December 31, 2009
COUNTRYWIDE HOME LOANS, INC., PLAINTIFF-RESPONDENT,
HWA GON KIM, BOM CHUN KIM, HIS WIFE, WASHINGTON MUTUAL BANK, F.A., AND PNC BANK CONSUMER LOAN CENTER, DEFENDANTS, AND BANK OF AMERICA, DEFENDANT-APPELLANT, AND COMMERCE BANK NORTH, DEFENDANT-RESPONDENT.
On appeal from Superior Court of New Jersey, Chancery Division, Morris County, Docket No. F-8921-06.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued December 2, 2009
Before Judges Graves and Newman.
Defendant Bank of America appeals from an order denying its motion to partially vacate a judgment of foreclosure and an order granting reconsideration but nonetheless denying relief from the foreclosure judgment. The judgment erroneously satisfied the junior obligation of Commerce Bank North (Commerce) ahead of Bank of America's senior lienholder position. The motion judge acknowledged that the judgment was flawed but denied relief because the motion was untimely under Rule 4:50-2 and there were no exceptional circumstances to warrant relief. We affirm.
The factual background may be summarized as follows. Hwa Gon Kim and his wife, Bom Chun Kim, ("the Kims") executed several mortgages on a property located on Circle Drive in Mount Tabor, New Jersey. The property was subject to a first mortgage for $321,000 by Countrywide Home Loans (Countrywide); a second mortgage for $200,000 by Bank of America's predecessor, Fleet National Bank; a third mortgage for $191,600 by Washington Mutual Bank, F.A. (Wamu); a fourth mortgage for $200,000 by Commerce; and a fifth mortgage for $180,000 by PNC Bank Consumer Loan Center (PNC).
On May 22, 2006, Countrywide filed a foreclosure complaint (the first action) against the Kims, Bank of America, Wamu, Commerce, PNC, and unknown tenants and/or occupants of the subject property.
On June 7, 2006, Commerce filed an answer as a subsequent encumbrancer and a certification alleging it was due a total of $200,769.16. Commerce did not indicate its order of priority in relation to the other mortgagees on the property. Default was entered against the remaining Countrywide defendants on July 21, 2006.
On July 25, 2006, Bank of America filed a separate foreclosure complaint (the second action) against the Kims, the occupants, Wamu, and Commerce, and it added a party not named in the first action, JP Morgan Chase (Chase).
On July 28, 2006, Bank of America contacted Countrywide because it was out of time to file an answer in the first action, and it requested that Countrywide provide Bank of America with a copy of its application for final judgment and its notice of sale. In the meantime, Bank of America served Commerce with the second action's complaint on August 5, 2006.
On November 17, 2006, in the first action, the court entered a final judgment of foreclosure, and issued a writ of execution. The court ordered that the mortgaged premises be sold to raise and satisfy the several sums of money due, in the first place [to Countrywide] the sum of $213,085.23 together with lawful interest . . . .
. . . . [and] that [Commerce] is entitled to have the sum of $200,769.16 . . . in the second place.
The court directed the Sheriff to deliver any surplus funds from the sale to the court.
All of the Bank of America defendants defaulted, and on March 1, 2007, the trial court entered a final judgment of foreclosure in the second action. According to that judgment, Bank of America was entitled to the sum of $211,167.82 plus interest and fees, to be paid from the sale of "so much of the said mortgaged premises" as necessary to satisfy the specified amount.
On March 22, 2007, the Morris County Sheriff conducted a sale pursuant to the Countrywide judgment, and Bank of America purchased the property for $371,000. The Sheriff's deed, dated April 4, 2007, included the court's initial writ of execution reflecting that Commerce was entitled to be paid in the second place. The Sheriff paid Countrywide and Commerce from the proceeds of the sale. According to a Sheriff's Report of April 2, 2007, a surplus of $125,640.83 remained after Countrywide was paid.
In the meantime, at Bank of America's request, the court vacated the final judgment entered in the second action in an order dated May 7, 2007, because the matter had been amicably settled between the parties.
On November 29, 2007, Bank of America filed a motion for surplus funds with the clerk of the trust fund unit in the first action, with notice to Countrywide and the remaining Countrywide defendants. On December 17, 2007, the Sheriff's Office advised Bank of America that it had already "[paid] the balance to the second mortgage" and that no surplus funds remained. Because no surplus funds remained, the motion court apparently directed Bank of America to withdraw its application.
