GMAC MORTGAGE, LLC v. CLYDE FRASER and TOYE MCCASTLE FRASER

NOT FOR PUBLICATION WITHOUT THE

APPROVAL OF THE APPELLATE DIVISION

SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

DOCKET NO. A-4301-08T14301-08T1

GMAC MORTGAGE, LLC,

Plaintiff-Respondent,

v.

CLYDE FRASER and TOYE MCCASTLE

FRASER,

Defendants-Appellants.

_________________________________

Submitted May 24, 2010 - Decided July 23, 2010

Before Judges Rodr guez, Reisner and Chambers.

On appeal from Superior Court of New Jersey, Law Division, Morris County, Docket No. L-2009-07.

Clyde Fraser and Toye Fraser, appellants pro se.

Fein, Such, Kahn & Shepard, P.C., attorneys for respondent (Brian W. Kincaid, on the brief).

PER CURIAM

Defendants Clyde Fraser and Toye Fraser appeal from the order of March 10, 2009, declaring that their mortgage and note held by plaintiff GMAC Mortgage, LLC (GMAC), are legally enforceable and that, as of January 1, 2009, they owe $2,335,861.29 on the mortgage and note. Although we agree with the trial court that the mortgage and note are legally enforceable, we reverse and remand for reconsideration of the balance of the order. We do not retain jurisdiction.

I

On May 10, 2005, defendants purchased a residence in the Township of Mendham for the sum of $1,534,700. After defendants defaulted on the payments due on their first and second mortgages, the property went into foreclosure. On October 3, 2006, defendants obtained financing from Zurich Mortgage Solutions, LLC (Zurich) and executed a mortgage and note on the premises in the principal sum of $1.8 million in favor of Zurich. These monies were used to pay off the first and second mortgages in default and other expenses, and defendants received the balance of $92,428.99. For the first sixty months of the mortgage, defendants were obligated to make interest only payments of $18,735 per month on the mortgage and note. At the time of this transaction, Zurich was not a licensed financial entity in New Jersey.

On October 11, 2006, Zurich assigned the mortgage to American Residential Equities, LLC (American), which also was not a licensed financial entity in New Jersey. Because defendants believed Zurich had charged more than the maximum number of points, defendants contacted the Department of Banking and Insurance, which issued a refund directive to Zurich. Defendants were advised by their private counsel to stop payment on the mortgage and note because Zurich was unlicensed and consequently unable to collect interest and because defendants were owed $108,000 for the six points they were charged at closing, plus interest. On November 7, 2006, the mortgage was transferred to GMAC, a licensed lender in New Jersey.

On July 9, 2007, GMAC commenced this declaratory judgment action against defendants seeking a declaration that it may enforce the mortgage and note against defendants and that, as of July 31, 2007, defendants owed $120,090.42 on the mortgage and note. Defendants, represented by counsel, filed an answer with counterclaims, which was later amended. They sought declarations that the mortgage and note were unenforceable; that they were not obligated to pay interest on the mortgage and note because Zurich was unlicensed; that they were not in default on payments because the payments for the first sixty months were for interest only; and that any amounts determined to be owed on the mortgage and note should be reduced by the $108,000 they had paid in points and the $37,470 they had paid in interest. Defendants also contended that they had refrained from bringing legal action by relying on a promise from GMAC and sought $2 million in damages.

Although GMAC filed the complaint in the Chancery Division, the chancery judge transferred the case to the Law Division. GMAC subsequently filed a mortgage foreclosure complaint against the defendants because they had not paid real estates taxes on the property as required by the mortgage. Defendants' motion to consolidate the actions was denied by the chancery judge, and, as a result, the two related actions proceeded separately before two different judges. This appeal is from the declaratory judgment action and not the foreclosure action. The discussion of the procedural history herein thus refers to the declaratory judgment action only. We will not discuss the involved procedural history of the case but only those aspects we find pertinent.

By order dated February 12, 2008, the trial court granted a motion by GMAC to compel defendants, during the pendency of the action, to make interest only payments on the mortgage to GMAC's counsel's trust account. Defendants failed to comply with this order. In June 2008, defendants filed a substitution of attorney indicating they would be appearing pro se. By order dated July 7, 2008, the trial court granted GMAC's motion to hold defendants in violation of litigant's rights for failing to make the payments required by the February 12, 2008 order. Defendants were ordered to pay into GMAC's counsel's trust account the sum of $337,055.94, representing interest only payments from January 2007 to June 2008, and thereafter to pay $18,725 a month. The order further provided that if defendants failed to make the requisite payments, GMAC could move ex parte to strike defendants' answer and counterclaims. When defendants failed to make the required payments, GMAC filed an ex parte motion to strike defendants' answer and counterclaims, which the trial court granted on September 2, 2008.

