Opinion
DOCKET NO. A-2504-14T3 DOCKET NO. A-3382-14T3
06-21-2016
CROWN BANK, NA n/k/a CROWN BANK, successor in interest to First Bank Americano, Plaintiff-Respondent, v. 629 38TH STREET LIMITED LIABILITY COMPANY, OSCAR LAZO, and RUTH GARCIA, Defendants-Appellants. CROWN BANK, NA n/k/a CROWN BANK, successor in interest to First Bank Americano, Plaintiff-Respondent, v. 629 38TH STREET LIMITED LIABILITY COMPANY, Defendant-Appellant.
David Rubenstein argued the cause for appellants (Rubenstein Business Law, attorneys; Mr. Rubenstein, on the brief). Alan M. Minato argued the cause for respondent (Hill Wallack LLP, attorneys; Eric P. Kelner, of counsel; Mr. Minato, of counsel and on the brief).
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION Before Judges Messano and Carroll. On appeal from the Superior Court of New Jersey, Law Division, Ocean County, Docket No. L-2073-12 in A-2504-14 and from the Superior Court of New Jersey, Chancery Division, Hudson County, Docket No. F-009518-12 in A-3382-14. David Rubenstein argued the cause for appellants (Rubenstein Business Law, attorneys; Mr. Rubenstein, on the brief). Alan M. Minato argued the cause for respondent (Hill Wallack LLP, attorneys; Eric P. Kelner, of counsel; Mr. Minato, of counsel and on the brief). PER CURIAM
These back-to-back matters, which we now consolidate for purposes of this opinion, arise out of a commercial loan agreement entered into between First Bank Americano (First Bank), as Lender, and defendant 629 38th Street Limited Liability Company (38th Street), as Borrower. Defendants Oscar Lazo and Ruth Garcia each signed a Commercial Guaranty, thereby personally guaranteeing repayment of the loan.
After 38th Street defaulted, First Bank began a mortgage foreclosure action in the Chancery Division, Hudson County. First Bank simultaneously filed a complaint in the Law Division, Ocean County, seeking all unpaid principal, interest, and other charges due on the loan. Defendants now appeal from (1) the Chancery Division's February 11, 2015 order denying 38th Street's motion to vacate the final judgment of foreclosure; and (2) the Law Division's December 19, 2014 order denying defendants' motion to vacate default judgment. After reviewing the record in light of the contentions advanced on appeal, we affirm.
I.
The Loan Transaction.
On September 7, 2006, First Bank extended a $723,500 loan to 38th Street to finance the acquisition of property located in Union City. The loan was evidenced by a Note executed by Lazo and Garcia on behalf of 38th Street, and was secured by a Mortgage, a Commercial Security Agreement, UCC-1 financing statements, an Assignment of Leases and Rents, and the two Commercial Guarantees.
The loan had an initial maturity date of March 7, 2008. On May 13, 2008, the parties agreed to extend the maturity date to November 28, 2008. On March 30, 2009, the maturity date was again extended until August 7, 2009.
On July 31, 2009, First Bank was closed by the New Jersey Department of Banking and Insurance and the Federal Deposit Insurance Corporation (FDIC) was appointed receiver. On that date, the FDIC and plaintiff, Crown Bank, executed a Purchase and Assumption (P&A) Agreement pursuant to which Crown Bank purchased First Bank's assets and liabilities. Article 3.1 of the P&A Agreement provides:
[Crown Bank] hereby purchases from [the FDIC], and [the FDIC] hereby sells, assigns,
transfers, conveys, and delivers to [Crown], all right, title, and interest of [the FDIC] in and to all of the assets (real, personal and mixed, wherever located and however acquired) of [First Bank] whether or not reflected on the books of [First Bank] as of [the date of First Bank's closing] . . . as set forth in Schedule 3.1. . . .
According to plaintiff, the loan maturity date was again extended, for the third and final time, to March 31, 2011. When defendants failed to pay the loan on maturity, plaintiff brought separate actions seeking to foreclose on the mortgage and to collect the outstanding indebtedness due on the note.
Neither party provided documentation of this final extension. --------
The Chancery Action.
Plaintiff filed its foreclosure complaint in the Hudson County Chancery Division on May 24, 2012. Defendants retained counsel, who filed an answer on January 9, 2014. It is undisputed that, for some period of time, the parties engaged in discussions designed to lead to a global settlement of both actions. Thereafter, counsel for both parties executed a consent order on February 24, 2014, which provided that: 38th Street withdrew its contesting answer; default was entered against it; and the matter was returned to the foreclosure unit to proceed as an uncontested matter. Plaintiff then applied for a final judgment of foreclosure, which was entered on April 23, 2014.
