In a noteworthy decision that was approved for publication on June 29, 2017, the New Jersey Chancery Division held that the appointment of a custodial receiver in a foreclosure action of a single-family home or condominium would run counter to the purpose of the Fair Foreclosure Act (“FFA”) (N.J.S.A. 2A:50-03 et seq.) and the FFA’s required notices and other procedures providing homeowners with opportunities to cure foreclosure defaults and keep their homes. See Wilmington Savings Fund Society v. Zimmerman, 2017 WL 2806292 (N.J. Super. Ct. App. Div. Mar. 6, 2017).
In the case, Wilmington Savings Fund Society (“Wilmington Savings”) sought to have a custodial receiver appointed in its foreclosure of a single-family residence. In support of its motion for the appointment, the lender asked the Court to apply a five-factor test. See Scott T. Tross, New Jersey Foreclosure Law & Practice, § 8-4:1 at 146 (2001 ed.). The factors were 1) the inadequacy of the security to satisfy the debt; 2) the inability of the mortgagor to satisfy any deficiency or the absence of personal liability on the part of the mortgagor in connection with the mortgage debt; 3) the failure by the mortgagor to pay taxes or insurance premiums; 4) evidence of waste or misappropriation of rents; and 5) the mortgagor’s failure to make interest payments. The Court concluded that even if it chose to apply the five factors, the first four did not weigh in favor of appointing a receiver in this case and, therefore, the appointment of a receiver would be improper.
The Court further held that it was not equitable to appoint a custodial receiver in this case. Wilmington Savings was assigned this mortgage seven years after the loan went into default. Therefore, the Court found that Wilmington Savings knew or should have known that the security was inadequate to satisfy the debt. Wilmington Savings was not the original mortgagee and therefore not entitled to the same equitable expectation of repayment that the original party would have been entitled. The Court also cited Kaufman v. 53 Duncan Investors, L.P., 368 N.J. Super. 501 (App. Div. 2004) to illustrate that the basis for the appointment of a receiver is a written contractual agreement. The Court found in this case that the mortgagor never agreed in writing to a custodial receiver.
Finally, the most significant holding for lenders was that, although the Court stated that a “homeowner must have agreed to the appointment of a custodial receiver as evidenced by a written statement in the mortgage documents before a custodial receiver can be appointed,” it then proceeded to hold that any such appointment of a custodial receiver nonetheless would be barred by the FFA for single-family homes or condominium units. The Court stated that the appointment of a custodial receiver in a residential foreclosure action would restrict homeowners from saving their homes, which would undermine the very purpose of the Act. While the Court noted that the FFA does allow for an accelerated procedure for properties in foreclosure that are abandoned or have an aggregate amount of liens that exceed 92% of the fair market value of the property, the Court did not determine whether Wilmington Savings had the right to this procedure. This case is a cautionary tale for lenders that they need to act promptly to protect their rights to collateral and use proper statutory remedies.