In separate motions, GMAC and defendants separately moved to strike the opposing party's pleadings for failure to provide discovery. By order dated September 3, 2008, the trial court granted GMAC's motion and dismissed defendants' answer and counterclaims without prejudice. The trial court denied defendants' motion to strike.

On January 23, 2009, the trial court heard GMAC's motion for summary judgment and defendants' motion for reconsideration of the February 2008 order. Defendant Clyde Fraser acknowledged that defendants had only made one payment on the mortgage loan in the one and half to two years they had been in the house. By order dated March 10, 2009, the trial court denied defendants' motion for reconsideration of the February 12, 2008 order and granted GMAC's motion for summary judgment. The March 10, 2009 order specifically declares the mortgage and note enforceable; declares that defendants are in default of the mortgage and note; declares that defendants owe GMAC the sum of $2,335,861.29; and dismisses defendants' answer and counterclaims with prejudice.

On appeal, defendants raise the following seven points: (1) defendants' Fifth Amendment rights regarding discovery in a civil case were violated because the trial court did not make an adverse inference against GMAC when GMAC failed to answer discovery requests; (2) the trial court ignored certain federal statutes in reaching its decision, thereby violating the Equal Protection Clause and Commerce Clause of the United States Constitution; (3) the trial court erroneously interpreted N.J.S.A. 17:11C-46; (4) the trial court failed to consider defendants' fraud and breach of contract claims and contentions that the mortgage violated N.J.S.A. 17:11C-3(a), -17(a), -20(a), -22(a), -22(c), -22(d), -22(e), -29(a), and -29(b); (5) that GMAC should have been compelled to provide discovery on GMAC's duty to refund defendants $108,000 and to conform to the mandates of N.J.S.A. 17:11C-29(b); (6) the trial court erred in not enforcing N.J.S.A. 17:11C-29(a); and (7) "[t]he [t]rial [c]ourt erred in not acknowledging our [m]otion to [h]ave [GMAC] send us a new certification of suit as a result of GMAC's massive restructuring and new ownership."

II

We will first address the heart of the dispute, which is whether or not the mortgage and note are legally enforceable by GMAC even though the original mortgagee and its subsequent assignee were not licensed to provide mortgages in New Jersey. Although defendants' answer had been suppressed, the trial court allowed defendants to present their arguments on this issue. The trial court decided this question in favor of GMAC on GMAC's motion for summary judgment.

When considering an appeal from a summary judgment motion, we apply the same standard as the trial court. Prudential Prop. & Cas. Ins. Co. v. Boylan, 307 N.J. Super. 162, 167 (App. Div.), certif. denied, 154 N.J. 608 (1998). Summary judgment is appropriate where no genuine issue of material fact is present and the movant is entitled to judgment as a matter of law. R. 4:46-2(c).

The facts relevant to the enforceability of the mortgage and note are not in dispute. Defendants entered into the mortgage and note with Zurich, which was not licensed in New Jersey, and its assignee, American, which also was not licensed in New Jersey. The mortgage and note were then assigned to GMAC, which is licensed in New Jersey.

Defendants contend that because Zurich was unlicensed in New Jersey when the mortgage and note were executed, the mortgage and note are illegal. We disagree. The statutes expressly provide that a failure to comply with the statutory licensing requirements "shall not affect the validity or enforceability of any mortgage loan or secondary mortgage loan, and no person acquiring such a loan shall be required to ascertain if a licensee has made such a loan in compliance with the provisions of this act." N.J.S.A. 17:11C-46. As a result, the mortgage and note remain enforceable, and we affirm paragraph one of the trial court's order declaring the mortgage and note enforceable.

III

On this record, we are unable to affirm the balance of the trial court's order of March 10, 2009, concerning the amount due on the mortgage and note and the dismissal of defendants' answer and counterclaims with prejudice.

The order, which is entitled "Order for Judgment," provides:

2. Ordered that Judgment is hereby entered in favor of Plaintiff, GMAC Mortgage, LLC, and against the Defendants, Clyde Fraser and Toye Fraser, declaring that the Defendants are in default pursuant to the Note and Mortgage attached hereto and there is due and owing from Defendants, Clyde Fraser and Toye Fraser, to Plaintiff, GMAC Mortgage, LLC, as of January 1, 2009, the sum of $2,335,861.29 for reasons set forth on record[.]

The Order of Judgment further provides:

5. Ordered that Summary Judgment is hereby entered in favor of the Plaintiff, GMAC Mortgage, LLC, . . . [and] that the Defendants, Clyde Fraser and Toye Fraser, are declared in default and are in arrears as of January 1, 2009 of the payments due on the Note and Mortgage in the sum of $2,335,861.29 and the Plaintiff, GMAC Mortgage, LLC, is entitled to collect from the Defendants, Clyde Fraser and Toye Fraser, interest, principal and other sums of money pursuant to the terms of the Note and Mortgage attached to this Judgment[.]