Approximately seven months later, on July 29, 2008, Bank of America filed a motion to partially vacate the final judgment in the first action. Bank of America requested that the court 1) [p]artially [v]acate the [f]inal [j]udgment, amend the [w]rit and [v]acate the [d]efault as to [Bank of America] and 2) [enter] an [o]rder to require the funds turned over by the Sheriff to Commerce Bank to be returned to the Sheriff, who will be directed to deposit those funds with the Surplus Funds Unit of the [c]lerk of the [c]court.
Bank of America argued that the foreclosure judgment violated the requirements of Rule 4:64-1(e)(3)*fn1 , which prohibits payment to a subsequent encumbrancer until all prior encumbrances are paid, and it requested relief. On August 18, 2008, Judge Langlois denied Bank of America's motion as untimely.
On September 8, 2008, Bank of America filed a motion for reconsideration. Bank of America asserted that under the unique circumstances of this case, the one-year limitation period for filing a motion to vacate should be tolled from December 17, 2007, which was purportedly the first time Bank of America learned from the Sheriff's Office that Commerce had been paid the surplus funds. Bank of America contended that it had not acted sooner because the April 2007 Sheriff's Report indicated a post-sale surplus and Bank of America had planned on seeking those funds in a motion for surplus funds. According to Bank of America, the erroneous provision in the judgment of foreclosure, Commerce's mistaken acceptance of the surplus funds, and the Sheriff's erroneous report constituted exceptional circumstances warranting relief.
Judge Langlois granted reconsideration but denied any relief, referring to the reasons previously mentioned in denying the initial motion. These included: the failure to timely move to vacate the judgment of foreclosure based on mistake within the one-year time limitation of Rule 4:50-2 and the failure to establish any grounds for relief under Rule 4:50-1. Additionally, the court pointed out the following:
[m]ovant has failed to establish any grounds to set aside orders entered over 2 years ago. Movant never challenged (or appealed) final judgment or writ of execution - and actually purchased the property at sheriff's sale. No reasons are given for failure to seek surplus funds in timely manner. No prejudice has been shown to movant which failed (on its own) to otherwise contest or appear in foreclosure action filed in 2006.
Rule 4:50-1 has not been met in terms of proofs under any subsection.
On appeal, Bank of America raises the following points for our consideration:
I. THE JUDGMENT SHOULD HAVE BEEN VACATED PURSUANT TO R. 4:50-1 BECAUSE THERE ARE EXCEPTIONAL CIRCUMSANCES WARRANTING RELIEF.
A. COMMERCE BANK SHOULD NOT HAVE BEEN INCLUDED IN THE JUDGMENT AHEAD OF BANK OF AMERICA.
II. THE COURT BELOW FAILED TO RECOGNIZE THE EXCEPTIONAL FACTS AND CIRCUMSTANCES WARRANTING RELIEF PURSUANT TO R. 4:50-1(f).
A. THE CIRCUMSTANCES WERE HIGHLY UNUSUAL AND EXCEPTIONAL IN THAT BANK OF AMERICA WAS THE VICTIM OF THE THREE MAJOR ERRORS BY OTHER PARTIES OR ENTITIES INVOLVED IN THE FORECLOSURE.
B. EXCEPTIONAL CIRCUMSTANCES WHICH REQUIRE VACATION OF THE JUDGMENT WERE CREATED BY THE "EXTERNAL FACTORS."
C. BANK OF AMERICA DID NOT CAUSE THE "MISTAKE."
D. THE DECISION OF THE COURT BELOW MUST BE REVERSED BECAUSE IT IMPROPERLY DID NOT RECOGNIZE THE EXCEPTIONAL CIRCUMSTANCES AND SHOULD HAVE BEEN VACATED OR AN APPROPRIATE REMEDY FASHIONED.
III. THE COURT SHOULD RECTIFY THE ERROR IN THE FORECLOSURE JUDGMENT.
A. BANK OF AMERICA WAS THE VICTIM OF MISTAKES BY THE FORECLOSURE UNIT AND BY THE SHERIFF'S OFFICE, WHICH OUGHT TO BE RECTIFIED BY THE COURT.
