Connell v. American Funding Ltd.

• Decision Date: 22 December 1987
• Citation: 231 N.J.Super. 409,555 A.2d 745
• Parties: Murray CONNELL and Elizabeth Connell, Plaintiffs, v. AMERICAN FUNDING LIMITED, a New Jersey Limited Partnership, Defendant.
• Court: New Jersey Superior Court

Page 409

231 N.J.Super. 409

555 A.2d 745

Murray CONNELL and Elizabeth Connell, Plaintiffs, v. AMERICAN FUNDING LIMITED, a New Jersey Limited Partnership, Defendant.

Superior Court of New Jersey, Chancery Division Bergen County.

Decided Dec. 22, 1987.

George J. Cotz for plaintiffs (Weber, Muth & Weber, Ramsey, attorneys).

Keith O. Evans for defendant (Marcus & Evans, Lodi, attorneys).

LESEMANN, J.S.C.

Cross motions for summary judgment in this case raise an unresolved question as to the consequence of a lender's noncompliance with the provisions of the Secondary Mortgage Loan Act, N.J.S.A. 17:11A-34 et seq. (hereinafter "the Act"). ¹ Section 58 of that statute, N.J.S.A. 17:11A-58, says that the obligation of a borrower arising out of a secondary mortgage loan "shall be void and unenforceable" unless the loan was executed in full compliance with the act. It has already been held that those words mean just what they say: if a loan is subject to the act, and there was not full compliance with its provisions, the debt incurred by the borrower is void. The noncomplying lender can recover neither the principal he advanced to the borrower nor any interest. See, e.g., Stubbs v. Security Consumer Discount Co., 85 N.J. 353, 426 A.2d 1014 (1981). ²

This case raises a further question: If the borrower pays off the entire loan and only thereafter learns that the seller violated the act when the loan was made, can the borrower then file suit against the lender and recover all of the money he had repaid on the loan?

The loan here was made on September 8, 1983, when plaintiffs Murray and Elizabeth Connell borrowed $150,000 from defendant American Funding Limited and as security therefore, gave a second mortgage on their home in Ridgewood, New Jersey. At the closing defendant required that plaintiffs pay certain closing costs representing expenses incurred by defendant. They included filing fees of $70, search fees of $131, title insurance premiums of $450 and a messenger service charge of $20. There is no question that the Secondary Mortgage Loan Act prohibits such charges respecting any transaction to which it applies. N.J.S.A. 17:11A-46. ³

For approximately two years following closing, plaintiffs made the normal monthly payments called for by their loan agreement. They then decided to sell their home and contacted defendant in order to obtain the necessary payoff figure to discharge the second mortgage.

Plaintiffs were given that payoff figure over the phone. They had a question as to the correctness of the amount, but inquiries to defendant brought only further statements reiterating the original figure. Upon the advice of the attorney representing them in connection with the sale of their home (not present counsel) they paid defendant the full amount requested, and obtained the discharge of the second mortgage. Only two months later did their attorney write to defendant requesting a "complete breakdown" and information as to how defendant had computed the payoff figure.

Approximately three weeks after that letter defendant's attorney responded, saying that he had "reviewed the entire loan file" and had concluded that plaintiffs were entitled to a refund of $17,913.68. He added that a check for that amount was being enclosed "in full satisfaction of your inquiry." Although the letter did not set out the reason for the original overcharge, it was subsequently acknowledged that defendant had included a prepayment penalty which was not permitted under the law of this State ( N.J.S.A. 46:10B-2) and had also calculated accrued interest in an incorrect manner. ⁴

That correspondence apparently induced plaintiffs to contact their present counsel who then, for the first time, focused on the improper charges imposed when the loan closed some years before. On that basis plaintiffs' new attorney wrote to defendant and demanded repayment of all monies that had been paid to defendant--both the monthly installments and the lump-sum payoff amount--less only the $17,913.68 which had already been refunded. Defendant rejected that demand and this litigation followed.

Defendant raises a number of defenses to plaintiffs' claim. Most of them can be disposed of briefly before addressing the dispositive issue, which is the proper interpretation of N.J.S.A. 17:11A-58.

First, defendant claims that the Secondary Mortgage Loan Act does not apply to this transaction. Rather, it says, N.J.S.A. 31:1-1, which is part of the General Usury Law, governs this matter.

