NOT TO BE PUBLISHED WITHOUT THE APPROVAL OF THE COMMITTEE ON OPINIONS

SUPERIOR COURT OF NEW JERSEY AURORA LOAN SERVICES, LLC, Plaintiff, v. KRAUS, ET AL. Defendants. CHANCERY DIVISION BERGEN COUNTY DOCKET No. BER-F-5485-11 CIVIL ACTION OPINION

Argued: June 22, 2012 Decided: June 26, 2012 Honorable Peter E. Doyne, A.J.S.C. William C. Sandelands, Esq. appearing on behalf of the plaintiff, Aurora Loan Services, LLC (Tompkins, McGuire, Wachenfeld & Barry). Abigail Kahl, Esq. appearing on behalf of the defendants, Scott and Elizabeth Kraus (Denbeaux & Denbeaux).

Introduction Before the court is a motion filed on behalf of Aurora Loan Services, LLC (Aurora or plaintiff) seeking summary judgment against Scott Kraus and Elizabeth Kraus (Scott and Elizabeth when referenced individually; defendants when referenced together) and the appointment of a rent receiver and a cross-motion for summary judgment filed on defendants behalf.1

As plaintiff points out in reply, defendants cross-motion is barred by the courts case management order executed and distributed to counsel on September 22, 2011, which provides, Any case-dispositive motions must be filed by May 8, 2012 or else same shall be precluded. As such, no cross motion(s) for dispositive

Fact and Procedural Posture On June 7, 2007, defendants refinanced a mortgage loan on investment property located at 196 Madison Avenue, Cresskill, NJ 07626 (the Investment Property) by obtaining a mortgage loan from American Financial Resources, Inc. (American Financial) in the amount of $712,500.00. The mortgage was evidenced by an adjustable rate note executed to American Financial on the same date by Scott. Interest was to be calculated at the initial interest rate of 8.000% per annum. Defendants were directed to make payments to 1100 Lake Street, Ramsey, NJ 07446. The note obligated defendants to make monthly installment payments due on the first day of each month commencing on August 1, 2007. The maturity date was scheduled for July 1, 2037, at which time all unpaid principal and interest thereon would have become due. The note provided for a late charge of 5.000% on the payment due for any payment not received within fifteen calendar days from that payments due date. If payments became overdue, the note permitted the holder to send notice of the overdue amount and require payment by a certain date. After said date, which could be no sooner than thirty days from the notices mailing, the lender could require the immediate payment of the full principal and interest owed thereon. To secure payment on the note, defendants executed and delivered to Mortgage Electronics Registration Systems, Inc., as nominee for American Financial and its successors and assigns (MERS), a mortgage on the Investment Property. The mortgage was recorded on June 28, 2007, in the Office of the Clerk of Bergen County, in Book

relief shall be permitted if the same contravenes the deadlines set herein. As both parties have blithely ignored the mandates of the case management order, though, the cross-motion shall be considered.

16832 of Mortgages on Page 685. The mortgage was assigned to plaintiff on February 24, 2011. The assignment was recorded on March 15, 2011. Defendants also executed, simultaneously with the note and mortgage, an Occupancy and Financial Status Affidavit, which states the Investment Property is owned and held by Borrower as an investment property. Borrower does not now occupy or use the property, and has no present intention to occupy or use the property in the future, either as Borrowers principal residence or second home. According to the certification of Darla Johnson, a foreclosure processor for plaintiff (Johnson and the Johnson Cert.), defendants defaulted under the terms of the note and mortgage by failing to make the monthly installment payment for August 1, 2010, and all payments due thereafter. Defendants admit the default. Though not required to do so, as the subject property is used for investment rather than residential purposes, in deference to the Fair Foreclosure Act (FFA), on November 12, 2010, plaintiff mailed a notice of intention to foreclose (NOI) to defendants. N.J.S.A. 2A:50-56. Also per the FFA, the NOI was sent more than thirty days prior to the foreclosure complaint; plaintiff sent the NOI on November 12, 2010, and filed the foreclosure complaint on July 19, 2011. On September 20, 2010, plaintiff obtained a brokers price opinion (BPO) for the Investment Property, which estimated the sale price for the Investment Property to be $620,000. According to the certification of plaintiffs counsel, William C. Sandelands, Esq. (Sandelands and the Sandelands Cert.), the estimated sale price (presumably premised upon the BPO) is substantially less than the amount owed on the mortgage loan.