B. MOTION FOR SURPLUS FUNDS CAN BE MADE AT ANY TIME.
C. VACATING THE JUDGMENT IS FAIR TO BOTH PARTIES.
IV. THE COURT BELOW DID NOT APPLY EQUITABLE PRINCIPLES AND SHOULD NOT HAVE FOUND IN FAVOR OF COMMERCE BANK BECAUSE IT KNEW IT WAS IN FOURTH LIEN POSITION AND NOT ENTITLED TO RETAIN FUNDS RECEIVED THROUGH MISTAKES OF THE COURT AND OTHER ENTITIES.
A. COMMERCE BANK HAD "UNCLEAN HANDS" IN ACCEPTING THE SURPLUS FUNDS TO WHICH IT WAS NOT ENTITLED, THEREFORE, IT CANNOT INVOKE THE EQUITABLE REMEDY OF "LACHES" TO DEFEAT BANK OF AMERICA'S CLAIM.
B. LACHES SHOULD NOT APPLY UNDER THESE CIRCUMSTANCES.
C. BANK OF AMERICA IS ENTITLED TO EQUITABLE RELIEF.
D. THE EQUITABLE MAXIM "EQUITY FOLLOWS THE LAW" REQUIRES THE JUDGMENT BE VACATED, OR A REMEDY FASHIONED WHICH PROVIDES THE SURPLUS FUNDS TO BANK OF AMERICA.
E. THE COURT BELOW DID NOT ADHERE TO THE PREMISE THAT IT "ADMINISTER EQUITABLE RELIEF UPON EQUITABLE TERMS, AND NOT AS PUNISHMENT."
We need not expressly address each of the points and subheadings because the same theme runs through all of them; namely, that through mistakes by the foreclosure unit and the Sheriff's Office, Commerce was paid ahead of Bank of America and that these mistakes should be rectified by partially vacating the foreclosure judgment and directing Commerce to remit the $125,640.83 it was paid to the Sheriff who, in turn, should pay that amount over to Bank of America.
In the interests of finality, relief from a final judgment is only sparingly granted. DEG, LLC v. Twp. of Fairfield, 198 N.J. 242, 261 (2009); F.B. v. A.L.G., 176 N.J. 201, 207 (2003).
Such decisions are entrusted to the "sound discretion of the trial court, which should be guided by equitable principles in determining whether relief should be granted or denied." Hous. Auth. of Morristown v. Little, 135 N.J. 274, 283 (1994). Accordingly, a decision to deny or grant "an application to open a judgment will be left undisturbed unless it represents a clear abuse of discretion." Ibid.
The disputed judgment in this appeal was a product of the foreclosure procedures set forth in Rule 4:64-1.*fn2 According to those rules, a foreclosure action is considered uncontested if, as to all defendants:
(1) a default has been entered as the result of failure to plead or otherwise defend; or
(2) none of the pleadings responsive to the complaint either contest the validity or priority of the mortgage or lien being foreclosed or create an issue with respect to plaintiff's right to foreclose it; or
(3) all the contesting pleadings have been stricken or otherwise rendered noncontesting.
If a complaint is uncontested, the court may enter final judgment after receiving proof of the amount due. R. 4:64-1(d). Notice of the final judgment must be served on all parties who appeared in the matter, but defaulting parties are only entitled to notice "if application for final judgment is not made within six months of the entry of default." Ibid.
With regard to additional lien holders, the rules provide in pertinent part:
A party holding a subsequent encumbrance for a sum certain and filing an uncontesting answer may have the encumbrance included for payment in the foreclosure judgment on the filing of proofs pursuant to R. 4:64-2. The judgment shall not order payment to a subsequent encumbrancer unless
(1) the priority of the encumbrance has been determined; and
(2) the encumbrancer has filed an affidavit stating that notice of the amount claimed due on the encumbrance has been served on all defendants whose addresses are known or readily ascertainable and none of the defendants, whose names and addresses shall be listed in the affidavit, has, within 10 days after the date of service of the notice made written objection to the validity, priority or amount of the encumbrance; and
(3) all prior encumbrances of parties to the action, including answering and defaulting parties, have been previously satisfied or ordered paid.
A subsequent encumbrancer may also seek any surplus funds "at any time after the sale and may be heard by the court on motion and notice to all parties . . . ." R. 4:64-3.
