NJ Appellate Division Makes Two Significant Holdings in Servicer/Mortgagee Case

NJ Appellate Division Makes Two Significant Holdings in Servicer/Mortgagee Case
Riker Danzig Banking Alert November 2014

New Jersey Appellate Division Makes Two Significant Holdings in Servicer/Mortgagee Case

The Timely Delivery of Note and Mortgage Afforded Standing Even if Assignments were Delivered to Lender After Possession is Transferred


Pre-Negotiation Letter Agreement Between Mortgagor and Mortgagee Barred Mortgagor’s Claims Despite Mortgagee’s Alleged Misrepresentations

The New Jersey Appellate Division, applying New York law, held that a pre-negotiation letter agreement (“PNL”) in which a mortgagor (“Defendant”) waived all claims against the servicer/mortgagee (“Plaintiff”) was enforceable and barred the mortgagor from making a claim that it only defaulted on its $38 million commercial loan based on the servicer/mortgagee’s misrepresentations. See MLCFC 2007-9 ACR Master SPE, LLC v. Echo Farms, RV Resort LLC, 2014 WL 5506807 (N.J. Super. Ct. App. Div. Nov. 3, 2014).  There, Defendant requested Plaintiff to restructure the loan.  According to Defendant, the Plaintiff informed Defendant that it could not restructure the loan until it went into default, at which point it would be assigned to Plaintiff and Plaintiff would extend the maturity date.  Allegedly relying on these instructions, Defendant ceased making payments on the loan, which was then assigned to Plaintiff by U.S. Bank.  U.S. Bank had itself been assigned the note and mortgage almost five years earlier by LaSalle Bank through an assignment that had been backdated four months.  Plaintiff then sent Defendant a PNL and informed it that it would not discuss modification until the PNL was executed, and, according to Defendant, that the PNL was “meaningless” and a “formality[.]”  The PNL stated in part that the Defendant “expressly, completely, irrevocably and unconditionally agrees that it will not assert any claim against [Plaintiff] with respect to [loan communications].”

After a short review of the loan, Plaintiff informed Defendant that it would not restructure but would instead initiate a foreclosure action.  Among Defendant’s defenses and counterclaims were its allegations that Plaintiff had fraudulently induced Defendant into defaulting and signing the PNL, which Defendant did in reliance on Plaintiff’s misrepresentations.  Defendant also argued that Plaintiff did not have standing to foreclose, claiming that, because LaSalle Bank had executed the assignment to U.S. Bank four months after it had actually delivered the note and mortgage to it, the assignment was ineffective as LaSalle was not the holder of the note and mortgage at the time of execution by LaSalle Bank.  The trial court granted Plaintiff summary judgment, dismissed Defendant’s counterclaims and struck its affirmative defenses.  The Appellate Division affirmed this decision.  First, it held that Defendant’s standing argument was without merit, as an assignment did not need to be in writing and could be effective through the physical delivery of the note and mortgage.  Second, it rejected Defendant’s other defenses and claims based on Plaintiff’s alleged misrepresentations, holding that “the PNL is clear and unequivocal.  Past and future loan communications are not binding upon either party” and that “[a]ll of the parties to the PNL are sophisticated commercial entities, capable of understanding complicated contract language.”  As such, Defendant’s execution of the PNL waived all of its claims against Plaintiff.  This case serves to remind lenders of the value of the timely transmission of loan documents and precise PNLs in forbearance negotiations.


For a copy of this decision or for any questions, please contact Michael O’Donnell of Riker Danzig's Banking Practice Group.