On December 24, 2014, 38th Street, represented by new counsel, moved to vacate the judgment. 38th Street argued that the judgment should be vacated, pursuant to Rule 4:50-1(a) and (f), because it did not authorize prior counsel to settle the foreclosure case and that enforcement of the judgment would be unfair and unjust. Additionally, although 38th Street did not deny defaulting on the loan, it contended that plaintiff lacked the requisite standing to foreclose.
Plaintiff opposed the motion, and submitted the certification of its senior vice-president, Timothy Doyle, averring in pertinent part:
25. . . . . By virtue of a certain [P&A Agreement] executed on or about July 31, 2009, by and between the FDIC and Crown, the FDIC transferred certain assets of First Bank to Crown including but not limited to the subject loan and the Loan Agreement, the Security Agreement, the Note, the Mortgage, as modified and the [Assignment of Leases and Rents] (hereinafter collectively referred to as the "Loan Documents"). . . .
26. When the FDIC closed down First Bank its assets were acquired by Crown Bank, including all of its loans.
27. The assets of First Bank consisted of a total portfolio of between $70 and $80 million in loans. Specifically, the loans that were on the books of First Bank on July
31 were transferred over to the books of Crown Bank on August 1.
28. Crown also possesses the original Note and by virtue of [the P&A Agreement] is the owner of the subject loan and the Loan Document[s] and is the proper party plaintiff herein.
Plaintiff also presented the certification of Roger D. Johnson, a "Resolutions and Receiverships Specialist" employed by the FDIC, who represented that he was "personally familiar with the sale of . . . First Bank to Crown Bank . . . ." Johnson stated:
3. On or about July 31, 2009, the FDIC and Crown entered into a [P&A] Agreement for the sale of First Bank. A copy of the [P&A] Agreement is attached hereto as Exhibit "A".
4. The loan from First Bank to [38th Street] was included in [the] sale of First Bank to Crown by the FDIC. A copy of the [s]creen [s]hot illustrating that the subject loan was transferred is attached hereto as Exhibit "B".
5. On July 31, 2009, the FDIC forwarded to Crown all of the original loan documents, inclusive of promissory notes, as to all of the loans of First Bank, which included the loan from First Bank to [38th Street].
6. Crown was in possession of the original promissory note nearly three years prior to the filing of the within foreclosure action on May 24, 2012.
The Chancery Division denied the motion on February 11, 2015. In his written statement of reasons, the judge found that 38th Street failed to establish a basis to vacate the foreclosure judgment under Rule 4:50-1(a). The judge concluded:
The . . . [f]inal [j]udgment in this matter was not entered as a result of a mistake or the excusable neglect of [] [d]efendant or [] [d]efendant's prior counsel. The record demonstrates that [f]inal [j]udgment was entered after the attorney of record negotiated a settlement on behalf of [] [d]efendant and consented to the entry of an order which provided for the withdrawal of the contesting answer. The consent order allowed [] [p]laintiff to then move for the entry of [f]inal [j]udgment which was ultimately granted by the [c]ourt. I see no basis for vacating the [f]inal [j]udgment on the grounds of mistake or excusable neglect. Defendant's claim is simply that [prior counsel] had no authority to settle this foreclosure action.The judge further found that 38th Street did not present any meritorious defenses, which is also a prerequisite for relief under Rule 4:50-1(a). Similarly, the judge determined that the lack of a meritorious defense was fatal to 38th Street's claim for relief under subsection (f) of the rule.
The Law Division Action.
Plaintiff filed a complaint in the Ocean County Law Division on July 2, 2014, seeking to collect all sums due pursuant to the terms of the Note and the Commercial Guarantees. Defendants failed to answer and default was entered against them on August 31, 2012. On December 7, 2012, the parties executed a consent order vacating the default. Defendants, represented by the same attorney who initially represented them in the Chancery action, filed an answer on December 12.
Plaintiff served its discovery demands on defendants on May 10, 2013. On July 29, the parties executed a stipulation extending discovery from August 11, 2013 to October 10, 2013. In the interim, the parties continued to engage in settlement discussions. Believing that a global settlement of both actions had been reached, on August 22, plaintiff's counsel sent defense counsel a proposed consent order dismissing the Law Division complaint without prejudice to plaintiff's right to reinstate the action if defendants failed to sell the Union City property or otherwise satisfy the loan balance. Ultimately, although plaintiff executed the consent order, defendants did not.