It is undisputed that Countrywide's foreclosure action was uncontested, that both Bank of America and Commerce were subsequent encumbrancers of which Bank of America was the senior lien holder, and that contrary to the prioritization requirements of Rule 4:64-1(e), Commerce's lien was satisfied ahead of Bank of America's. The narrow question is whether the motion judge abused her discretion in declining to correct an outcome which is arguably at odds with the law.
Pursuant to Rule 4:50-1, a court may relieve a party from a final judgment based on:
(a) mistake, inadvertence, surprise, or excusable neglect; (b) newly discovered evidence which would probably alter the judgment or order and which by due diligence could not have been discovered in time to move for a new trial under R. 4:49; (c) fraud[,] . . . misrepresentation, or other misconduct of an adverse party; [or when] (d) the judgment or order is void; [or when] (e) the judgment or order has been satisfied . . .; or (f) any other reason justifying relief from the operation of the judgment or order.
"It is not essential that an applicant state the subsection pursuant to which relief should be granted . . . ." F.B., supra, 176 N.J. at 208. See also Hous. Auth., supra, 135 N.J. at 283 (considering the various grounds for relief implicated by the record, even though the trial court below did not specify the subsection). However, the designation can be relevant because motions predicated on subsections (a), (b), and (c) must be made within one year of the disputed judgment, while applications based on the remaining subsections must be made within a "reasonable time." R. 4:50-2.
By contrast, motions premised on subsection (f) should only be granted "when truly exceptional circumstances are present and only when the court is presented with a reason not included among any of the reasons subject to the one year limitation." Baumann v. Marinaro, 95 N.J. 380, 395 (1984). Thus, [w]hether exceptional circumstances exist is determined on a case by case basis according to the specific facts presented . . . .
Among the factors to be taken into account on a Rule 4:50 motion are the "extent of the delay in making the application for relief, the underlying reason or cause, fault or blamlessness [sic] of the litigant, and any prejudice that would accrue to the other party." [In re Guardianship of J.N.H., 172 N.J. 440, 474 (2002) (quoting C.R. v. J.G., 306 N.J. Super. 214, 241 (Ch. Div. 1997)).]
The timeliness of an application is tolled from when the "the order was entered . . . and served upon the party or parties adversely affected by the order or [when] the adversely affected party had actual knowledge of the order." Farrell v. TCI of N. N.J., 378 N.J. Super. 341, 353-54 (App. Div. 2005). See also Palko v. Palko, 73 N.J. 395, 398 (1977) ("A significant element in the timeliness of plaintiff's motion, noting the strictures of the rule, would consist of the date when plaintiff first discovered the facts underlying her application . . . ."). The reasonableness of a party's timing in filing its motion is "dependent on the totality of the circumstances." Pressler, supra, comment 3 on R. 4:50-2.
By referencing the mistakes of the foreclosure unit, the motion court ostensibly analyzed Bank of America's motion under subsection (a). The record reveals that the court also considered, but ultimately denied relief under subsections (d) and (f).
At this juncture, Bank of America virtually concedes that it was not entitled to relief under subsection (a). Indeed, the one-year time limitation was not satisfied, and the court was without authority to enlarge the time period. R. 1:3-4(c). However, Bank of America maintains there were exceptional circumstances warranting relief under subsection (f), because it was the alleged "victim" of a string of mistakes committed by other parties in the foreclosure proceedings. Bank of America's related assertion that the existing judgment is contrary to Rule 4:64-1(e) may also be viewed as a reference to subsection (d).
Ultimately, whether based on subsection (d) or (f), the salient questions in this appeal remain the same. First, did Bank of America file its motion within a reasonable time? Second, did Bank of America establish exceptional circumstances sufficient to justify vacating Countrywide's final, albeit flawed, foreclosure judgment and to require Commerce to return funds which it received in 2007? Judge Langlois's resolution of these questions in the negative is well supported by the record, and consistent with the applicable principles of law.
As to the timeliness of Bank of America's motion, Bank of America asserts that it was "monitoring" the foreclosure proceeding. Had it kept itself apprised of developments in a matter that clearly affected its interests, it would have discovered the anomaly in the foreclosure judgment much earlier. Indeed, even if Bank of America was never served with a copy of the final judgment, it was a matter of public record.
