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Midcountry Bank v. George Smartt and Grace Smartt


May 24, 2011


On appeal from the Superior Court of New Jersey, Chancery Division, Sussex County, Docket No. F-5901-09.

Per curiam.


Submitted: May 11, 2011

Before Judges Axelrad and Lihotz.

In this foreclosure action on a mortgage, defendants George and Grace Smartt, the mortgagors, appeal from orders granting summary judgment to the mortgagee bank and denying their subsequent motions for relief. We affirm.

As defendants do not challenge the specifics of the mortgage or the fact they are in default of the obligation but, rather, its characterization as a temporary construction loan, we provide an abbreviated factual recitation. On December 13, 2004, defendants executed a note and construction note addendum to MidCountry Bank (Bank) in the amount of $337,000, with a maturity date of December 13, 2005, in connection with their construction of a house at 24 Fieldstone Trail, Byram Township, New Jersey. The construction note addendum identifies the note as for a "combined construction loan and permanent" loan. In bold all-caps language at the top of the form it notifies defendants: "THIS LOAN IS PAYABLE IN FULL AT MATURITY" and "THE LENDER IS UNDER NO OBLIGATION TO REFINANCE OR MODIFY THE LOAN AT THAT TIME." Accordingly, defendants will "BE REQUIRED TO MAKE PAYMENT OUT OF OTHER ASSETS THAT [THEY] MAY OWN, OR [THEY] WILL HAVE TO FIND A LENDER, WHICH MAY BE THE LENDER [THEY] HAVE THIS LOAN WITH, WILLING TO LEND [THEM] THE MONEY." The parties also executed a construction loan agreement listing December 13, 2005 as the project completion date.

As security, defendants executed a mortgage that was duly recorded. Defendants also signed a construction loan rider "incorporated into and . . . deemed to amend and supplement" the mortgage, which provided that the "term of the loan shall be for the period of 372 months, of such time 12 months have been allocated for the construction period." It further provided that "all advances plus accrued interest and penalty (if any) shall become immediately due and payable" if construction of the new house was not completed by December 13, 2005.

The parties subsequently executed a loan modification agreement increasing the principal balance to $417,000 and numerous agreements extending the maturity date of the obligation. On January 30, 2007, George Smartt signed a disclosure form acknowledging the "construction loan is being approved for an amount that results in a risk level approval. I further acknowledge that there may not be an end loan investor willing to accept the loan as a construction loan modification at the completion of construction." Smartt "accept[ed] the fact that if no end loan investor is willing to accept the loan for modification I will be required to requalify and complete the refinance as a two close transaction." The last extension of mortgage agreement gave defendants until October 13, 2008 to pay the balance due.

Defendants defaulted by failing to complete construction of the house and failing to timely pay the balance due on the loan. On February 2, 2009, the Bank filed a foreclosure complaint against defendants. Default was entered against defendants on May 8, 2009, based on their failure to file an answer contesting the foreclosure. On July 6, 2009, the Bank sent defendants a notice of motion to enter final judgment.

Rather than moving to vacate the entry of default, R. 4:43-3, on June 17, 2009, defendants filed an answer containing a general denial and asserting as separate defenses barring of the Bank's action because: (1) it failed to send the requisite notice of intention to foreclose under the Fair Foreclosure Act; (2) its solicitor was not licensed by the New Jersey Department of Banking & Insurance; (3) it engaged in deceptive and misleading solicitation in connection with a consumer loan; (4) it charged defendants excessive fees under the New Jersey Home Ownership Security Act of 2002 (Home Ownership Act); (5) it had prior knowledge that defendants had no experience in building houses and thus assumed the risk of nonpayment of the loan; and (6) it is estopped because it failed to provide defendants the funds to complete construction. Defendants also asserted counterclaims alleging violations of the Home Ownership Act, New Jersey Licensed Lender Act (Licensed Lender Act), and the Consumer Fraud Act. The Bank filed responsive pleadings.

On or about November l6, 2009, the Bank filed a motion for summary judgment seeking an order striking defendants' answer on the ground it set forth no defense sufficient in law and transmitting the case to the Foreclosure Unit as uncontested. Defendants filed opposition and a cross-motion to dismiss the foreclosure complaint. Following oral argument on February 5, 2010, the court found the construction loan never became a permanent loan and thus was not subject to the statutory protections available to a residential mortgage debtor. Accordingly, in an order memorialized on that date, the court granted the Bank's motion, struck defendants' answer and referred the case to the Foreclosure Unit as uncontested, and denied defendants' cross-motion. By order of March 11, 2010, the court entered a final judgment of foreclosure in favor of the Bank in the amount of $440,426.32, with interest and costs.

