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Hsbc Bank Usa v. Lamiaa Gouda


December 17, 2010


On appeal before the Superior Court of New Jersey, Chancery Division, Hudson County, Docket No. F-20201-07.

Per curiam.


Argued December 7, 2010

Before Judges Parrillo and Skillman.

Defendants, Lamiaa Gouda and Mohammed Shaikh, husband and wife, appeal from the Chancery Division's entry of summary judgment and then final judgment in favor of plaintiff, HSBC Bank USA (HSBC), the foreclosing mortgagee. We affirm.

Defendants purchased a one-family home located at 83 Logan Avenue, Jersey City, in 2003 for $165,000. Purchased as an investment, defendants renovated and converted the property into a two-family home.

In June 2005, defendants refinanced the property through a mortgage broker, Empire Equity Group, Inc. (Empire). As part of that refinancing, Mortgage Lenders Network USA, Inc. issued defendants an adjustable rate loan of $293,250 with an initial interest rate of 6.75%.

In January 2006, defendants again contacted Empire to borrow an additional $40,000 by way of a second mortgage or home equity line of credit. The property was then appraised at $400,000. Empire supposedly persuaded defendants to refinance the entire loan instead and, on February 6, 2006, offered defendants a thirty-year conventional loan for $333,200 with an 8% interest rate through New Century Mortgage Company (New Century). Two days before the scheduled loan closing, however, Empire informed defendants that it could no longer provide a loan on such terms, but instead offered a forty-year adjustable rate loan of $352,800 with an initial interest rate of 9.9%. According to defendants, Empire represented that they could refinance within three months with a thirty-year conventional loan at an interest rate of 8% or less.

Defendants agreed to the new terms and, on March 3, 2006, Lamiaa Gouda (defendant) executed and delivered to New Century a note in the sum of $352,800, payable over forty years with interest accruing at an adjustable rate. To secure the note, defendant provided New Century with a mortgage against the Logan Avenue property. Three days later, New Century assigned its interest in the note and mortgage to HSBC, who remains the holder and owner of the same. The thirty-year conventional loan at 8% or less allegedly promised to defendants never materialized.

Defendants defaulted on the note on February 1, 2007 and failed to make payments thereafter. HSBC elected to call the entire principal balance due. Consequently, on August 10, 2007, HSBC filed a complaint in the Chancery Division, seeking to foreclose on the Logan Avenue property. Defendants answered, contesting the foreclosure action and asserting statutory claims under the Truth in Lending Act and the New Jersey Consumer Fraud Act, as well as common law fraud, deceit, inducement, and misrepresentation. Specifically, defendants alleged that the actual terms of the loan were not disclosed in the executed documents, as they were to be given a loan at 8%, not 9.9%. Defendants also claimed they never received executed copies of the documents relating to the note and mortgage except for two signed HUD-1 forms.

HSBC moved for summary judgment striking defendants' answer. Defendants opposed the relief, arguing that Empire defrauded them into accepting the March 2006 mortgage by changing the terms of the mortgage two days before the closing and misrepresenting that defendants would be able to refinance within three months of the closing. Following argument, the court granted HSBC's motion for summary judgment, striking defendants' answer, and entered default. The court referred the matter to the Foreclosure Unit for further proceedings and entry of final judgment. Following submission of HSBC's proofs, the court entered final judgment in favor of HSBC, entitling plaintiff to the sum of $447,215.14, together with interest and $4,622.15 in attorney's fees. The court also issued a Writ of Execution, directing the Sheriff of Hudson County to sell the Logan Avenue property to satisfy the mortgage debt. The Sheriff's sale was stayed pending appeal.

