In the recently-issued decision of Deutsch v. Iedu Tech., No. A-1541-21, LEXIS 2309 (App. Div. Nov. 23, 2022), the New Jersey Appellate Division reaffirmed the principle that unrecorded mortgages are enforceable in certain circumstances.

In August 2016, Defendants Iedu Technology, LLC, Xiu Quin Liu, and Juijun Wang (collectively “Defendants”) borrowed $500,000 from Plaintiff Jacob Deutsch (“Plaintiff”), executing a promissory note (“the note”) bearing an eighteen percent interest rate per year.  The note required Defendants to pay $7,500 per month of interest-only payments for one year, following which the entire loan balance would come due on August 30, 2017.  In the event Defendants defaulted, the note provided that the entire loan amount would be payable, along with interest, costs of collection, and attorneys’ fees.

As collateral to secure payment, the note granted Plaintiff mortgages on five real properties that Defendants’ owned in Jersey City, New Jersey.  However, these mortgages were never recorded.  Defendants made the required interest payments owed on the note from September 2016 through January 2017, in February 2017 paid Plaintiff $100,000, and in March 2017 paid Plaintiff a further $142,600.  Subsequent to issuing this March payment, Defendants consulted with an attorney who advised them that the note was usurious and illegal, claiming the maximum interest rate statutorily permitted for such loans had been exceeded.  Defendants thereafter ceased remitting all payments owed on the note.

In March 2020, Plaintiff filed suit seeking a judgment for the loan amount along with interest, attorneys’ fees, and costs, to which Defendants asserted the usurious nature of the loan as a defense.  Plaintiff ultimately moved for summary judgment, arguing that there was no evidence Defendants had ever intended to grant Plaintiff a security interest in any of the mortgaged properties as the mortgages were never recorded, and thus the mortgages should be treated as nonexistent and of no force and effect.

The crux of Plaintiff’s argument hinged upon the application of N.J.S.A. 31:1-1, which establishes a maximum interest rate of sixteen percent “for written contract[s] specifying a rate of interest.”  However, under N.J.S.A. 31:1-1(e), loans “in the amount of $50,000[] or more” are exempted from this sixteen percent rate cap, unless the loan is one “where the security given” on the loan “is a first lien on real property” used for residential purposes.  In such an instance, the “minimum threshold for first liens on residential property is six percent” with the maximum set at the value of the “Monthly Index of Long Term [U.S.] Government Bond Yields . . . for the second preceding calendar month plus an additional [eight percent] per annum.”  N.J.S.A. 31:1-1(b).[¹]

As the note was for more than $50,000, if it was deemed to not fall within the categorization of being secured by a “first lien on real property,” Plaintiff’s eighteen percent rate would be valid.  Plaintiff accordingly argued that Defendants’ mortgages should be treated as of no force and effect.

The trial court agreed with Plaintiff’s contention, granting Plaintiff summary judgment and awarding him a judgment for the loan principal, interest, attorneys' fees, and costs of suit.  The trial court reasoned that Defendants’ “unrecorded mortgages [were] of no force and effect” because the fact they were never recorded betrayed that defendants never “intended to give any security on any properties listed in the” note, for authority relying on the language of N.J.S.A. 46:26A-12 which provides that mortgages have no effect “unless . . . evidenced by a document that is first recorded.”

Defendants appealed, contending the lower court had erred because N.J.S.A. 46:26A-12 was only intended to apply to bona fide purchasers, subsequent judgment creditors, and purchasers for value, and because of this the mortgages should be considered enforceable and the note usurious.  The Appellate Division agreed, “reject[ing] the finding [that] defendants never intended the mortgages to apply,” explaining that Defendants were correct that N.J.S.A. 46:26A-12 was only legislatively intended to apply to a select group of purchasers and creditors, none of which were involved in this matter, and that the trial court’s interpretation had impermissibly “expanded the statute, rendering it meaningless.”  Thus, the mortgages, “although unrecorded, were effective as between the parties.”

The Appellate Division also rejected “the finding [that] defendants never intended the mortgages to apply to the properties listed in the note,” as the language of the note “specifically provided that a mortgage would secure defendants' payment,” listed the properties to be encumbered, contained unambiguous terms, explicitly stated the mortgages were given to secure the loan, and gave “plaintiff the power to file a deed in lieu of foreclosure on any of the listed properties if defendants defaulted on the loan—a power only available to a party who had been given a mortgage.”  Thus, the “language of the note unambiguously created a mortgage between the parties” which was valid and enforceable despite being unrecorded.

The Appellate Division therefore found the note usurious.  As the mortgages were construed to be valid, the interest cap applicable to security interests given as “a first lien on real property” was triggered.  The interest rate charged by the note was calculated as violating the maximum permissible percentage rate allowed, and the matter accordingly reversed and remanded.

Takeaways

This decision reaffirms a basic principle that unrecorded mortgages are enforceable between the parties and that lenders have to comply with the requisite consumer protection statutes even if they are holding the instruments creating those liens in escrow to be acted upon only in the event of default.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com, Kevin Hakansson at khakansson@riker.com, James Mazewski at jmazewski@riker.com or Kori Pruett at kpruett@riker.com.

[¹] N.J.S.A. 31:1-1 et. seq. governs civil usury on certain non-institutional loans as banks and lenders of consumer credit are exempt.  See N.J.S.A. 17:9A-58; 12 U.S.C. § 85; Saul v Midlantic Nat. Bank/South, 240 N.J. Super. 62, 74, 80-81 (App. Div. 1990).