take the instrument for value, in good faith, without notice that the instrument is overdue or has been dishonored or that there is an uncured default with respect to payment of another instrument issued as part of the same series, without notice that the instrument contains an unauthorized signature or has been altered, without notice of any claim to the instrument as described in [N.J.S.A.] 12A:3-306, and without notice that any party has a defense or claim in recoupment described in subsection a. of [N.J.S.A.] 12A:3-305.
In this case, the face of the instrument disclosed that it was overdue when plaintiff acquired it; the latest note was due on December 31, 1992, prior to plaintiff's acquisition of the note in August 1993. Plaintiff's contention that it is a ...