On May 4, 2010, defendants filed a notice of motion "to vacate the final judgment, vacate the summary judgment order and dismiss Plaintiff's Foreclosure Complaint." The Bank filed opposition. By order of May 28, 2010, the court denied defendants' motions. On June 29, 2010, defendants appealed the orders of February 5 and May 28, 2010. By order of July 23, 2010, the trial court granted defendants' motion for a stay of the July 26, 2010 sheriff's sale and adjourned the sale to September 27, 2010, with the notation that all future requests for stay were to be made to us.*fn1

On appeal, defendants renew their arguments asserting violations of the Fair Foreclosure Act and Licensed Lender Act.

We first note that defendants' appeal of the February 5, 2010 order granting summary judgment in favor of the Bank is out of time. See R. 2:4-1 (requiring appeals from final judgment or order of a court within forty-five days of their entry). Nevertheless, we will address defendants' arguments on the merits.

Our review of a trial court's grant of summary judgment is de novo, using the Brill standard employed by the trial court. See Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520, 540 (1995); Prudential Prop. & Cas. Ins. Co. v. Boylan, 307 N.J. Super. 162, 167 (App. Div.), certif. denied, 154 N.J. 608 (1998). That is, we consider whether there are any material factual disputes and, if not, whether the facts viewed in the light most favorable to the non-moving party would permit a decision in that party's favor on the underlying issue. Brill, supra, 142 N.J. at 540.

The facts are not in dispute and defendants have failed to raise a debatable issue of law as to their defenses. Defendants do not dispute the validity of the mortgage, the amount of indebtedness or the Bank's right to resort to the mortgaged premises. See Great Falls Bank v. Pardo, 263 N.J. Super. 388, 394 (Ch. Div. 1993) (holding that absent the inapplicable statutory protections, "[t]he only material issues in a foreclosure proceeding are the validity of the mortgage, the amount of the indebtedness, and the right of the mortgagee to resort to the mortgaged premises"), aff'd, 273 N.J. Super. 542 (App. Div. 1994). Accordingly, summary judgment was appropriately granted by the trial court as a matter of law in favor of the Bank, striking defendants' pleadings and permitting the case to proceed in the Foreclosure Unit as uncontested.

We reject as unmeritorious defendants' assertions that the Bank violated the Fair Foreclosure Act by failing to provide them with a notice of intent to foreclose, N.J.S.A. 2A:50-56,*fn2 and a subsequent notice to cure prior to entry of final judgment, N.J.S.A. 2A:50-58. The trial court properly concluded the Fair Foreclosure Act, N.J.S.A. 2A:50-53 to -68, does not apply to defendants' construction loan. The purpose of this Act is to provide residential mortgage debtors "every opportunity to pay their home mortgages, and thus keep their homes." N.J.S.A. 2A:50-54 ("Findings, declarations on payment of home mortgages"). Among other items, this Act requires a thirty-day notice to be mailed to a residential mortgage debtor prior to acceleration of the maturity of any residential mortgage obligation and commencement of any foreclosure or related proceedings. N.J.S.A. 2A:50-56.

A "residential mortgage" is defined as follows:

[A] mortgage, security interest or the like, in which the security is a residential property such as a house, real property or condominium, which is occupied, or is to be occupied, by the debtor, who is a natural person, or a member of the debtor's immediate family, as that person's residence. This act shall apply to all residential mortgages wherever made, which have as their security such a residence in the State of New Jersey, provided that the real property which is the subject of the mortgage shall not have more than four dwelling units, one of which shall be, or is planned to be, occupied by the debtor or a member of the debtor's immediate family as the debtor's or member's residence at the time the loan is originated. [N.J.S.A. 2A:50-55.]