As such, Sandelands certifies the equity in the Investment Property is presently being diminished by defendants default and continued failure to make mortgage payments. On August 10, 2011, counsel for defendants filed an answer. The answer

admitted execution of the note and mortgage and defendants default on the loan. The answer, however, denied knowledge of the recordation or assignment of the mortgage to plaintiff and denied plaintiff mailed the NOI. Defendants raised fifteen affirmative

defenses. Defendants also asserted a counterclaim wherein they alleged plaintiff violated the Truth in Lending Act (TILA), 15 U.S.C. 1601, et seq., by underdisclosing finance charges and defendants right to cancel the contract. No evidence has been provided to substantiate any of defendants claims. Counsel on behalf of plaintiff filed the instant motion for summary judgment and to appoint a rent receiver on May 8, 2012. In support of the motion, counsel submitted a brief, a statement of material facts, the Johnson Cert., the Sandelands Cert., and the following exhibits: (1) the note; (2) the recorded mortgage; (3) the recorded assignment; (4) the NOI; (5) the Occupancy and Financial Status Affidavit; (6) the complaint; (7) the answer; and (8) the BPO. Plaintiffs brief maintains a prima facie right to foreclose has been established by the validity of the note and mortgage coupled with the evidence of default. Plaintiff asserts it is the holder and owner of the note and the mortgage, and defendants have failed to pay all sums due and owing. Plaintiffs brief submits defendants have brought forth no evidence to support a contested issue of material fact. Plaintiff also asserts it is entitled to an appointment of a rent receiver on the following grounds: (1) defendants, despite their default, have applied the rents received to

debts other than the mortgage loan and taxes; (2) the terms of the mortgage provide for the appointment of a rent receiver upon default; and (3) the Investment Property is worth less than the total amount due. On June 6, 2012, defendants filed an opposition to plaintiffs motion for summary judgment and a cross-motion for summary judgment. In support of the cross-motion, counsel submitted a brief, a response to plaintiffs statement of undisputed material facts, a counter-statement of undisputed material facts, and a certification on behalf of Adam Deutsch, Esq. (Deutsch and the Deutsch Cert.), which attaches the courts case management order of September 22, 2011, an allegedly unanswered discovery demand, and three unpublished cases.2 Defendants arguments fall into two strands. First,

defendants put forth two discovery-related arguments: the court should not consider the assignment of the mortgage as defendants requested a copy of it in discovery and never received one, and plaintiff never submitted a witness list in accordance with the case management order or otherwise identified Johnson as a potential witness. More

substantively, defendants argue the Johnson Cert. establishes neither plaintiffs possession of the note when it filed the complaint nor the validity of the assignment. Defendants also argue Johnson lacks the personal knowledge to make the assertions contained in her certification. On June 11, 2012, plaintiff filed a reply to defendants opposition to plaintiffs motion for summary judgment and opposition to defendants cross-motion. Plaintiff argues summary judgment should be granted and a rent receiver should be appointed as defendants admit plaintiff has set forth a prima facie case for foreclosure while concededly collecting approximately $3,600 in monthly rent. Plaintiff also argues it has
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Conspicuously absent was a certification of Scott or Elizabeth.

established its standing to foreclose as the holder of the note, and the Johnson Cert. is competent evidence in support thereof. Lastly, plaintiff argues defendants should be precluded from asserting plaintiffs alleged discovery default as a basis for objecting to the entry of summary judgment as defendants are similarly in default of discovery requests. Lastly, at oral argument on June 22, 2012, the parties clarified their positions. Defendants urged plaintiff must show authentication of the assignment and, therefore, wanted to depose the signatory to the document which purportedly assigned the mortgage to plaintiff. Plaintiff asserted there was no such obligation, and it had standing to

foreclose as the holder of the note. The court then permitted additional briefing limited to the issue of whether a plaintiff purporting to have standing to foreclosure on a mortgage must authenticate the validity of the assignment of the mortgage.3 Law A. Plaintiffs Right to Foreclose The defenses to foreclosure actions are narrow and limited. The only material issues in a foreclosure proceeding are the validity of the mortgage, the amount of indebtedness, and the right of the mortgagee to foreclose on the mortgaged property. Great Falls Bank v. Pardo, 263 N.J. Super. 388, 394 (Ch. Div. 1993). In Thorpe v. Floremoore Corp., 20 N.J. Super. 34 (App. Div. 1952), the court set forth the elements for a prima facie right to foreclose: Since the execution, recording, and non-payment of the mortgage was conceded, a prima facie right to foreclose was made out. Defendants argue since the mortgage was in their counsels possession and produced by him at the
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In his post-argument brief, counsel for plaintiff also argued defendants do not have standing to challenge the assignment, an issue which is not decided herein.