Notwithstanding, the motion judge properly identified the Sheriff's sale as the moment when Bank of America knew, or should have known, of the error. Farrell, supra, 378 N.J. Super. at 353-54. Indeed, the Sheriff's deed, dated April 4, 2007, included a copy of the court's initial writ of execution ordering the Sheriff to pay Commerce "in the second place." Bank of America attempts to minimize its oversight by suggesting that reviewing the writ more thoroughly "would not have saved the erroneous provision in the judgment," and that in any event, Commerce "was the first party to know." These arguments are unpersuasive and ignore the fact that Bank of America's motion would have been within time had it exercised reasonable diligence and reviewed the contents of the Sheriff's deed when it was first delivered.
These same considerations support the motion judge's finding on the second legal question presented in this appeal: whether there are exceptional circumstances warranting relief. Bank of America portrays itself as the unwitting "victim" of "external factors" that were outside its control. Bank of America faults the office of foreclosure for including Commerce in the final judgment, the court for entering the judgment, the Sheriff's office for informing it that surplus funds remained, and Commerce for accepting the funds. In emphasizing the errors of these parties, Bank of America overlooks its own role in the outcome of this matter.
Bank of America asserts that it could not file an answer because it was not served the complaint until after default had been entered. However, the record indicates that despite any issues with service, Bank of America received the complaint on June 9, 2006, almost six weeks before default was entered on July 21. Bank of America also failed to take any steps to vacate the default.
Bank of America's apparent justification for its inaction is that it justifiably relied on the prioritization requirements of Rule 4:64-1(e) and that the errors arose because "subsequent lienholders are rarely included in foreclosure judgments." Bank of America presumably raises this latter point to establish that its conduct in this matter was reasonable.
The rules specifically provide that a subsequent encumbrance may be satisfied as part of a foreclosure judgment, and further warn that defaulting parties are only entitled to receive notice "if [the] application for final judgment is not made within six months of entry of default." R. 4:64-1(d). It was Bank of America's obligation to keep itself apprised of a matter that affected its interests, particularly before voluntarily vacating the default judgment that it secured for itself in March 2007. Bank of America never took steps to obtain either the application for judgment or the final order and, instead, evidently chose to wait for Countrywide to provide it with copies of the documents. The record shows that Bank of America had ample time to both discover and remedy any flaws in the foreclosure judgment, and Bank of America should not be permitted to now blame the foreclosure unit, the Sheriff's Office, and other parties for its own indolence.
These same reasons undermine Bank of America's contention that the motion court should have found otherwise under the "exceptional circumstances" analysis followed by the New Jersey Tax Court in Vogelbacher v. Director, Div. of Taxation, 15 N.J. Tax 106 (Tax 1995). The Vogelbacher court examined whether there were "exceptional circumstances" for reinstating the complaint within the meaning of Rule 4:23-5(a) and expressly noted that Rule 4:50-1 would not apply because no final judgment had been entered. Id. at 117. Nonetheless, the court commented that exceptional circumstances justifying a party' failure to plead or defend under Rule 4:50-1(f) should only be found when that failure arose from factors outside the party's control, such as "indigency, incarceration, or lack of an attorney." Id. at 118. The record is devoid of any evidence that Bank of America was ever subject to such extenuating circumstances.
Bank of America's related claim that it is being "punished" for not filing its motion for surplus funds at an earlier point is likewise rejected. The motion judge mentioned Bank of America's delay in filing its motion for surplus funds in assessing the overall circumstances of the matter, but there is no indication that the court's decision to deny Bank of America's request for relief was predicated on that delay.
Lastly, Bank of America's reliance on Davis v. DND/Fidoreo, Inc., 317 N.J. Super. 92 (App. Div. 1998), certif. denied, 158 N.J. 686 (1999), in arguing that it was entitled to relief, is misplaced. Unlike here, the movant in Davis sought to vacate a default judgment. Id. at 100. Such applications are typically treated with greater indulgence than other applications for relief from final judgment. Compare Baumann, supra, 95 N.J. at 395 (requiring exceptional circumstances to vacate), with Marder, supra, 84 N.J. Super. at 319 (viewing application to reopen default with "great liberality"). The outcome in Davis was also appropriate because there had been doubts as to whether the movant was properly served with the complaint. Davis, supra, 317 N.J. Super. at 100. Such is not the case here.