As the documentary evidence reflects, defendants' construction loan was to be converted to a permanent loan from the Bank or another lender once construction of the new house was completed. Defendants acknowledge that construction of the new house has not been completed and that a certificate of occupancy has not been issued. The construction loan addendum conspicuously advises, "THIS LOAN IS PAYABLE IN FULL AT MATURITY" and "THE LENDER IS UNDER NO OBLIGATION TO REFINANCE OR MODIFY THE LOAN AT THAT TIME." Defendants were expressly "REQUIRED TO MAKE PAYMENT OUT OF OTHER ASSETS THAT [THEY] MAY OWN, OR [THEY] WILL HAVE TO FIND A LENDER, WHICH MAY BE THE LENDER MAY BE THE LENDER [THEY] HAVE THIS LOAN WITH, WILLING TO LEND [THEM] THE MONEY." Had they done so, the permanent loan, secured by a mortgage on the new house, would be covered by the Fair Foreclosure Act.

Moreover, the loan matured on October 13, 2008, at which time defendants were required to pay the balance due. The foreclosure complaint was not filed until February 2, 2009. "Where the mortgage obligation has matured, so that all sums secured by the mortgage are immediately due and payable, acceleration is not required in order to foreclose. The [Fair Foreclosure Act's] own terminology makes the notice of intention inapplicable in this instance." 30 New Jersey Practice, Law of Mortgages § 24.12, at 264 (Myron C. Weinstein) (2d ed. 2000).

Because defendants are not entitled to the statutory protections of the Fair Foreclosure Act, the Bank was not required to provide defendants with a "notice to cure" prior to the entry of final judgment under N.J.S.A. 2A:50-58. Nonetheless, presumably as an additional precaution, the Bank sent such notice on June 9, 2009. Defendants do not claim they are able to cure the default, either by completing construction of the house or paying the balance due on the construction loan.

We also reject as unmeritorious the argument by defendants that the contract is null and void as a result of violations of the Licensed Lender Act, N.J.S.A. 17:11C-1 to -50.*fn3 N.J.S.A. 17:11C-3(a) provided that "[n]o person shall act as a mortgage banker or mortgage broker . . . without first obtaining a license under this act." This Act also provided that a consumer lender who violates or participates in the violation of N.J.S.A. 17:11C-3, shall be guilty of a crime of the fourth degree. A contract of a loan not invalid for any other reason, in the making or collection of which any act shall have been done which constitutes a crime of the fourth degree under this section, shall be void and the lender shall have no right to collect or receive any principal, interest or charges unless the act was the result of a good faith error [N.J.S.A. 17:11C-33(b).]

The Licensed Lender Act expressly exempted "depository institutions." N.J.S.A. l7:11C-4, -5. A "depository institution" was defined as "a state or federally chartered bank, savings bank, savings and loan association, building and loan association or credit union, irrespective of whether the entity accepts deposits." N.J.S.A. 17:11C-2. The Bank is a federally chartered savings association regulated by the Office of Thrift Supervision and the Federal Deposit Insurance Corporation and MidCountry Mortgage Corporation is a division of the bank, not a subsidiary. Accordingly, these institutions are exempt from the Licensed Lender Act.*fn4

Defendants also contend the Home Builder's Network (Home Builder's) violated the Licensed Lender Act by failing to be licensed as a broker. Defendants have failed to demonstrate Home Builder's acted as a broker in this case rather than as a consultant in providing defendants with information as to how to build their own home. Defendants also did not name Home Builder's as a party in this action.

We turn now to the May 28, 2010 order denying defendants' motion to vacate final judgment, vacate summary judgment and dismiss the bank's complaint. This motion was, in essence, a motion for reconsideration filed out of time with respect to the summary judgment order. See R. 4:49-2 (requiring a motion for reconsideration to be served within twenty days after service of the judgment or order). The trial court, however, rejected defendants' arguments on the merits, finding "the foreclosed loan was not converted to a permanent loan as the home construction was not complete." We have already explained the reason this decision is sound as a matter of law.

We are also satisfied defendants failed to demonstrate the criteria for reconsideration of summary judgment or the foreclosure judgment. Reconsideration is appropriate only where "1) the Court has expressed its decision based upon a palpably incorrect or irrational basis, or 2) it is obvious that the Court either did not consider, or failed to appreciate the significance of probative, competent evidence. Said another way, a litigant must initially demonstrate that the Court acted in an arbitrary, capricious, or unreasonable manner, before the Court should engage in the actual reconsideration process." D'Atria v. D'Atria, 242 N.J. Super. 392, 401 (Ch. Div. 1990). In their May 4, 2010 motion, defendants merely reiterated legal arguments the trial court had already rejected. Defendants provided no new evidence or argument to demonstrate that the grant of the judgments was arbitrary, capricious, or unreasonable.


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