request of plaintiff, delivery thereof after execution was not established and consequently no case appeared. However, proof of the recording creates a presumption of delivery. [Id. at 37.] If the defendants answer fails to challenge the essential elements of the foreclosure action, the plaintiff is entitled to strike the defendants answer as a noncontesting answer. Old Republic Ins. Co. v. Currie, 284 N.J. Super. 571, 574 (Ch. Div. 1995); Somerset Trust Co. v. Sternberg, 238 N.J. Super. 279, 283 (Ch. Div. 1989). When a party alleges he/she is without knowledge or information sufficient to form a belief as to the truth of an aspect of the complaint, the answer shall be deemed noncontesting to the allegation of the complaint to which it responds. R. 4:64-1(a)(3). Pursuant to R. 4:64-1(c)(2) an answer to a foreclosure complaint is deemed to be noncontesting if none of the pleadings responsive to the complaint either contest the validity or priority of the mortgage or lien being foreclosed, or create an issue with respect to plaintiffs right to foreclose. Consequently, a plaintiff may move to strike such an answer pursuant to R. 4:6-5 on the grounds it presents no question of fact or law which should be heard by a plenary trial. Old Republic Ins. Co., supra, at 574-75. In order to satisfy its burden of proof on a summary judgment motion, plaintiff must show that no genuine issue of material facts exists. Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520, 528-29 (1995). Once the moving party satisfies its burden, the burden then shifts to the non-moving party to present evidence there is a genuine issue for trial. Ibid. In satisfying their burden, defendants may not rest upon mere allegations or denials in their pleading but must produce sufficient evidence to reasonably support a verdict in their favor. Triffin v. Am. Intl Group, 372 N.J. Super. 517, 523 (App. Div.

2004); R. 4:46-5(a). Moreover, R. 4:5-4 requires all affirmative defenses be supported by specific facts. Parties must respond with affidavits meeting the requirements of R. 1:6-6 as otherwise provided in this rule and by R. 4:46-2(b), setting forth specific facts showing there is a genuine issue for trial. An issue of fact is genuine only if, considering the burden of persuasion at trial, the evidence submitted by the parties on the motion, together with all legitimate inferences therefrom favoring the non-moving party, would require submission of the issue to the trier of fact. R. 4:46-2(c); see also Brill, 142 N.J. at 535. B. Standing As the Honorable Stephen Skillman, P.J.A.D., recently highlighted in Wells Fargo Bank, N.A. v. Ford, 418 N.J. Super. 592, 597 (App. Div. 2011), in New Jersey, [a]s a general proposition, a party seeking to foreclose a mortgage must own or control the underlying debt. See also Bank of N.Y. v. Raftogianis, 418 N.J. Super. 323, 327-28 (Ch. Div. 2010). However, when a debt is evidenced by a negotiable instrument, Article III of the Uniform Commercial Code (UCC), N.J.S.A. 12A:3-101 -605, in particular N.J.S.A. 12A:3-301, governs. Ford, supra, 418 N.J. Super. at 597. Under the applicable statute: Person entitled to enforce an instrument means [1] the holder of the instrument, [2] a nonholder in possession of the instrument who has the rights of the holder, or [3] a person not in possession of the instrument who is entitled to enforce the instrument pursuant to [N.J.S.A.] 12A:3-309 or subsection d. of [N.J.S.A.] 12A:3-418. [N.J.S.A. 12A:3-301.] Under the first circumstance provided by N.J.S.A. 12A:3-301, a person who qualifies as the holder of the instrument is entitled to foreclose on a negotiated debt. A

holder is defined as the person in possession if the instrument is payable to bearer or, in the case of an instrument payable to an identified person, if the identified person is in possession. N.J.S.A. 12A:1-201; see also N.J.S.A. 12A:3-201(a) (A holder is the person who has physical possession of the negotiated instrument). In order to transfer holder status to a third party, a negotiation must take place whereby the transferring holder indorses the instrument and then physically transfers possession of the instrument to the transferee. N.J.S.A. 12A:3-201(b). Only once the negotiation has occurred, will the third party become the new holder and be entitled to foreclose upon the debt. Ibid. Second, a person has standing to foreclose on a negotiated debt when they are a nonholder in possession of the instrument who has the rights of a holder. See N.J.S.A. 12A:3-301. In this scenario, the instrument is physically transferred without the

indorsement of the issuer. See N.J.S.A. 12A:3-203(c). While the lack of the indorsement prevents the person with possession of the instrument from becoming a holder, the transfer vests in the transferee any right of the transferor to enforce the instrument, including any right as a holder in due course.4 See N.J.S.A. 12A:3-203(b). Under N.J.S.A. 12:A3-301:

Under N.J.S.A. 12A:3-302, holder in due course means the holder of an instrument if: (1) the instrument when issued or negotiated to the holder does not bear such apparent evidence of forgery or alteration or is not otherwise so irregular or incomplete as to call into question its authenticity; and (2) the holder took the instrument for value, in good faith, without notice that the instrument is overdue or has been dishonored or that there is an uncured default with respect to payment of another instrument issued as part of the same series, without notice that the instrument contains an unauthorized signature or has been altered, without notice of any claim to the instrument . . . and without notice that any party has a defense or claim in recoupment.

In essence, to be a holder in due course, one must take a negotiable instrument for value, in good faith, and without notice of any default or defect. Ibid.

A nonholder in possession of an instrument includes a person that acquired rights of a holder by subrogation or under Section 3-203(a). It also includes both a remitter that has received an instrument from the issuer but has not yet transferred or negotiated the instrument to another person and also any other person under the applicable law is a successor to the holder or otherwise acquires the holders rights. Once the instruments transfer has been completed, the ability to enforce the unindorsed instrument can only be denied if, if the transferee engaged in fraud or illegality affecting the instrument. See N.J.S.A. 12A:3-203(b). Finally, standing to foreclose on a debt is obtained when a holder, who is entitled to enforce the instrument, subsequently loses physical possession of the instrument because the instrument was destroyed, its whereabouts cannot be determined, or it is in the wrongful possession of an unknown person or a person that cannot be found or is not amendable to service of process. See N.J.S.A. 12A:3-309(a). However, the loss of

possession [must] not [be] the result of a transfer by the person or a lawful seizure. See N.J.S.A. 12A:3-309(a). Aside from physical loss, if the instrument was paid or accepted by mistake and the payor or acceptor recovers payment or revokes acceptance, . . . it is treated as dishonored, and the person from whom payment is recovered has rights as a person entitled to enforce the dishonored instrument. See N.J.S.A. 12A:3-418(d). Legal Analysis A. Plaintiff Has Established a Prima Facie Right to Foreclose. When a party raises incomplete discovery as a defense to a motion for summary judgment, the party must demonstrate the likelihood continued discovery would uncover sufficient and necessary information. J. Josephson, Inc. v. Crum & Forster Ins. Co., 293 N.J. Super. 170, 204 (App. Div. 1996) (citing Auster v. Kinoian, 153 N.J. Super. 52, 56

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(App. Div. 1977) (explaining partys obligation to demonstrate with some degree of particularity the likelihood that further discovery will supply the missing elements of the cause of action)). Here, curiously and disappointingly, the first time lack of discovery was raised as an issue was in defendants cross-motion. Prior to the cross-motion, the court received no notice of any issue(s) pertaining to discovery or a request for the court to intervene. With defendants also allegedly defaulting in discovery and the trial date fast approaching on July 9, 2012, raising it as an issue at this time is unacceptable and far too facile. It appears clear both counsel purposefully ignored discovery mandates, without notifying the court, for strategic purposes. Considering, then, the substance of the motion and cross-motion presented, plaintiff has successfully established a prima facie foreclosure case. Plaintiff has

provided evidence of the validity of the note and mortgage, the mortgages recordation, and defendants default on the loan. Defendants contesting answer did not contravene any of the essential elements plaintiff needed to show to be entitled to the relief. As such, plaintiffs request for summary judgment is granted, and the contesting answer is stricken. B. Plaintiff Has Standing to Foreclose, Regardless of the Assignments Validity. In addition to establishing a prima facie case, plaintiff has also shown it has standing to foreclose, as the Johnson Cert. provides, Plaintiff has held the original Note, endorsed to Plaintiff, since February 25, 2011 and continues to hold it at this time.5 In the absence of any competent contrary evidence, this establishes plaintiffs status as a holder of the note, i.e., a party in possession of a note which is made payable to it, and,
5

At oral argument, defendants counsel urged the quoted statement is ambiguous as to whether plaintiff possesses the note, but, on its face, the court finds the statement sufficiently free from ambiguity as to not create a genuine dispute of material fact.