N.J.S.A. 31:1-1 sets general ceilings for interest rates on loans. It also defines certain exceptions to those ceilings. The specific provision relied on by defendant is N.J.S.A. 31:1-1(e) which states that, notwithstanding the general interest rate ceiling set out in the General Usury Law, certain described transactions "may provide for any rate of interest which the parties agree upon." One such class of exempt transaction is described as "loans in the amount of $50,000 or more," except for certain loans secured by first mortgages on described types of real property. Plaintiff says that since the loan here was for more than $50,000, and did not involve one of the described first mortgages (it was a second mortgage), the loan is exempt from the interest limitations of the General Usury Law.

That conclusion seems unassailable. However, defendant uses that conclusion as a basis for a claim that N.J.S.A. 31:1-1(e) thus leaves "totally unregulated the charges that a borrower pays" on such a loan in excess of $50,000. That logic and that conclusion, however, are not supported by the language or the policy of either the General Usury Act or the Secondary Mortgage Loan Act.

The General Usury Act regulates interest rates. And that is all it does. If the provisions of that statute exempt a particular transaction from its provisions, that means only that a higher rate of interest can be charged on that loan. It does not mean that the transaction also--in some unexplained way--becomes exempt from the totally different provisions of the Secondary Mortgage Loan Act. That latter statute regulates much more than interest rates. Among other things it regulates permissible charges other than interest rates and there is no reason to conclude that simply because a transaction may be exempt from the General Usury Law, it is also exempt from the provisions of the Secondary Mortgage Loan Act. The one simply does not follow from the other.

Defendant also submits arguments of waiver, estoppel and accord and satisfaction, all based on plaintiffs having made full payment of the payoff amount demanded by defendant, and having thereafter received and retained the $17,913.68 repaid by defendant. ⁵

The short answer to these arguments is that all those actions occurred while plaintiffs were unaware that the charges defendant had imposed at the 1983 closing were unlawful, or that because of that illegality, the note they had signed in 1983 was "void and unenforceable." Without that knowledge, there is no basis for a claim that plaintiffs waived the rights of which they were unaware, or that they should be estopped from asserting those rights now, or that their acceptance of the refund check represented an accord and satisfaction respecting a claim that they did not know they had.

A waiver is generally defined as an intentional relinquishment of a known right. West Jersey Title & Guarantee Co. v. Industrial Trust Co., 27 N.J. 144, 141 A.2d 782 (1958); In Re Bessemer Trust Co., 147 N.J.Super. 331, 396, 371 A.2d 316 (Ch.Div.1976). Here there was neither knowledge of the right in question nor any basis to find an intent to relinquish the same. Thus, the claim of waiver fails on both counts.

An estoppel arises when one party is led to change his or her position in reliance on a course of conduct followed by another. In such a case, the doctrine of estoppel will be applied to bar the second party from altering that conduct if, to do so, would prejudice the first party. Highway Trailer Co. v. Donna Motor Lines, Inc., 46 N.J. 442, 217 A.2d 617 (1966), cert. den. 385 U.S. 834, 87 S.Ct. 77, 17 L.Ed.2d 68 (1966); Jewish Center of Sussex Cty. v. Whale, 165 N.J.Super. 84, 397 A.2d 712 (Ch.Div.1978).

None of those elements is present here. Nothing that plaintiffs did caused defendant to change its position to its detriment. The concept of estoppel is simply inapplicable.

The same is true of accord and satisfaction. Defendant cites authorities standing for the proposition that a creditor who accepts some payment less than the full amount demanded may--in the absence of an appropriate reservation of rights--be found to have accepted the smaller payment as an "accord and satisfaction" by which the creditor surrendered any claim to the larger amount in dispute. Again, the essence of the concept is a knowing and deliberate decision to act in the described manner. Kissell v. Myer & Bush Co., 96 N.J.L. 513, 115 A. 378 (E. & A.1921); A.G. King Tree Surgeons v. Deeb, 140 N.J.Super. 346, 356 A.2d 87 (Cty.D.Ct.1976). Absent any knowledge that a larger amount is or may be owing, there is no basis for finding an accord and satisfaction through acceptance of what is later found to be less than the full amount owed.

Defendant also claims that N.J.S.A. 17:11A-46(g), which prohibits imposition of the charges made here, is unconstitutional. The argument is based on the fact that the Secondary Mortgage Loan Act exempts from its provisions "financial institutions such as State and National banks, State and Federal savings and loan associations, savings banks and insurance companies." N.J.S.A. 17:11A-61. Since those institutions are permitted to impose the charges which a second mortgage company such as defendant is prohibited from charging, says defendant, the former obtains a competitive advantage. And that unequal treatment, it claims, violates the Equal Protection Clause of the Fourteenth Amendment to the United States...