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Mortgage Electronic Registration Systems, Inc. v. Omar


May 15, 2008


On appeal from the Superior Court of New Jersey, Chancery Division, Hudson County, F-123-05.

Per curiam.


Argued April 22, 2008

Before Judges Skillman, Winkelstein and LeWinn.

In this mortgage foreclosure proceeding, plaintiff Mortgage Electronic Registration Systems (MERS) challenges the trial court's order discharging its mortgage (the MERS mortgage), which had been a first lien against real property in Bayonne owned by defendant Magdy Omar. The discharge elevated the mortgage held by FGC Commercial Finance d/b/a Fremont Mortgage (the Fremont mortgage) to a first lien position. We affirm.

A bench trial revealed the following facts. On January 6, 2003, Omar closed on a loan (2003 loan) originated by Metro Center Mortgage, Inc., in the principal amount of $294,500. That loan was secured by a mortgage on real property owned by Omar known as 25 West 10th Street in Bayonne. The mortgage was recorded on July 15, 2003. MERS, nominee for the mortgagee, subsequently assigned the mortgage to JP Morgan, which retained Homecomings Financial Network, Inc. as its servicer.*fn1

The mortgage included the following provision regarding payment: "Payments are deemed received by Lender when received at the location designated in the Note or at such other location as may be designated by Lender in accordance with the notice provisions in Section 15." The note gave the borrower the right to prepay the loan without penalty. It included the following language:

I have the right to make payments of Principal at any time before they are due. . . .

I may make a full Prepayment or partial Prepayments without paying any Prepayment charge. The Note Holder will use my Prepayments to reduce the amount of Principal that I owe under this Note. . . .

Omar defaulted on the 2003 loan soon after it closed. Consequently, on April 21, 2004, purportedly to refinance the MERS mortgage, Omar obtained a loan in the principal amount of $350,000 from Fremont (2004 loan), secured by the same property as the MERS mortgage. The Fremont mortgage was recorded on June 17, 2004. Omar did not, however, use the 2004 loan proceeds to pay off the 2003 loan. Instead, he fraudulently converted the loan proceeds to his own use. The issue to be resolved at trial was which entity, Homecomings, on behalf of MERS, or Yorktown Title, which was retained by Fremont to close the 2004 loan, was responsible for inadvertently sending the 2004 loan proceeds to Omar.

Homecomings generated a payoff statement for the 2003 loan as of the date of the 2004 loan closing. The total outstanding balance due on the 2003 loan was $298,219.57, with $79.95 per diem interest accruing. The payoff statement directed that the payoff check was to be made payable to "Homecomings Financial," and sent to Homecomings's payoff center in Richardson, Texas.

Yorktown closed the 2004 loan on April 21, 2004. Following the closing, Yorktown's title agent, Sabrina Durham, sent Homecomings a payoff check dated April 28, 2004, in the amount of $298,219.57, made payable to "Homecomings Funding," along with a cover letter dated "October 29, 2002." The check did not account for the $79.95 per diem interest that would accrue between the loan closing and when the loan proceeds were received by Homecomings. The cover letter, which Durham inadvertently drafted on letterhead of "All Jersey Title Agency, Inc.," stated that if the funds were insufficient to "completely pay off the entire [MERS] mortgage," Homecomings should accept the check as a partial payment and immediately contact Yorktown. Durham testified that the date of the cover letter was an error, and that the letterhead was from a former title company for whom she had been employed.

According to Federal Express (FedEx) tracking, on April 28, 2004, the letter and check were delivered to Homecomings's payoff center. Homecomings's internal records, dated April 29, 2004, verified that the check had been received, but was short in the amount of $559.65, representing per diem interest that had accrued since the 2004 loan closing. Consequently, on April 29, 2004, Nancy Marks, a Homecomings employee, electronically signed a letter which, along with the payoff check and a payoff statement, were apparently sent to Omar, at 25 West 10th Street in Bayonne. The letter stated that Homecomings was returning the check to Omar because it was not sufficient to satisfy the balance due.