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therefore, as a party with standing to foreclose. N.J.S.A. 12A:1-201; Ford, supra, 418 N.J. Super. at 597. As it is often said the mortgage follows the note, defendants attempt to draw an artificial distinction between the note, as representing the debt, and the mortgage, as representing the security interest on the debt, is rejected. See Hyman v. Sun Ins. Co., 70 N.J. Super. 96, 101 (App. Div. 1961) ([I]t is well established in the law that an assignment of a debt, if not limited in its scope, carries with it the promises and undertakings connected therewith and tending to secure its payment.). Therefore, as holder of the note, plaintiff has standing to foreclose regardless of the validity of the assignment of the mortgage. Consequently, there appears to be no need for further discovery, and, as such, plaintiffs motion for summary judgment is granted. C. Plaintiff is Entitled to the Appointment of a Rent Receiver. In New Jersey, courts maintain significant discretion in deciding whether to appoint a rent receiver in a foreclosure action and should exercise this power when it appears necessary for the protection of the mortgagee. First Union Trust Co. v. Pasternack, 123 N.J. Eq. 181, 183-84 (E. & A. 1937). Receivers are not appointed as a matter of course but only when it appears that the appointment is reasonably necessary for the protection of the mortgagee. This situation is commonly shown by evidence that the security is uncertain or precarious and that the mortgagor cannot be made to respond to any deficiency which may arise at the foreclosure sale. N.J. Natl Bank & Trust Co. v. Morris 9 N.J Misc. 444, 445 (Dist. Ct. 1931) (citing Land Title and Trust Co. v. Kellogg, 73 N.J. Eq. 524 (1907)). Simply put, a receiver should be appointed when it is necessary to protect the mortgagees security. Fidelity Union Trust Co., supra, 123 N.J. Eq. at 183-84.

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The mortgage in this case assigns rents collected after default to the mortgagee. Courts have consistently ruled the mortgagee is entitled to recover rents collected after default from the mortgagor where a mortgage includes a provision assigning rents collected after default to the mortgagee. See Stanton v. Metro. Lumber Co., 107 N.J. Eq. 345, 347 (Ch. 1930) (Although it is held that the bank is not entitled to the rents as mortgagee, they, however, belong to it under the assignment contained in the mortgage . . . The assignment, though conditional, became absolute upon default of the mortgage debt, and was valid and enforceable against the assignor); see also Paramount Bldg. & Loan Assn v. Sacks, 107 N.J. Eq. 328, 330 (Ch. 1930) (It is, of course, competent for the parties to provide in the mortgage for the payment of rents and profits to the mortgagee, even while the mortgagor remains in possession). As defendants admittedly continue to collect rent despite their default on the mortgage loan, and in light of the terms of the mortgage providing for a rent receiver in the event of a default, the court is satisfied the appointment of a rent receiver is appropriate to protect plaintiffs mortgage security in the Investment Property. D. Plaintiffs Motion to Dismiss Defendants Counterclaim is Granted. Additionally, defendants asserted a counterclaim against plaintiff, alleging plaintiff violated TILA by underdisclosing finance charges and defendants purported right to cancel the contract. However, plaintiff correctly argued TILA explicitly does not cover [c]redit transactions involving extensions of credit primarily for business, commercial, or agricultural purposes. 15 U.S.C.A. 1603(1). Rather, its disclosure requirements only apply to consumer credit transactions. 15 U.S.C.A. 1602(h).

Consumer credit transactions are those in which the party to whom credit is offered or

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extended is a natural person, and the money, property, or services that are the subject of the transaction are primarily for personal, family, household, or agricultural purposes. Ibid. Here, the subject mortgaged premises is a rental property purchased for investment purposes in which defendants do not reside and is therefore the subject of a transaction entered into for commercial or business purposes. As such, TILA is not applicable, and defendants counterclaim has failed to state a cause of action. Accordingly, summary judgment in favor of plaintiff as to defendants counterclaim is appropriate. Conclusion For the foregoing reasons, plaintiffs motion for summary judgment and request for the appointment of a rent receiver are granted; defendants cross-motion for summary judgment is denied; and defendants counterclaim is dismissed. The matter shall be forwarded to the Foreclosure Unit to proceed as uncontested. The court appoints Stephen P. Sinisi, Esq. as a rent receiver. Counsel are encouraged to agree upon the parameters of Mr. Sinisis remuneration. Absent agreement, that issue may be brought before the court. Plaintiffs counsel shall submit an order in conformity with this decision, on notice to defendants counsel, under the five-day rule.

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