It is unclear from this language whether the "Order for Judgment" is intended to constitute a money judgment subject to docketing and enforcement or whether it merely represents a statement of the obligations of defendants. If the order is intended to be a money judgment or if it may be used to compel payments by defendants, then it appears contrary to N.J.S.A. 2A:50-2. That statute provides in pertinent part:

Except as otherwise provided, all proceedings to collect any debt secured by a mortgage on real property, shall be as follows:
 
First, a foreclosure of the mortgage; and
 
Second, an action on the bond or note for any deficiency, if, at the sale in the foreclosure proceeding, the mortgaged premises do not bring an amount sufficient to satisfy the debt, interest and costs.

[N.J.S.A. 2A:50-2.]

Thus, before collection proceedings may begin on the mortgage debt, the mortgage must first be foreclosed and the property sold. The record before us does not indicate that the mortgage foreclosure proceedings were concluded by the time this order was entered.

We also note that the amount fixed in the order was determined without considering defendants' claim for credits and their counterclaims. Among their other claims, defendants contend on appeal that they were entitled to a credit of $108,000, representing the points that they paid to Zurich. Indeed, they include in the record a letter dated March 29, 2007, from the Department of Banking and Insurance to them advising that a refund directive had been issued to Zurich in the amount of $108,695, which Zurich was apparently disputing. These claims were not adjudicated by the trial court because it had struck defendants' answer and counterclaims. However, the trial court's treatment of defendants' defenses and counterclaims was mistaken for a variety of reasons.

First, the trial court struck defendants' answer and counterclaims because they had failed to make court ordered interest payments on the mortgage. However, the orders of February 12, 2008, and July 7, 2008, appear to be contrary to N.J.S.A. 2A:50-2, prohibiting collection on the debt before the foreclosure has concluded when a residential mortgage is involved. Further, the entry of the July 7, 2008 order striking defendants' answer and counterclaims was done ex parte, contrary to Scalza v. Shop Rite Supermarkets, Inc., 304 N.J. Super. 636, 639-40 (App. Div. 1997) (holding dismissal of complaint for failure to abide by court order requiring more specific answers to interrogatories on an ex parte application to be improper).

Second, on September 3, 2008, the trial court struck defendants' answer and counterclaims without prejudice for failure to answer GMAC's notice to produce as permitted by Rule 4:23-5(a)(1). This was the first of two steps under Rule 4:23-5(a). If the defaulting party has not provided the discovery and moved to vacate the order within sixty days of the entry of the order, then the litigant seeking the discovery may take the second step and move to strike with prejudice. R. 4:23-5(a)(2). Here, GMAC moved for judgment without proceeding to the second step and obtaining an order striking defendants' answer and counterclaims with prejudice.

A default judgment may not be entered when the pleadings are suppressed without prejudice under Rule 4:23-5(a)(1). Pressler, Current N.J. Court Rules, comment 1 on R. 4:43-1 (2010) (stating "[a] default judgment may be entered in plaintiff's favor when an answer is stricken only if the order striking it is with prejudice"). The purpose of Rule 4:23-5 is to encourage parties to provide timely discovery, not to accomplish the suppression of claims or defense. Adedoyin v. Arc of Morris County Chapter, Inc., 325 N.J. Super. 173, 180 (App. Div. 1999).

Third, the trial court entered summary judgment against defendants although defendants were in default. When a party's pleadings are stricken, a request for entry of a default judgment, not entry of summary judgment, is the appropriate procedure. Compare R. 4:43-1 (providing procedure to enter default where answer has been stricken), with R. 4:46-2(b) (discussing required submissions from opposition on motion for summary judgment).

For all the these reason, judgment should not have been entered adjudicating GMAC's claims on the amount due and dismissing defendants' defenses and counterclaims. We have allowed to stand the portion of the judgment declaring the mortgage and note enforceable, despite these procedural defects, because that issue involved a question of law and defendants were allowed by the trial court to present their position and arguments on that issue. As a result, on this issue, they were not prejudiced by the entry of default. However, the trial court did not allow defendants to present arguments on their counterclaims nor their claim for a $108,000 credit.

In light of these circumstances, we affirm only paragraph one of the March 10, 2009 order, which declares the mortgage and note legally enforceable. We reverse the balance of the order, and remand for further proceedings.

 
Affirmed in part; reversed in part; and remanded for further proceedings. We do not retain jurisdiction.

We note that this sum is somewhat less than the $18,735 initial monthly payment specified in the note.

Although a default judgment in the foreclosure action was entered on February 22, 2008, this was vacated on August 29, 2008.

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A-4301-08T1