On September 20, 2013, plaintiff moved to strike defendants' answer based on their failure to respond to plaintiff's discovery demands. On October 11, the court granted plaintiff's motion, striking defendants' answer without prejudice. On December 20, the answer was stricken with prejudice. On February 26, 2014, a default judgment was entered against defendants in the amount of $1,096,890.88.
On October 19, 2014, defendants, represented by new counsel, moved to vacate the default judgment pursuant to Rule 4:50-1(a). Defendants contended they established excusable neglect by virtue of prior counsel's failure to respond to discovery demands or to notify them that their answer and defenses had been stricken. They also argued they possessed a meritorious defense because plaintiff lacked standing to enforce the promissory note. Plaintiff opposed the motion, and relied on a certification signed by Doyle, its vice-president, which substantially mirrored the certification Doyle submitted in the Chancery action.
The Law Division judge denied the motion on December 19, 2014. Relying on Baumann v. Marinaro, 95 N.J. 380, 394 (1984), the judge concluded that prior counsel's lack of diligence did not constitute excusable neglect. Having reached this conclusion, the judge did not address whether defendants possessed a meritorious defense.
II.
We review an order denying a motion to vacate an order or judgment under the abuse of discretion standard. U.S. Bank Nat'l Ass'n v. Guillaume, 209 N.J. 449, 467 (2012). "The decision granting or denying an application to open a judgment will be left undisturbed unless it represents a clear abuse of discretion." Hous. Auth. of Morristown v. Little, 135 N.J. 274, 283 (1994). "[An] abuse of discretion only arises on demonstration of 'manifest error or injustice[,]'" Hisenaj v. Kuehner, 194 N.J. 6, 20 (2008) (quoting State v. Torres, 183 N.J. 554, 572 (2005)), and occurs when the trial judge's "decision is made without a rational explanation, inexplicably departed from established policies, or rested on an impermissible basis." Milne v. Goldenberg, 428 N.J. Super. 184, 197 (App. Div. 2012) (quoting Flagg v. Essex Cnty. Prosecutor, 171 N.J. 561, 571 (2002)).
Rule 4:50-1 provides the grounds upon which an order or judgment may be vacated:
[T]he court may relieve a party . . . from a final judgment or order for the following reasons: (a) mistake, inadvertence, surprise, or excusable neglect; (b) newly discovered evidence which would probably alter the judgment or order and which by due diligence could not have been discovered in time to move for a new trial under R. 4:49; (c) fraud (whether heretofore denominated intrinsic or extrinsic), misrepresentation, or other misconduct of an adverse party; (d) the judgment or order is void; (e) the judgment or order has been satisfied, released or discharged, or a prior judgment or order upon which it is based has been reversed or otherwise vacated, or it is no longer equitable that the judgment or order should have prospective application; or (f) any other reason justifying relief from the operation of the judgment or order.
Rule 4:50-1(a).
On appeal, as they did in both the Chancery and Law Division actions, defendants continue to seek relief under subsection (a) of Rule 4:50-1 based on excusable neglect. They contend that they should not be held responsible for the negligence, malfeasance, and malpractice of their prior counsel. Specifically, in challenging the Chancery Division's order, 38th Street asserts that, without its knowledge or consent, prior counsel executed a consent order that settled the matter by allowing its answer to be withdrawn and the case to proceed on an uncontested basis. With respect to the Law Division action, prior counsel failed to respond to discovery demands or advise defendants that their answer and defenses were dismissed, thus resulting in the entry of the default judgment. Defendants continue to maintain that plaintiff lacks standing to enforce the note or foreclose on the mortgage. Also, in the Chancery action, 38th Street belatedly attempted to raise a claim of tortious interference with its contractual relations. We conclude these arguments lack merit.
It is well settled that, under Rule 4:50-1(a), a default judgment will not be disturbed unless the failure to appear or otherwise defend was excusable under the circumstances and unless the defendant has a meritorious defense to both the cause of action and damages. Guillaume, supra, 209 N.J. at 468-69. Attorney carelessness or lack of proper diligence does not constitute excusable neglect unless "attributable to [an] honest mistake" that is compatible with due diligence or reasonable prudence. Baumann, supra, 95 N.J. at 394 (1984); see also Quagliato v. Bodner, 115 N.J. Super. 133, 138 (App. Div. 1971) (holding that excusable neglect under Rule 4:50-1(a) does not include an attorney's tardiness on the day a motion he was opposing was listed and consequently argued and disposed of in his absence).