Nevertheless, although the letter was purportedly sent to Omar, Mary Jacob, another Homecomings employee, testified that the letter would have been sent to the party who had sent Homecomings the funds, in this case, Yorktown, which did in fact receive both the letter and the returned check. According to Durham, after Yorktown received the check, one of its employees advised Homecomings that the check was again "being sent out." When asked whether she recalled sending the check back to Homecomings a second time, Durham testified:

A: I think I did.

Q: All right.

A: It's a long time ago, I can only go off what I think. I'm not really positive, but I'm pretty sure I probably did.

Q: Okay. If you were to review the file, would that refresh your recollection any better?

A: If there's a FedEx - there should be a FedEx tracking in there if there was - yes, I think I did send the second one out, yes.

Q: You sent the second check out?

A: Uh-huh.

THE COURT: The second check or resending the first check?

THE WITNESS: Resending the first check.


Q: You sent a second Federal Express then to Homecomings?

A: Yes, uh-huh.

Durham then contacted Omar, who told her that he would send a certified check directly to Homecomings for the remaining balance. That did not occur.

Durham testified at her deposition that her recollection of the Omar loan was "vague," and that her answers were largely based on her knowledge of Yorktown's "policy."

Jacob testified at trial as to the procedures followed by Homecomings in processing payments. Homecomings allows a $50 "built-in tolerance" for payoff checks that are insufficient to cover the amount due. When the deficiency exceeds $50, Mellon Bank, the lockbox vendor, is instructed to reject the check and send it to Homecomings's in-house processing center in Dallas. There, the associates who review the loan and the payoff check have discretion to waive up to $250 in fees so as to make the payoff transaction complete. If the payoff check would still be short after the $250 fee waiver and $50 tolerance, then Homecomings would generate a cover letter and send it, along with the check and a payoff statement, back to the "person remitting the funds." These measures are noted on the loan system, with appropriate FedEx tracking numbers. As to the Omar loan, Homecomings had no record of receiving the payoff check a second time.

The parties stipulated to the following facts. On May 7, 2004, Yorktown sent an overnight package via FedEx to Omar. On May 10, 2004, Yorktown sent an overnight package via FedEx to Homecomings, which was received by Homecomings's lockbox vendor on May 11, 2004. In neither instance did the FedEx tracking information describe the contents of the package or identify the matter to which the mailing related. Yorktown's file did not contain a copy of a cover letter accompanying the "May 10, 2004 delivery."

Durham did not recall what was in the package sent to Omar from Yorktown on May 7, 2004. She opined that the package might have been "reimbursement from the borrower" or "closing documents." She said that there should have been a cover letter attached to the May 7 delivery, but there was no evidence of one in the file. She further testified that the original cover letter, from the first delivery of the payoff check to Homecomings, would have been sent with the check on May 10 when it was sent to Homecomings for the second time.

Homecomings's "Financial Collection History Profile" for the 2003 loan did not include any entries indicating that Homecomings received a payoff check in May 2004 from either Yorktown or Omar, and it did not list any phone calls between Homecomings and Yorktown at that time.

Omar ultimately obtained Yorktown's payoff check and deposited it into a fraudulent account he opened in the name of "Homecomings Financial Service, Inc.," a corporation formed on May 7, 2004, by Naser Belosa. Belosa also opened an account in the name of "Homecomings Financial Service, Inc." with Fleet Bank on May 10, 2004.

Judge Olivieri placed his decision on the record on March 20, 2007. He found, in part, that:

Homecomings received the payoff check that was contained in the May 10, 2004 Federal Express package. Ms. Durham indicated that she returned the payoff check to Homecomings, along with a copy of Mr. Omar's check. She did not include a new cover letter explaining why this was all happening, because according to her she said that . . . Homecomings knew that the payoff check was being resent, because that was the arrangement that was made. At least according to Ms. Durham, who I found to be generally credible. . . . .

I do believe that Homecomings should have accepted that first . . . payoff check and applied it to the amount owed the first time it was sent by Yorktown Title. And had of course that been done, considering . . . it was only $559.65 short, all of this, of course, wouldn't have happened.

