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Hsbc Bank Usa, National Association, As Trustee For Home Equity Loan v. Bernard Woodhouse


May 24, 2012


On appeal from Superior Court of New Jersey, Chancery Division, Bergen County, Docket No. F-53147-09.

Per curiam.


Submitted November 16, 2011 -

Before Judges Lihotz and St. John.

In this mortgage foreclosure matter, defendant Bernard Woodhouse appeals from an order filed on October 20, 2010, granting summary judgment to plaintiff HSBC Bank USA, National Association (HSBC), as trustee for Home Equity Loan Trust Series ACE 2006-HE1. Woodhouse argues the judge erred by not finding that HSBC breached the implied covenant of good faith and fair dealing. We disagree and affirm.


On appeal, the record discloses the following facts and procedural history.

On November 29, 2005, Woodhouse executed and delivered to FGC Commercial Mortgage Finance (Freemont Mortgage) and its successors and/or assigns, a note in the principal amount of $348,720 payable on December 1, 2035, with an initial interest rate of 8.55% per annum. The note was an adjustable rate note, providing for changes, either higher or lower, in the interest rate as set forth therein. To secure payment of this obligation, Woodhouse executed and delivered a purchase money mortgage on real property, located on Martin Terrace in Hackensack, to Mortgage Electronic Registration Systems, Inc. (MERS), as nominee for Freemont Mortgage and its successors and/or assigns. The mortgage was recorded in the office of the Clerk of Bergen County on December 13, 2005. MERS assigned the mortgage to HSBC on August 28, 2006. The assignment was recorded on December 15, 2006.

Woodhouse defaulted on the note and mortgage in April 2006, and a complaint in foreclosure was filed against him on August 14, 2006, with a final judgment entered on August 29, 2008. Prior to the May 29, 2009 sheriff's sale, HSBC, through Wells Fargo Bank, N.A. d/b/a America's Servicing Company (ASC) and Woodhouse, negotiated a loan modification agreement. As a result of the modification, HSBC dismissed its foreclosure action on May 13, 2009.

ASC sent a commitment letter to Woodhouse dated April 8, 2009, which stated in pertinent part:

The terms of your modification/restructure are outlined below:

1. Due date of first payment: 06/01/2009;

2. New principal and interest payment amount: $2214.49;

3. *Required escrow payment based on previous analysis: $1131.71;

4. Estimated new net payment: $3346.20;

5. Modified maturity date: 12/01/2035;

6. **Interest rate: 4.00% * (Your Escrow shortage may not be fully included in the modification terms, payment may be subject to an additional increase in the future. The Escrow Department will reanalyze your loan after the terms of the modification are met and you will receive notice regarding any additional increase.) ** (Step rate changes, if applicable, will be reflected in the terms of the loan modification agreement. The interest rate and payment the borrower will pay may change in accordance with the note.)*fn1

The commitment letter enclosed a loan modification agreement, which Woodhouse was requested to execute and return to ASC. The agreement was dated April 8, 2010, and a recordable form was filed June 11, 2009. It reduced the interest rate from 8.55% to 4.00% per annum, and capitalized certain accrued, but unpaid interest, in the amount of $83,010.83, thereby increasing the unpaid principal balance to $434,539.43. This provision permitted Woodhouse to pay the interest he had failed to pay from 2006, over the term of the loan, which matures in 2035. The loan modification agreement stated that "the borrower promises to make monthly payments of principal and interest of U.S. $2214.49 at a fixed yearly rate of 4.00%, not including any escrow deposit, if applicable." (Emphasis added).

Not only had Woodhouse defaulted in 2006 by not making scheduled payments of principal and interest on the note and mortgage, but he also failed to pay real estate taxes and insurance on the premises, as required by the mortgage. In order to protect its interest, HSBC advanced the payment for real estate taxes*fn2 and force-placed insurance*fn3 in the aggregate amount of $48,853.03. HSBC was unwilling to capitalize this amount and added it to the new outstanding principal amount on the note and mortgage reflected in the modification.

ASC sent Woodhouse an escrow disclosure statement, dated May 14, 2009, reflecting his monthly payments and the escrow shortage, stating that the new monthly payment commencing on June 1, 2009, would be $3346.20 plus $1065.58 per month, totaling $4411.78. The additional amount of $1065.58 per month would amortize the escrow shortfall related to unpaid taxes and force-placed insurance over forty-eight months.