In sum, although the foreclosure judgment in this matter was flawed, Bank of America's motion was untimely and failed to establish exceptional circumstances warranting relief.
In Point IV, Bank of America contends that vacating the final judgment and requiring Commerce to return the funds it received would be the only "fair" outcome in this matter. It claims that Commerce was a "wrongdoer" because it deliberately accepted funds even though it allegedly knew it was not entitled to them, and that Bank of America was "an innocent victim." In Point IV(A), Bank of America claims that Commerce should not have been permitted to invoke the doctrine of laches, because it had unclean hands. In Point IV(B), Bank of America argues that the lower court erred in finding that its application was barred by laches. In Points IV(C) and IV(E), it contends that the outcome is unfair and punitive when considering Commerce's purported misconduct in accepting the funds and Bank of America's own losses, and urges reversal on that basis. In Point IV(D), Bank of America asserts that the judgment should be vacated to comport with the maxim that "equity follows the law."
In rendering her decision on Bank of America's motion for reconsideration, Judge Langlois did not address Commerce's laches arguments but rather premised her denial of Bank of America's motion on Bank of America's failure to satisfy the requirements of Rule 4:50-1.
Bank of America's unfairness arguments merely restate assertions which we have already addressed. Indeed, Bank of America claims that the lower court's decision to deny its motion should not be permitted to stand because then Commerce, as the fourth lien holder, would be permitted to keep approximately $125,000 to which it was not otherwise entitled. Bank of America also asserts that as a result of a series of errors by other parties, it will have lost the value of both its lien on the Kims' property and the $371,000 it paid for the property at the Sheriff's sale.
The result is anomalous inasmuch as it is contrary to the requirements of Rule 4:64-1(e). However, any unfairness was occasioned by Bank of America's own untimeliness and lack of vigilance. Bank of America did not file its motion until well over a year after the property had been sold and the proceeds distributed. Bank of America asserts that Commerce should be required to refund sums that Commerce had accepted in 2006 in reliance on a court judgment. However, to require a refund on these facts would undermine public confidence in the finality of court judgments. See DEG, supra, 198 N.J. at 261 (holding that Rule 4:50-1 is "a carefully crafted vehicle intended to underscore the need for repose while achieving a just result").
Bank of America ignores the plain facts that the foreclosure proceedings were of public record and that it was served with the complaint, and it, therefore, had ample opportunity to participate. Bank of America declined to take advantage of that opportunity and should not be permitted at this late juncture to blame other parties for an outcome that arose from its own lack of vigilance.
These same considerations undermine Bank of America's attempt in Point IV(D) to invoke the maxim that "equity follows the law." This principle stands for the idea that "as a rule[,] a court of equity [should] follow the legislative and common-law regulations of rights, and also obligations of contract." Dunkin' Donuts of Am., Inc. v. Middletown Donut Corp., 100 N.J. 166, 183 (1985). Bank of America's arguments on this point are not presented with sufficient specificity to warrant substantial comment. More importantly, although the final judgment is admittedly anomalous, the outcome is ultimately consistent with the requirements of Rule 4:50-1. Bank of America fails to explain why the equitable principles underlying Rule 4:50-1 are any less compelling that those underlying Rule 4:64-1.
Bank of America's arguments that the court misapplied the equitable principles of laches and unclean hands are rejected. The motion judge did not apply either laches or the unclean hands doctrine. Indeed, these arguments were not presented before the motion judge. Moreover, even if unclean hands had been properly raised, it would be rejected.
The doctrine of unclean hands is another affirmative defense which may be applied at the discretion of the court. Kingsdorf v. Kingsdorf, 351 N.J. Super. 144, 156 (App. Div. 2002). Its purpose is to effectuate the principle that relief should not be granted to a wrongdoer. Bank of America contends that Commerce intentionally profited from a series of mistakes made in its favor, but there is no evidence of such misconduct in the record. At worst, it appears that Commerce was only one of many parties, Bank of America included, which failed to detect the error in the foreclosure judgment. There is no evidentiary basis for Bank of America's claim that Commerce acted improperly.
In sum, Judge Langlois's decision to deny Bank of America's motion was well supported by the record and consistent with the requirements of Rule 4:50-1 and -2.