Here, there was no excusable neglect attributable to an honest mistake that was compatible with due diligence or reasonable prudence. Even accepting defendants' allegations of attorney malfeasance as true, prior counsel's failure to answer discovery or oppose the dismissal motions was akin to the attorney inattention that the Court in Baumann concluded did not constitute excusable neglect justifying relief under Rule 4:50-1(a). See Baumann, supra, 95 N.J. at 394 (citing Schulwitz v. Shuster, 27 N.J. Super. 554, 558 (App. Div. 1953)) (deeming failure to appear in court and to answer interrogatories inexcusable neglect).
Moreover, prior counsel did not totally abdicate his duties, as defendants contend. Rather, prior counsel provided some representation, even if it was deficient. He filed answers in both matters, and it is undisputed that he engaged in settlement discussions and negotiated a potential settlement that would have resolved both matters had it ultimately been consummated.
Even if we are mistaken in our conclusion that defendants did not establish excusable neglect, it is clear they have no meritorious defense to either action. As noted, defendants claim that plaintiff lacks standing to enforce the note and mortgage. We disagree.
Generally, the defenses to foreclosure actions are narrow and limited. The material issues to be established 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. See Great Falls Bank v. Pardo, 263 N.J. Super. 388, 394 (Ch. Div. 1993), aff'd 273 N.J. Super. 542 (App. Div. 1994); Thorpe v. Floremoore Corp., 20 N.J. Super. 34, 37 (App. Div. 1952), (holding that when "the execution, recording, and non-payment of the mortgage [is] conceded, a prima facie right to foreclosure [is] made out"). If the defendant's answer fails to challenge these essential elements, the mortgagee is entitled to strike it as a noncontesting answer. See 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).
Here, defendants do not contest that they executed the loan documents, or that they failed to pay the loan when it matured. Rather, defendants contend they executed the loan documents in favor of First Bank, and that plaintiff did not establish a valid negotiation of the note and assignment of the mortgage necessary to confer standing on plaintiff to enforce those loan documents.
"'[A] party seeking to foreclose a mortgage must own or control the underlying debt'" at the time the foreclosure complaint was filed. Wells Fargo Bank, N.A. v. Ford, 418 N.J. Super. 592, 597 (App. Div. 2011) (quoting Bank of N.Y. v. Raftogianis, 418 N.J. Super. 323, 327-28 (Ch. Div. 2010)). If the plaintiff cannot establish ownership or control, it "lacks standing to proceed with the foreclosure action and the complaint must be dismissed." Ford, supra, 418 N.J. Super. at 597. "If a debt is evidenced by a negotiable instrument, such as the note executed by defendant," whether the plaintiff established ownership or control over the note "is governed by Article III of the Uniform Commercial Code (UCC), N.J.S.A. 12A:3-101 to -605, in particular N.J.S.A. 12A:3-301." Ford, supra, 418 N.J. Super. at 597.
Thus, plaintiff had to show it fell within one of the "three categories of persons entitled to enforce negotiable instruments" as described in N.J.S.A. 12A:3-301. Deutsche Bank Nat'l Trust Co. v. Mitchell, 422 N.J. Super. 214, 222-23 (App. Div. 2011). N.J.S.A. 12A:3-301 provides:
"Person entitled to enforce" an instrument means the holder of the instrument, a nonholder in possession of the instrument who has the rights of a holder, or 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. A person may be a person entitled to enforce the instrument even though the person is not the owner of the instrument or is in wrongful possession of the instrument.
Saliently, in Remington Inv., Inc. v. Davis, 287 N.J. Super. 360, 368 (App. Div. 1996), the plaintiff by an assignment from the FDIC purchased a bulk portfolio of distressed loans from an insolvent bank. The assigned loans included two that had been guaranteed by defendant Davis, who asserted in opposition to a summary judgment motion in the foreclosure action that plaintiff did not have standing to maintain the action. Id. at 362-63, 367-68. We explained:
The question whether Remington Investments has standing to sue as assignee would be material if it raised any genuine issue of fact. But it does not. Plaintiff has submitted a document, duly executed and acknowledged on behalf of the FDIC, confirming the assignment from the FDIC to plaintiff. Unless defendants can raise some question about the authenticity of that document — and they have not done so — it is dispositive of the standing issue.
[Id. at 368.]
We acknowledge that Remington is distinguishable in that the standing issue there arose in the context of a summary judgment motion rather than a motion to vacate a default judgment. Nonetheless, plaintiff's proofs that it owned the note and mortgage, which included not only the P&A Agreement, but also Johnson's certification attesting that the FDIC transferred to plaintiff all of First Bank's loans, including the subject loan, are dispositive of the standing issue here. Moreover, defendants have not asserted that any entity other than plaintiff has made demand upon them for payment after First Bank was closed and the FDIC was appointed receiver. At oral argument, defendants conceded that all their settlement negotiations were with plaintiff. Defendants' remaining arguments on the issue of whether plaintiff owned the mortgage, note and other related documents so as to have standing to enforce them are without sufficient merit to warrant further discussion. R. 2:11-3(e)(1)(E).
