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Mortgage Electronic Registration Systems v. Amboy National Bank


May 24, 2012


On appeal from Superior Court of New Jersey, Law Division, Hudson County, Docket No. L-3436-08.

Per curiam.


Submitted March 30, 2011

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 unpublished opinion. Mortgage Electronic Registration Systems, Inc., v. Magdy Omar, Docket No. A-5187-06, (App. Div. May 15, 2008).

Homecomings' complaint against BOA was then tried in the Law Division on a stipulated record, admitted exhibits, and the affidavit of Scott Zeitz, a witness for the Payee Parties. The Law Division judge found in favor of Homecomings.

Against this factual record, we will now address the arguments raised by BOA.


In the foreclosure action before the Chancery Division, the trial court found that "Homecomings should have accepted that first . . . payoff check and applied it to the amount owed the first time it was sent [a check] by Yorktown Title. And had of course that had been done, considering . . . it was only $559.65 short, all of this, of course wouldn't have happened."

As the Chancery Division's allusion to a "first check" implies, the court found that Yorktown sent Homecomings the payoff check a second time. The Chancery Division found that Homecomings compounded this error by inexplicably returning the payoff check to Omar.

But it's clear to me [the Chancery Division judge] that . . . Homecomings should have accepted the first payoff. But even if they were not obligated to accept the first payoff check[] [t]he credible evidence in this matter based upon Ms. Durham [the agent for Yorktown Title]'s testimony and the times [sic] that have been marked into evidence, [along] with the stipulated facts, led this Court to believe that Homecomings, in fact, received both checks[] [a]nd sent them back for whatever reason . . . to Mr.

Omar, who then converted those funds through his own . . . use.

This critical error by Homecomings gave Omar the opportunity to conspire with Belosa to carry out the theft of these funds and triggered the chain of events that inexorably led to this civil action. As the Chancery Division found, and we affirmed, despite the de minimis nature of the shortfall, Homecomings intentionally returned the payoff check on two separate occasions. In so doing, Homecomings unequivocally communicated its intention to reject this check. See Mortgage Electronic Registration Systems, Inc., v. Magdy Omar, supra, Slip op. at 13.

In this appeal BOA argues that the trial court erred when it applied common law principles of negligence and conversion to the claims brought by Homecomings. According to BOA, banking transactions of the nature involved here are exclusively governed by the U.C.C. Thus, BOA argues that N.J.S.A. 12A:3-406(a) bars Homecomings' claims because, as the Chancery Division found in the foreclosure action, Homecomings' failure to exercise ordinary care substantially contributed to its loss.

At this court's request, both sides submitted supplemental briefing on the question of whether Homecomings' decision to return the check issued by Yorktown constituted an intentional and voluntary surrender of the instrument under N.J.S.A. 12A:3-604(a); and, if such surrender occurred, whether it revokes Homecomings' entitlement or standing to enforce payment of the check under N.J.S.A. 12A:3-420(a).

We now reverse the trial court and hold that by voluntarily returning the check issued by Yorktown, Homecomings' actions constituted a surrender of the instrument pursuant to N.J.S.A. 12A:3-604(a), thus depriving Homecomings of standing to seek payment of the check under N.J.S.A. 12A:3-420(a).

Under the U.C.C., a "payee" who "receive[d] delivery of [an] instrument" may bring an action for conversion against a depository bank who caused payment to be made to "a person not entitled to enforce the instrument." N.J.S.A. 12A:3-420. A person "receives delivery of [an] instrument" under N.J.S.A. 12A:3-420 "when the check comes into the payees possession, as for example when it is put into the payee's mailbox." Ibid., comment 1. Delivery is required because it is not until this point when the payee becomes the holder or a "person entitled to enforce the check." Ibid. If the check is not delivered to the payee, the underlying obligation for which the check was issued is not affected, and therefore, the payee's right to enforce the underlying obligation remains fully intact. Ibid. The drawee can still bring an action under N.J.S.A. 12A:3-417(a)(1) against the depository bank for breach of warranty. However, because the payee's rights to enforce the underlying obligation against the payor are unaffected, there is no reason to give the payee an additional remedy for conversion. Ibid.

A payee can also "discharge [an] obligation of a party to pay the instrument by an intentional voluntary act, such as surrender of the instrument to the party . . . ." N.J.S.A. 12A:3-604a. Consequently, a discharge of the obligation to pay would simultaneously revoke any entitlement the payee had to enforce payment on the instrument. If no entitlement to enforce payment exists, there can be no right to sue for conversion under N.J.S.A. 12A:3-420. A depository bank "is strictly liable for conversion on a forged or stolen instrument" to a party that received delivery.*fn2 Leeds v. Chase Manhattan Bank, 331 N.J. Super. 416, 422 (App. Div. 2000) (citing N.J.S.A. 12A:3-420, comment 1); wsee also New Jersey Lawyers' Fund for Client Prot.

v. First Fidelity Bank, N.A., 303 N.J. Super. 208, 226-27 (App. Div.), cert. denied, 152 N.J. 13 (1997).

Here, the Law Division found that Homecomings received the check, and that BOA was strictly liable to Homecomings under N.J.S.A. 12A:3-420a. As previously noted, however, it is undisputed that Homecomings rejected and returned the check on two separate occasions, and that its employees caused the check to be erroneously sent to Omar. By finding liability under N.J.S.A. 12A:3-420, the Law Division overlooked the legal significance of Homecomings' actions. Returning the check, either to the payor or to a third party interloper, served as a discharge pursuant to N.J.S.A. 12A:3-604a.

Because Homecomings discharged Yorktown's obligation to pay on the instrument, it cannot assert a cause of action for negligence against the depositor bank. Although N.J.S.A. 12A:3-420 only discusses that an instrument must be delivered to the payee for the payee to have standing under the conversion provision, Homecomings' discharge under N.J.S.A. 12A:3-604a relieved Yorktown of paying on the instrument, and likewise severed any right Homecomings had to enforcement. The return of the check also severed any right Homecomings had to sue for conversion under N.J.S.A. 12A:3-420.

We thus reverse the Law Division judgment holding BOA liable to Homecomings for conversion under N.J.S.A. 12A:3-420.


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