. . . [T]his Court does believe that . . . [the] first check should have been accepted. But . . . even if that's not the case or even if Homecomings was not . . . obligated to accept the . . . first payoff check . . . the credible evidence . . . establishes that the check was received by Homecomings a second time. . . . [Fremont] and Yorktown have . . . little fault in what happened here.

How Mr. Omar obtained the payoff check I have no idea. However . . . it's a logical inference that Homecomings returned both checks to the borrower. In fact Chicago Title Insurance at least came to that conclusion.*fn2

But it's clear to me that . . . Homecomings should have accepted the first payoff check. But even if they were not obligated to accept the first payoff check[]

[t]he credible evidence in this matter based upon Ms. Durham's testimony and the times [sic] that have been marked into evidence, [along] with the stipulated facts, led this Court to believe that Homecomings, in fact, received both checks[] [a]nd sent them back for whatever reason . . . to Mr. Omar, who then . . . converted those funds through his own . . . use.

Homecomings set up this procedure. For the receipt of payoffs. That is the lock box vendor.

Ms. Durham testified that she followed her procedure and did what she was told to do to send the first check and then the second check. . . . I don't believe . . . any inadvertence or negligence . . .

[i]nures to [Yorktown]. . . . See [Balmoral Arms v. Rutkin, 104 N.J. Super. 354 (Ch. Div. 1969)]. . . . [E]ven though Homecomings may not have been obligated to accept the first check, better practice would have been for them to accept the first check and then go after Mr. Omar for the balance as they were going to do anyway.

The fact[s] show and are stipulated that [Homecomings] received on May 11[,] 2004[,] the very package that Ms. Durham says that she sent, which included the original check and the copy of Mr. Omar's certified check. This non-payment of the Homecoming[s] mortgage . . . was caused by Homecomings['s] conduct in this matter. And

[i]t is the decision of this Court that based upon those findings of fact[] . . . that there shall be a discharge of the Homecomings mortgage.

The court denied Homecomings's motion for reconsideration.

No dispute exists that the MERS mortgage was recorded before the Fremont mortgage, giving it a first priority. See Les Realty Corp. v. Hogan, 314 N.J. Super. 203, 206 (Ch. Div. 1998) ("first in time, first in right"); see also N.J.S.A. 46:22-1. The judge found, however, that the debt secured by the MERS mortgage was effectively paid when the first payoff check was delivered to Homecomings. Thus, the court concluded that Fremont had a defense to MERS's foreclosure complaint; that the MERS mortgage was no longer an enforceable lien; and that the Fremont mortgage consequently became a first lien against the Bayonne property. See Kushinsky v. Samuelson, 142 N.J. Eq. 729, 731 (E. & A. 1948) (payment is a defense in foreclosure suits); Franklin Mortgage & Title Guar. Co. v. Muster, 140 N.J. Eq. 503, 505 (Ch. 1947), aff'd sub nom., Franklin Mortgage & Title Ins. Co. v. Bauman, 142 N.J. Eq. 244 (E. & A. 1948) (payment must be proved by a preponderance of the evidence). The record supports the court's findings.

A "duly honored" check constitutes payment "upon its delivery to and acceptance by the payee." Hayes v. Fed. Shipbuilding & Dry Dock Co., 5 N.J. Super. 212, 214 (App. Div. 1949). When a check is delivered, if "'the drawer has funds in the drawee bank to meet it, and if the check is, upon presentment, honored and paid, . . . payment will be deemed to have been made as of the time of the delivery of the check.'" Ibid. (citation omitted); see also Bey v. Truss Sys., Inc., 360 N.J. Super. 324, 328-29 (App. Div. 2003) (date of receipt of payment by check occurred on the "date [the check] was posted and delivered to [the petitioner's] residence").

Here, no dispute exists that Homecomings received the payoff check the first time it was sent by Yorktown. Nor is there a dispute that if Homecomings had deposited the check, it would have been honored and paid. The mortgage stated that a payment was deemed received when sent to the designated location, which is what occurred here, and the note contained a clause giving the borrower the right to prepay at any time without penalty. Under these circumstances, Homecomings was obligated under the terms of the loan documents to accept the check in the sum of $298,219.57 as payment and apply it against the balance due on the loan. Therefore, had Homecomings deposited the first check, all that would have remained unpaid was $559.65 in accrued interest from the date of the closing. In other words, Homecomings would have been paid substantially the entire amount due on the 2003 loan. These facts constitute a defense to the foreclosure action.