Before the Chancery Division, in a reply brief, defendants also attempted to assert a claim for tortious interference. This claim, which was not raised in defendant's pleadings, alleged that plaintiff improperly refused to approve the sale of two condominium units in the Union City property that would have allowed defendants to satisfy the loan.
Initially, we note the general principle that it is improper for a party to use a reply brief to raise an issue for the first time or enlarge the main argument. See, e.g. State v. Smith, 55 N.J. 476, 488, cert. denied, 400 U.S. 949, 91 S. Ct. 232, 27 L. Ed. 2d 256 (1970); L.J. Zucca, Inc. v. Allen Bros. Wholesale Distribs. Inc., 434 N.J. Super. 60, 87 (App. Div.), certif. denied, 218 N.J. 273 (2014); N.J. Citizens Underwriting Reciprocal Exch. v. Kieran Collins, D.C., LLC, 399 N.J. Super. 40, 50 (App. Div.), certif. denied, 196 N.J. 344 (2008); Borough of Berlin v. Remington & Vernick Eng'rs, 337 N.J. Super. 590, 595-96 (App. Div.), certif. denied, 168 N.J. 294 (2001). Moreover, statements of counsel made in a supporting brief do not constitute cognizable facts. See Gonzalez v. Ideal Tile Importing Co., 371 N.J. Super. 349, 358 (App. Div. 2004), aff'd 184 N.J. 415 (2005)); Templeton Arms v. Feins, 220 N.J. Super. 1, 24 (App. Div.), certif. denied, 109 N.J. 489 (1987). Accordingly, this belated claim was properly rejected.
Rule 4:50-1(f).
In the Chancery action, 38th Street also sought to vacate the foreclosure judgment under Rule 4:50-1(f). It argued, as it does on appeal, that due to prior counsel's malfeasance, enforcement of the final judgment would be unjust and unfair. 38th Street further contends the Chancery judge erred in concluding that the lack of a meritorious defense was fatal to its claim for relief under this subsection of the rule.
We disagree that Rule 4:50-1(f) justifies vacation of the judgment of foreclosure. Subsection (f) permits a judge to vacate a default judgment for "any other reason justifying relief from the operation of the judgment or order," and "is available only when truly exceptional circumstances are present." Guillaume, supra, 209 N.J. at 484. The applicability of this subsection is limited to "situations in which, were it not applied, a grave injustice would occur." Ibid.
On this record, defendants have failed to show that any deficiencies in prior counsel's performance constitute "excusable neglect," no less "exceptional circumstances." Equally important, we agree with the Chancery judge that 38th Street cannot claim the result is unjust where, as here, it does not possess a meritorious defense to the action. As we have noted, "the granting of Rule 4:50 relief would be a futile exercise if plaintiff remained entitled to judgment as a matter of law." Ridge at Back Brook, LLC v. Klenert, 437 N.J. Super. 90, 100 (App. Div. 2014). See also Guillaume, supra, 209 N.J. at 469 ("[i]t would create a rather anomalous situation if a judgment were to be vacated . . . only to discover later that the defendant had no meritorious defense").
Notably, defendants did not assert subsection (f) as a basis for relief from the default judgment entered in the Law Division action. Having failed to do so, they are barred from raising the issue on appeal from the Law Division's order denying their motion to vacate that judgment. See Nieder v. Royal Indem. Ins. Co., 62 N.J. 229, 234 (1973) (discussing the limited circumstances in which an appellate court will consider an argument first raised on appeal). In any event, defendants' Rule 4:50-1(f) argument lacks merit for the reasons we have previously explained.
Rule 4:50-1(e).
For the first time on appeal, defendants argue they are entitled to relief under Rule 4:50-1(e). They contend that, because plaintiff lacks standing to enforce the note and mortgage, enforcement of both judgments is "no longer equitable." This argument warrants little discussion. Because defendants failed to raise this argument in either the Chancery or Law Division actions, we decline to consider it on appeal. Nieder, supra, 62 N.J. at 234. Moreover, as discussed above, the standing issue is without merit.
Affirmed.
I hereby certify that the foregoing is a true copy of the original on file in my office.
CLERK OF THE APPELLATE DIVISION