On appeal, defendants present a two-fold argument that (1) the note is non-negotiable because it imposes an obligation on defendants, in addition to payment, to notify the lender if pre-payment is made, in violation of N.J.S.A. 12A:3-104(a); and (2) HSBC is not a holder in due course because it knew or should have known of defects and irregularities in the mortgage closing documents at the time of assignment, as the documents were in its possession. As to the latter, the specific claim is that HSBC knew or should have known that the mortgage broker misrepresented the terms of the loan, understated the interest rate just prior to closing, and misled defendants into signing closing statements that did not accurately reflect the terms of the closing. We find no merit in either argument.


A note is a negotiable instrument if it contains "an unconditional promise or order to pay a fixed amount of money" and

(1) is payable to bearer or to order at the time it is issued or first comes into possession of a holder;

(2) is payable on demand or at a definite time; and

(3) does not state any other undertaking or instruction by the person promising or ordering payment to do any act in addition to the payment of money

[N.J.S.A. 12A:3-104(a).]

New Jersey case law sheds little light on the meaning of "other undertaking or instruction" within the intendment of N.J.S.A.

N.J.S.A. 12A:3-104(a)(3). In Triffin v. Pomerantz Staffing Servs., LLC, 370 N.J. Super. 301 (App. Div. 2004), the counterfeit checks at issue were printed with the warning, "THE BACK OF THIS CHECK HAS HEAT SENSITIVE INK TO CONFIRM AUTHENTICITY." Id. at 304. We rejected the plaintiff's argument that the heat sensitive ink instructions prohibited the checks from being considered negotiable instruments, concluding that the instructions "did not represent conditions on the maker's undertaking but presented, for the benefit of any future holder, the opportunity to examine the checks' authenticity." Id. at 309 n.3.

As pertains to defendants' claim here, the note allows defendants the right to prepay. Specifically, section 5 of the note states:

I have the right to make payments of Principal at any time before they are due. A payment of Principal only is known as a "Prepayment." When I make a Prepayment, I will tell the Note Holder in writing that I am doing so. I may not designate a payment as a Prepayment if I have not made all the monthly payments due under this Note.

Defendants contend that the requirement of a written notice constitutes an "undertaking or instruction" to do an "act in addition to the payment of money," in violation of N.J.S.A. 12A:3-104(a)(3), and as such, their note is non-negotiable. We disagree.

Defendants cite no binding legal authority for their proposition. On the contrary, the note on its face meets all the requirements of a negotiable instrument as set forth in N.J.S.A. 12A:3-104(a). The note provides "an unconditional promise or order to pay a fixed amount of money . . . payable to bearer or to order," namely that Lamiaa Gouda "promise[s] to pay U.S. $352,800.00 . . . plus interest, to the order of Lender [, New Century Mortgage Corporation]." The note then states the interest rate, the amount of monthly payments and when they will be due, and the amortization period. It further states that if the borrower still owes amounts under the note on April 1, 2036 (the "Maturity Date"), she must pay those amounts in full on that date. The note, therefore, is payable on demand or at a definite time specified in the note, as required by N.J.S.A. 12A:3-104(a)(2).

The right of defendants, under the note, to prepay part of the principal does not constitute an "additional undertaking or instruction" that adversely affects the negotiability of the note. Quite the opposite, the right of prepayment is a voluntary option that defendants may elect to exercise solely at their discretion. Indeed, such an allowance confers a benefit, not a burden, upon defendants, who can freely choose to decline the opportunity. The fact that defendants must notify the lender in the event they opt for prepayment imposes no additional liability on them and is not a condition placed on defendants' promise to pay. Rather, notification is simply a requirement of the exercise of the right of prepayment which, as noted, defendants are free to reject. This requirement does not render the note in issue non-negotiable.


We similarly reject defendants' argument that HSBC is not a holder in due course.

