On appeal from Superior Court of New Jersey, Law Division, Hudson County, Docket No. L-3436-08.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Before Judges Fuentes, Nugent and Newman.
In this appeal, we are required to determine whether a payee who rejects and returns a check to the payor has standing to hold a depositor bank liable for thereafter permitting a third party to fraudulently convert the proceeds of the check. Stated differently, we must decide whether the return of the check by the payee constituted an intentional and voluntary surrender of the instrument under N.J.S.A. 12A:3-604(a); and if such action does constitute a surrender, whether it revokes the payee's standing to enforce payment of the check under N.J.S.A. 12A:3-420(a).
This dispute arose when homeowner Magdy Omar ostensibly sought to refinance an outstanding loan, which was originally issued in 2003 by Metro Center Mortgage, Inc., (Metro) and secured by a first-lien mortgage on real property Omar owned in the City of Bayonne. Metro named as nominee the Mortgage Electronic Registration Systems (MERS). MERS then assigned the mortgage to JP Morgan, who designated Homecomings Financial Network, Inc. (Homecomings) as the servicer of the loan.
Although Omar defaulted on the Metro loan, he was able to refinance the loan in 2004 through FGC Commercial Mortgage Finance, d/b/a/ Fremont Mortgage (Fremont). Homecomings generated a payoff statement of the 2003 loan that reflected an outstanding balance of $298,219,57, with a per diem rate of interest accrual of $79.95. At the closing for the refinance loan, Fremont's agent, Yorktown Title LLC, sent Homecomings a check in the amount of $298,219.57,*fn1 along with a transmittal letter that stated that the check was intended to payoff the 2003 Metro loan. Of particular relevance here, the transmittal letter also indicated that if the funds were insufficient, the check should be applied to the debt and Homecomings should contact the sender.
It is undisputed that Homecomings received the check and that, according to the per diem rate, the payoff amount was short by $559.65 in accrued interest. However, instead of applying the $298,219.57 check to the outstanding loan balance and contacting Yorktown to arrange for the receipt of the additional accrued interest, Homecomings returned the check to Yorktown, insisting that the check was insufficient to discharge the loan. The record also shows that Yorktown sent the payoff check to Homecomings a second time, and that Homecomings again rejected it.
Instead of returning the payoff check to Yorktown, Homecomings returned the check to Omar, the delinquent borrower.
Upon receipt of the check, Omar decided to conspire with a cohort to steal the proceeds of the check. On May 7, 2004, Naser Belosa formed a New Jersey company by the name of Homecomings Financial Service, Inc. On May 10, 2004 Belosa opened a business account at Fleet Bank, now Bank Of America (BOA), in the name of the newly formed company.
On May 24, 2004, working in concert with Omar, Belosa presented the payoff check, made payable to "Homecomings Funding," to BOA for deposit into the Homecomings Financial Services, Inc., account. The check was endorsed in type with the words, "Homecomings Financial." Amboy National Bank n/k/a/ Amboy Bank ("Amboy"), debited the Yorktown account and paid the check after it was presented to Amboy for payment from BOA. Omar and Belosa thereafter shared the proceeds of the laundered check by writing checks to themselves and other business entities.
On January 3, 2005, MERS filed a complaint in foreclosure against Omar in the Chancery Division, General Equity Part. It was at this point that plaintiff discovered the fraud perpetrated by Omar and Belosa. MERS amended its complaint shortly thereafter to name Fremont as a defendant, alleging that it held a subordinate lien on the property. Fremont filed an answer and defenses to MERS complaints and a third-party complaint against Homecomings alleging that it had sent a payoff check to Homecomings. Homecomings answered Fremont's third-party complaint and filed its own third-party complaint against BOA, Amboy, Omar, and Belosa.
As a matter of case management, the Chancery Division stayed all claims except those involving priority of liens between Fremont and Homecomings. The Chancery Division thereafter held a bench trial on the foreclosure/lien priority matter and ruled in favor of Freemont. The court found that Homecomings' decision to reject and return the payoff check constituted a "discharge" of its mortgage, resulting in Fremont having priority. On Homecomings' appeal, we affirmed the Chancery Division in a Per Curiam ...