Subsequent to the execution of the loan modification agreement, Woodhouse made an initial payment of $3778.64, which was returned to him. On September 2, 2009, Woodhouse made a second payment of $4000, which was also returned to him. HSBC once again filed a foreclosure action.

During oral argument on the motion for summary judgment, counsel conveyed Woodhouse's request that the $48,853.03 in real estate taxes and force-placed insurance paid by HSBC be added to the unpaid principal amount of the loan, and amortized over the term of the loan which matures in 2035. In response, the judge stated:

He's seeking to really modify the terms to disable the lender from exercising the right that it retained under this agreement, which is to modify the monthly obligation, which they did from the very first payment, to reduce this tax escrow shortage which arose as a result of them paying the taxes for the borrower all those years. Under those circumstances, I can't re-write the loan modification agreement.

The judge granted summary judgment to HSBC. It is from that judgment that Woodhouse appeals.


Woodhouse argues that HSBC breached the implied covenant of good faith and fair dealing by amortizing the accrued but unpaid real estate taxes and force-placed insurance over forty-eight months instead of adding those amounts to the outstanding principal to be amortized over the term of the mortgage. He also asserts that the provision in the loan modification agreement, which adds the unpaid escrow amounts to the monthly payments, is confusing and ambiguous. Woodhouse contends there exists a genuine issue of material fact in dispute because HSBC "diverged far from industry standards" evincing bad faith, which would preclude the granting of summary judgment.

"On appeal from an order granting summary judgment, we apply the same standard that governs the analysis by the motion judge." Atl. Mut. Ins. Co. v. Hillside Bottling Co., 387 N.J. Super. 224, 230 (App. Div.) (citing Prudential Prop. & Cas. Ins. Co. v. Boylan, 307 N.J. Super. 162, 167 (App. Div.), certif. denied, 154 N.J. 608 (1998)), certif. denied, 189 N.J. 104 (2006). "We therefore must first determine whether, giving the non-moving party the benefit of all reasonable inferences, the movant has demonstrated that there are no genuine issues of material fact." Id. at 230-31 (citing Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520, 540 (1995)). We next analyze whether the motion judge's application of the law was correct. Id. at 231; see also Prudential, supra, 307 N.J. Super. at 167. In carrying out our review, however, we owe no deference to the interpretation of the motion judge on matters of law. Manalapan Realty, L.P. v. Twp. Comm. of Manalapan, 140 N.J. 366, 378 (1995).

"Interpretation and construction of a contract is a matter of law for the court subject to de novo review." Fastenberg v. Prudential Ins. Co. of Am., 309 N.J. Super. 415, 420 (App. Div. 1998). In construing a contract, the court should "consider what was written in the context of the circumstances under which it was written, and accord to the language a rational meaning in keeping with the expressed general purpose." Atl. N. Airlines, Inc. v. Schwimmer, 12 N.J. 293, 302 (1953). Hence, if a contract contains clear terms, the court must "enforce it as written and not [] make a better contract for either of the parties." Kampf v. Franklin Life Ins. Co., 33 N.J. 36, 43 (1960). See also Pacifico v. Pacifico, 190 N.J. 258, 266 (2007) ("As a general rule, courts should enforce contracts as the parties intended."); Seaview Orthopaedics ex rel. Fleming v. Nat'l Healthcare Res., Inc., 366 N.J. Super. 501, 510 (App. Div. 2004) ("[P]arties [are] free to contract as they deem[] appropriate, and courts will not rewrite contracts to make better deals for parties than they freely and voluntarily chose to make for themselves.").

Additionally, a "court will, if possible, give effect to all parts of the instrument, and an interpretation which gives a reasonable meaning to all its provisions will be preferred to one which leaves a portion of the writing useless or inexplicable." Maryland Cas. Co. v. Hansen-Jensen, Inc., 15 N.J. Super. 20, 27 (App. Div. 1951). It follows, the court may determine that those terms the parties excluded from the contract were intentionally excluded. Gabel v. Manetto, 177 N.J. Super. 460, 464 (App. Div. 1981) ("An affirmative expression ordinarily implies a negation of any other alternative."), certif. dismissed, 91 N.J. 270 (1982). Outside of the contractual language, courts may also consider "the circumstances leading up to the formation of the contract, custom, usage, and the interpretation placed on the disputed provision by the parties' conduct." Kearny PBA Local #21 v. Town of Kearny, 81 N.J. 208, 221 (1979).