The right to foreclose is an equitable right inherent in a mortgage, triggered by a borrower's failure to comply with the terms and conditions of the associated loan. Chase Manhattan Mortg. Corp. v. Spina, 325 N.J. Super. 42, 50 (Ch. Div. 1998), aff'd, 325 N.J. Super. 1 (App. Div. 1999). "Both state law and common law have established that a mortgagee maintains the absolute right to foreclose and accelerate against a defaulting mortgagor, so long as the alleged default is not attributable to the mortgagee's conduct." Ibid. The mortgagee has the right to insist upon strict observance of the obligations that are contractually owed to it, including timely payment. Kaminski v. London Pub, Inc., 123 N.J. Super. 112, 116 (App. Div. 1973).

To obtain relief in a mortgage foreclosure action, the mortgagee must establish that (1) the mortgage and loan documents are valid; (2) the mortgage loan is in default; and (3) it has a contractual right to foreclose upon the mortgaged premises in light of the default. Great Falls Bank v. Pardo, 263 N.J. Super. 388, 394 (Ch. Div. 1993), aff'd, 273 N.J. Super. 542 (App. Div. 1994); Cent. Penn Nat'l Bank v. Stonebridge Ltd., 185 N.J. Super. 289, 302 (Ch. Div. 1982). A mortgagee who was not the original lender, but was assigned the mortgage, must also prove that it is a holder in due course.

The Uniform Commercial Code defines a holder in due course as "one who takes a negotiable instrument for value, in good faith and without notice of any defense or claim against it." Carnegie Bank v. Shalleck, 256 N.J. Super. 23, 33 (App. Div. 1992) (citing N.J.S.A. 12A:3-302 and N.J.S.A. 12A:3-102(1)(3)). Good faith is defined as "honesty in fact and the observance of reasonable commercial standards of fair dealing." N.J.S.A. 12A:3-103(a)(4). Thus, "a holder in due course must satisfy both a subjective and an objective test of good faith, requiring a consideration of the holder's honesty in fact and observance of reasonable commercial standards." Triffin, supra, 370 N.J.

Super. at 308 (internal citations omitted). Under this standard, "[a] party who fail[ed] to make an inquiry, reasonably required by the circumstances of the transaction, so as to remain ignorant of facts that might disclose a defect[,] cannot claim to be a holder in due course." Id. at 309. Most importantly, "once it appears that a defense exists against the payee, the person claiming the rights of a holder in due course has the burden of establishing that he is in all respects such a holder." Gen. Inv. Corp. v. Angelini, 58 N.J. 396, 404 (1971).

Here, defendants challenge HSBC's good faith simply because a few days before closing, the terms of the note changed from a thirty-year conventional loan of $333,200 with an 8% interest rate to a forty-year adjustable rate loan of $352,800 with an initial interest rate of 9.9%. Merely suspicious circumstances without more, however, do not implicate a note holder's good faith.

[P]roof of circumstances calculated merely to arouse suspicion will not defeat recovery on a negotiable note taken for value before maturity. Bad faith, i.e., fraud, not merely suspicious circumstances, must be brought home to a holder for value whose rights accrued before maturity, in order to defeat his recovery on a negotiable note upon the ground of fraud in its inception or between the parties to it. [Rice v. Barrington, 75 N.J.L. 806, 807 (E. & A. 1968).]

See Driscoll v. Burlington-Bristol Bridge Co., 8 N.J. 433, 480, cert. denied, 344 U.S. 838, 73 S. Ct. 25, 97 L. Ed. 652 (1952), and the cases cited therein. Moreover, defendants do not dispute that they were fully aware of the changes in the note's terms days before closing and nevertheless voluntarily decided to proceed with the loan. Nothing in the record therefore supports a valid defense to plaintiff's foreclosure action. Rather, the undisputed proofs demonstrate that HSBC is a holder in due course, having purchased the note and mortgage from New Century for value, in good faith and in the regular course of business, and without notice that the mortgage was overdue or that any party had a claim or defense against the instrument. Thus, since defendants' default is not attributable to any conduct by HSBC, plaintiff has an absolute right to foreclose against the defaulting mortgagors. Chase Manhattan Mort. Corp., supra, 325 N.J. Super. at 50.



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