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Third-Party Defendants.


August 20, 2014


Argued March 10, 2014 Decided


Before Judges Parrillo, Kennedy and Guadagno.


On appeal from Superior Court of New Jersey, Chancery Division, Atlantic County, Docket No. F-10209-08.


Mark J. Malone argued the cause for appellants (South Jersey Legal Services, Inc. and Law Office of James F. Viller , Jr., attorneys; Mr. Viller , Abigail B. Sullivan, Mr. Malone, Olga D. Pomar and Kenneth M. Goldman, on the briefs).


Richard A. Oetheimer (Goodwin Procter) of the Massachusetts bar, admitted pro hac vice, argued the cause for respondent(Archer &Greiner, P.C., attorneys; Sean T. O'Meara, of counsel; Sabrina M. Rose-Smith (Goodwin Procter) of the Virginia bar, admitted pro hac vice, and Mr. Oetheimer, on the brief).


David G. McMillin argued the cause for amicus curiae Legal Services of New Jersey (Melville D. Miller, Jr., Rebecca Schore and Margaret Lambe Jurow, on the brief).


Linda E. Fisher and Kyle L. Rosenkrans, attorneys for amicus curiae Seton Hall Law School, Center for Social Justice.


Defendants appeal from an order entered by the Chancery Division on November 18, 2011, granting plaintiff final judgment of mortgage foreclosure with respect to defendants' property. Defendants argue that the court erred in determining that plaintiff was a holder in due course and that it had standing to pursue the foreclosure action. They also argue that the court erred in granting plaintiff equitable relief despite "compelling evidence plaintiff lacked clean hands." We disagree and affirm essentially for the reasons set forth by Judge William C. Todd, III, in his well-reasoned and thorough forty-four page written opinion, as supplemented by his oral opinion on the record. We add only the following.

Defendants obtained a mortgage loan in the amount of $224,000 from Countrywide Home Loans, Inc. (CHL) in July 2005 to buy a residential property. At the time, defendant Victor Ukpe worked as a cab driver. Defendants allege they told the mortgage broker, representing an entity known as Morgan Funding Corporation, they could not afford to make a monthly mortgage payment that exceeded $1000. The broker allegedly assured them that the payment would not exceed that sum.

During the closing, when defendants learned that their monthly payment would be $1488.67, the broker told them they could refinance in a few months and decrease the payment to $1000. Defendants proceeded with the closing. The note signed by defendants was "payable to the lender[.]" Defendants also signed a mortgage encumbering the property. On August 8, 2005, the mortgage was recorded in Atlantic County, and was held by Mortgage Electric Recording System ("MERS") as nominee for American Wholesale Lender, which was another name for CHL.

In the fall of 2005, the defendants' mortgage, along with others, was securitized, thereby enabling investors to purchase interests in the securities backed by the mortgages. In September 2005, several entities entered into a "Pooling and Servicing Agreement" (PSA) with respect to the various mortgages. CHL was identified in the PSA, along with a few other entities, as a "seller"; CWABS, Inc. was identified as the "depositor" and the "master servicer" was Countrywide Home Loans Servicing, LP (CHLS); and the Bank of New York (BNY) was designated as the "Trustee." Under the PSA, the sellers transferred the mortgages to the depositor, and the depositor, in turn, transferred the mortgages to the trustee. The trustee then held the mortgages for the benefit of investors, who were designated as "certificate holders."

The master servicer would service the mortgage loans and would from time to time remit to the trustee such sums it had collected on the mortgages, less its fees, for eventual payment to the certificate holders. The PSA expressly required the original mortgage notes, endorsed in blank, to be delivered to the trustee.

The PSA was dated September 1, 2005, and the closing on the trust occurred on September 27, 2005. Records from the time of the closing indicated that defendants' "collateral file" which ordinarily would have included the original note was received by the BNY's trust company on September 21, 2005. The file was reviewed on October 21, 2005, and the presence of the original note, endorsed in blank, was confirmed.

Glenn Mitchell, vice-president of BNY, certified that defendants' mortgage note has been in BNY's possession since the fall of 2005. According to Mitchell, under the PSA, BNY was required to deliver three certifications as to each loan it purchased: (1) an initial certification attesting to BNY's receipt of the required collateral documents; (2) an interim certification of the original note endorsed in blank thirty days after the PSA closed; and (3) a final certification as to the receipt of all collateral documents, six months after the loan closed. All three certifications were made for defendants' loan, indicating that BNY was in possession of all the collateral documents for defendants' loan within six months after the closing of the loan.

Defendants unsuccessfully attempted to refinance on several occasions. In August 2007, defendants stopped making payments and defaulted on their loan. In March 2008, BNY filed a foreclosure complaint, and defendants filed an answer and counterclaim. Defendants later amended their answer to assert third-party complaints against CHL and CHLS. A further third-party complaint was filed against the law firm of Phelan, Hallinan and Schmeig.

After the parties filed motions and cross-motions for summary judgment, Judge Todd rejected defendants' challenge to BNY's standing. He found that BNY "presented fairly compelling proofs indicated that it [had] possession of [defendants'] note as of the fall of 2005," three years before the foreclosure complaint was filed. Consequently, Judge Todd determined that plaintiff had standing to pursue the foreclosure action.