Woodhouse requested that the motion judge write into the loan modification agreement a provision requiring HSBC to amortize the un-reimbursed real estate taxes and force-placed insurance over the life of the loan. This provision, under any reasonable reading of the loan documents, did not exist and should not be judicially imposed upon the lender. The motion judge appropriately analyzed the loan modification as written and refused to make a better contract for Woodhouse. See Kampf, supra, 33 N.J. at 43. We see no reason to disturb the judge's decision.

We find little merit in Woodhouse's claim that HSBC breached the implied covenant of good faith and fair dealing.

Every contract entered into under the laws of this state contains an implied covenant of good faith and fair dealing. See Kalogeras v. 239 Broad Ave., L.L.C., 202 N.J. 349, 366 (2010). "Good faith" imports "standards of decency, fairness or reasonableness" and "requires a party to refrain from destroying or injuring the right of the other party to receive its contractual benefits." Iliadis v. Wal-Mart Stores, Inc., 191 N.J. 88, 109-10 (2007) (internal citations and quotation marks omitted). "The party claiming a breach of the covenant of good faith and fair dealing 'must provide evidence sufficient to support a conclusion that the party alleged to have acted in bad faith has engaged in some conduct that denied the benefit of the bargain originally intended by the parties.'" Brunswick Hills Racquet Club, Inc. v. Route 18 Shopping Ctr. Assocs., 182 N.J. 210, 225 (2005) (quoting 23 Williston on Contracts § 63:22, at 513-14 (Lord ed. 2002)).

The implied covenant of good faith and fair dealing focuses on the performance and enforcement of a valid agreement more than it regulates contract formation. See id. at 224; Restatement (Second) of Contracts § 205 (1981) ("Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement."). The implied covenant of good faith and fair dealing does not require "either side in negotiations to reveal any and all information that might help the adversary and hurt his or her own client," Brundage v. Estate of Carambio, 195 N.J. 575, 609 (2008), but directs that "'neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract[,]'" once it is entered into. Sons of Thunder v. Borden, Inc., 148 N.J. 396, 420 (1997) (quoting Palisades Props., Inc. v. Brunetti, 44 N.J. 117, 130 (1965)).

Here, there is no evidence that HSBC suddenly attempted to frustrate Woodhouse's right to the full measure of the loan modification agreement or "destroy[ ] [his] reasonable expectations and right to receive the fruits of the contract[.]" Id. at 425. Under the loan modification agreement, Woodhouse was entitled to receive a reduction in the interest rate, capitalization of accrued but unpaid interest, the benefit of paying the accrued but unpaid taxes and force-placed insurance over forty-eight months, and no more. Because HSBC's interpretation of the arrangement does not abrogate the benefit of the bargain to be enjoyed by Woodhouse as contemplated by the loan modification agreement and the commitment letter, there can be no breach of the implied covenant of good faith and fair dealing.

Defendants' final point on appeal in effect asks this court to take judicial notice of "the established standard of the mortgage industry under Fannie Mae Guidelines and the Making Homes Affordable Program" as described in a certification of Thomas Donahue, the accountant for Woodhouse, relating generally to the ability of borrowers to repay mortgages based on their income.*fn4 Donahue's certification was included in support of defendant's opposition to the summary judgment motion, and as support for the assertion that HSBC was obligated to agree to amortize the real estate tax and force-placed insurance arrearages over the life of the loan. In substance, Donahue contended that Woodhouse did not have the financial ability to repay the loan and the arrearages, and because HSBC did not agree to the requested amortization period, it was acting in bad faith in contravention of certain "industry standards." The certification and its relevance to the proceedings was considered by the motion judge in connection with the October 20, 2010 order granting summary judgment. We find no error in his analysis of the issues to which it purportedly relates.

On appeal, however, defendant seeks to have this court take judicial notice of those "industry standards" and to do so for the purpose of reaching a different conclusion as to HSBC's bad faith. This request is inappropriate and we decline the exercise of judicial notice. See RWB Newton Assocs. v. Gunn, 224 N.J. Super. 704, 710-11 (App. Div. 1988). Further, we reject this application as an improper effort to have us substitute defendant's view of the terms of the loan modification agreement based on non-evidential "industry standards" for the determination before us of the motion judge.


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