The judge also found that "the check was received by Homecomings a second time." That finding is also supported by the record. Durham, whom the court found to be credible, testified that she mailed the check, for the second time, to Homecomings via FedEx. The evidence showed that on May 10, 2004, Yorktown sent an overnight FedEx package to Homecomings, and that package was received by the lockbox vendor, Mellon Bank, on May 11, 2004. The logical inference from this evidence is that Homecomings received the check a second time from Yorktown. It therefore follows that it was Homecomings, not Yorktown, which subsequently delivered the check to Omar.

We recognize that the evidence could have supported a contrary conclusion. Durham did not specifically recall sending the check the second time to Homecomings, but based her conclusion that she sent the check to Homecomings on general office procedures. The evidence also shows that the "imposter" bank account was opened the same date the May 10, 2004 FedEx package was sent. Nevertheless, the trial judge's findings were not "so manifestly unsupported by or inconsistent with the competent, relevant and reasonably credible evidence as to offend the interests of justice," and were in fact "supported by adequate, substantial and credible evidence" as to be binding on appeal. Rova Farms Resort, Inc. v. Investors Ins. Co. of Am., 65 N.J. 474, 484 (1974); see also P.B. v. T.H., 370 N.J. Super. 586, 601 (App. Div. 2004) (appellate court defers to trial court's factfinding when evidence is primarily testimonial); Cannuscio v. Claridge Hotel & Casino, 319 N.J. Super. 342, 347 (App. Div. 1999) (appellate court gives due regard to factfinder's ability to judge credibility).

We also agree with the trial judge that MERS is equitably estopped from enforcing its lien. Equitable estoppel "is designed to ensure that the loss is borne by the party who 'made the injury possible or could have prevented it.'" First Union Nat'l Bank v. Nelkin, 354 N.J. Super. 557, 568 (App. Div. 2002) (citation omitted). Equitable estoppel does not require evidence of fraudulent intent; the doctrine applies if the conduct "works an unjust or inequitable result to the person it was designed to influence." Hendry v. Hendry, 339 N.J. Super. 326, 336 (App. Div. 2001). "[A]s between two innocent parties[,] equity will visit the loss upon the one by whose act the injury first could have been avoided." Global Am. Ins. Managers v. Perera Co., 137 N.J. Super. 377, 388 (Ch. Div. 1975), aff'd o.b., 144 N.J. Super. 24 (App. Div. 1976); see also Sears Mortgage Co. v. Rose, 134 N.J. 326, 346 (1993) (where two parties were innocent, loss was imposed on party in best position to prevent the loss created by a third party's theft); Zucker v. Silverstein, 134 N.J. Super. 39, 52 (App. Div. 1975) (same).

A party seeking equitable estoppel must meet its burden "by a fair preponderance of the evidence." Harr v. Allstate Ins. Co., 54 N.J. 287, 307 (1969). Here, Fremont has met that burden. Both Fremont and Homecomings were innocent parties, in that the loss was created by Omar's deposit of Yorktown's check into a fraudulent bank account. Nevertheless, Homecomings was in the best position to avoid the loss when it initially received the check from Yorktown on April 28, 2004. Although the check did not account for the accrued per diem interest, the accompanying cover letter did not request a discharge of the mortgage, but indicated that if the amount sent was insufficient to cover the total amount due, Homecomings should accept the check in partial payment, and request the balance due. Instead, based on its own internal procedures, Homecomings returned the check. That action ultimately led to Omar's possession of the check. Thus, Homecomings had the opportunity to avoid the loss, but failed to do so.

The remaining points Homecomings raises on appeal are not of sufficient merit to warrant discussion in a written opinion.

R. 2:11-3(e)(1)(E). Consequently, we affirm the April 3, 2007 order discharging MERS mortgage and the May 11, 2007 order denying reconsideration. We remand to the trial court for further proceedings consistent with this opinion.

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