With respect to the questions of whether the note was a negotiable instrument and whether plaintiff was a holder in due course, Judge Todd opined that the note, being payable to the holder, was obviously a negotiable instrument. Further, he held, in part:

Plaintiff has presented appropriate proofs indicating that the note was endorsed in the fall of 2005, around the time the various mortgage loans were securitized. The PSA required the endorsement and transfer of the various mortgage notes at issue and the endorsement and transfer process was the subject of specific review. The various exception reports appear to confirm the Ukpe note was in the collateral file, in the appropriate form, and plaintiff has accounted for the handling of the collateral file from the fall of 2005 to the present time. The endorsement at issue is in the name of a CHL employee who left CHL's employment sometime in 2006. The Ukpe defendants offer no direct proofs to the contrary. In the absence of any direct proofs, I see no legitimate basis for inferring that the note was not endorsed in 2009, as defendants have suggested. At this point, I am not convinced there is a genuine issue of fact as to the timing of the endorsement, as contemplated in R. 4:46-2 and Brill.


Assuming my view is not altered by the oral argument, I would conclude that the note was endorsed in the fall of 2005 and that it was appropriately negotiated prior to any default by the Ukpes. Assuming that to be the case, it would appear appropriate to treat plaintiff as a holder in due course, taking the note free of the defenses and claims the Ukpe defendants may be able to assert against CHL.


. . . .


[T]he Ukpe defendant[s] argue that plaintiff is so "closely connected" to CHL that it should not be able to avail itself of the protections that flow from being a holder in due course. I do not believe that doctrine should be applied to bar plaintiff from attaining the status of a holder in due course in this matter, assuming it would otherwise attain that status under the UCC.


. . . . I am satisfied that the doctrine is generally applicable only when the parties are involved in such an unusually close relationship that the transferee should have known that the underlying transaction was somehow suspect. that may occur when the transferee was created by the transferor to handle the transactions in question. It may also occur when the transferee somehow controls the actions of the transferor or is intimately involved in the structuring or processing of the underlying transactions. Those circumstances are simply not presented here. There is no apparent reason to suggest that plaintiff was created by or for CHL, or that it was involved in the structuring of the Ukpe mortgage.


Judge Todd thereafter entered judgment for foreclosure on behalf of plaintiff and transferred the remaining third-party claims to the Law Division.

The rights of parties with respect to negotiable instruments are governed by chapter three of the Uniform Commercial Code. N.J.S.A. 12A:3-101 to 3-805. A negotiable instrument is one that is made payable to bearer or to order at the time it is issued and does not include any additional undertaking or obligation other than the paying of money. N.J.S.A. 12A:3-104. When a negotiable instrument is transferred, the transferee has the right to enforce it. N.J.S.A. 12A:3-203. An endorsement "in blank" is payable to the bearer and may be negotiated by transfer of possession. N.J.S.A. 12A:3-205. By law, therefore, defendants' mortgage note was a "negotiated instrument."

As a general rule, one who takes an instrument does so subject to the claims and defenses that the maker may have against the originator. N.J.S.A. 12A:3-305. The holder in due course doctrine is an exception to this general rule, protecting from liability an innocent bona fide purchaser of an instrument. Carnegie Bank v. Shalleck, 256 N.J. Super. 23, 33 (App. Div. 1992). A holder in due course is one who takes the instrument in good faith and for value. N.J.S.A. 12A:3-306; Unico v. Owen, 50 N.J. 101, 109 (1967) (pertaining to mass marketing of consumer goods). The doctrine is meant to remove anxieties of one who takes the paper as an innocent purchaser. Unico, supra, 50 N.J. at 109. However, holder in due course status is "neither necessary nor desirable when the transferee knew a great deal about, or controlled, or participated in, the underlying transaction." Mercedes-Benz Corp. v. Lotito, 306 N.J. Super. 25, 31 (App. Div. 1997), certif. denied, 165 N.J. 137 (2000).

In Unico, a consumer and a merchant had agreed that in exchange for the payment of a monthly fee, the merchant would deliver goods. Unico, supra, 50 N.J. at 104-05. The consumer signed a note that the merchant assigned. Ibid. Thereafter, the merchant became insolvent and stopped delivering the goods, but the assignee attempted to collect on the note anyway. Id. at 108.

The Court found that the assignee was a partnership that had been formed exclusively to finance the merchant's sales. Id. at 114. The assignee had played a major role in structuring the merchant's financing contracts and in setting financing terms. Id. at 115-16, 122-23. Therefore, according to the Court, the "close connectedness" between the merchant and the assignee prohibited the assignee from being considered an HIDC. Ibid. The holding was expressly limited to consumer goods transactions. Id. at 122.

Here, it is clear beyond dispute that plaintiff bank was not created by CHL for the purpose of this transaction. Moreover, there was nothing in the documents executed at closing that would have indicated to plaintiff that a mortgage broker made false representations to defendants, or that defendants made any false representations in their application for a mortgage loan. Also, nothing in the record supports that plaintiff played any role whatsoever in structuring defendants' mortgage obligations. Accordingly, Judge Todd appropriately determined that plaintiff was entitled to the protections of a holder in due course.




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