Moran v. American Funding, Ltd.
| Decision Date | 13 October 1989 |
| Citation | 569 A.2d 841,238 N.J.Super. 263 |
| Parties | Donald F. MORAN and Judy Moran, his wife, Plaintiffs, v. AMERICAN FUNDING, LTD. and Marine Midland Bank, N.A., Defendants. GOLD TRENDS, INC., Plaintiff, v. Dora BENEDUCE and Mario Beneduce, her husband; Frank Benecki and Elaine Benecki; Joseph Shapinski and Mary Shapinski, his wife; Martin Burger, Trustee; Anthony Petrino; Ned Bevelheimer; and Lyndhurst Sze, Inc., d/b/a Mr. Win Chinese Seafood, Defendants. |
| Court | New Jersey Superior Court |
These related cases raise the question of whether a 1987 amendment to the Secondary Mortgage Loan Act, N.J.S.A. 17:11A-34 et seq. (hereinafter "The Act") should be applied retroactively or only prospectively. That amendment (included within L.1987, C. 230) drastically changed the effect of a lender's non-compliance with the Act. Prior to its adoption, the Act provided that if a lender violated the Act while making a loan, the loan was void and the lender could recover neither the principal advanced nor any interest. The 1987 amendment modified that harsh result to permit recovery of the principal of the loan. For certain violations however, interest can still not be recovered and for other violations the Act specifies additional penalties.
The loans in both these cases were made before the 1987 change in the law, although both cases were filed thereafter. The applicable facts can be set out briefly.
MORAN V. AMERICAN FUNDING, LTD.
In February, 1984 Donald and Judy Moran obtained a $50,000 loan from defendant, American Funding Ltd, 1 with the loan secured by a second mortgage on their home in Ridgewood, New Jersey. The Morans allege that at or before closing, they were required to pay charges for title insurance to cover the mortgagee's interest in the property, and also to increase the fire insurance coverage on their dwelling.
At the time of the transaction, the Act barred both of those charges by the lender. N.J.S.A. 17:11A-46 prohibited the charge for title insurance because the Act contained no authorization for such a charge, and thus the "catch all" prohibition of that section applied: viz., the lender may not "contract for, charge, receive or collect" any one of a number of designated charges, nor may it "receive or collect ... any other thing of value other than charges authorized by this act". And N.J.S.A. 17:11A-49.1 specifically prohibited the lender from requiring the mortgagors to increase their "property insurance" because of the loan.
The Morans made regular monthly payments on their loan through January, 1988. At that time, they refinanced their home but instead of paying off the American Funding mortgage, they filed this suit alleging that the loan was void and unenforceable. The amount in question has since been paid into court. Plaintiffs now move for summary judgment and claim that the pre 1987 law governs and bars any recovery--of principal or interest--by defendants.
For purposes of this motion only defendants "admit" that they did impose the charges and obligations alleged by plaintiffs. They assert a number of defenses including laches, estoppel, and unclean hands, and include as well a claim that the forfeiture provisions of the pre-1987 Act are unconstitutional. 2 They have counterclaimed seeking foreclosure of their mortgage and argue that, at most, plaintiffs are entitled to the lesser relief provided by the post-1987 Act (forfeiture of interest) and they must in any event repay the principal of the loan.
In August, 1986 defendants Mario and Dora Beneduce borrowed $130,000 from plaintiff Gold Trends, Inc. As collateral they executed two mortgages on properties located respectively in Lyndhurst and Rutherford, New Jersey. Both mortgages were subject to prior encumbrances and thus constituted second mortgages.
Approximately one month later, in September 1986, the Beneduces borrowed an additional $160,000 from defendant Martin Burger as "trustee for an undisclosed principal." That loan was secured by two further mortgages, one a second mortgage on property in East Rutherford, and the other an additional mortgage on the same Lyndhurst property that formed part of the security for the Gold Trends loan.
On August 29, 1988, Gold Trends filed a foreclosure complaint against the Beneduces in which they also named Burger as a defendant. 3 The Beneduces defended by claiming that neither Gold Trends nor Burger is a licensed second mortgage lender and thus, under the Act as it read when the loans were made, both loans are "void and unenforceable".
Both Gold Trends and Burger acknowledge that they were not licensed under the Act and on the basis of that acknowledgment the Beneduces have filed a motion for summary judgment dismissing the foreclosure complaints. The mortgagees claim that the Beneduces may be guilty of fraud by accepting the loans with no intention of repaying them. And they argue further that, in any event, the less severe "penalty" provisions of the 1987 amendment should apply, rather than the harsher language in effect theretofore.
Any obligation on the part of a borrower arising out of a secondary mortgage loan shall be void and unenforceable unless such secondary mortgage loan was executed in full compliance with the provisions of this Act. (emphasis added)
In Connell v. American Funding Ltd., supra, 231 N.J.Super. 409 at p. 412, 555 A.2d 745, this court noted that prior cases have made clear 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.
To the same effect see, e.g., Stubbs v. Security Consumer Discount Co., 85 N.J. 353, 426 A.2d 1014 (1981).
Further, that loss of principal and interest could be imposed not only because of the imposition of unlawful charges, but also for any failure to act "in full compliance with the provisions" of the Act. For example, and of particular significance in the Gold Trends suit here, if the lender was not licensed, the loan was treated as being in violation of the Act, and neither principal nor interest could be recovered. Gottesfeld v. Kaminski, supra, 216 N.J.Super. 679, 524 A.2d 872 (App.Div.1987). 4
The purpose of the sanction contained in section 58--the policy underlying the provision--was also clear. As pointed out in Connell, supra, at p. 417, 555 A.2d 745,
Our courts have noted more than once that adoption of the Secondary Mortgage Loan Act was a response to abuses often perpetrated by "fly-by-night" operators preying on unsophisticated borrowers.... (citations omitted). The act was promulgated because local and out-of-state lenders were engaging in such transactions by fraud and chicanery. They procured borrowers through the means of false advertising. They then extracted unconscionable amounts of interest as well as exhorbitant fees.
It was to counter and deter those practices that the Legislature included section 58 in the Act. The "remedy" contained in that section was
harsh indeed. For a violation of the act, the lender can lose his entire loan and the borrower can find himself or herself with a huge windfall.... It is a deterrent, and undoubtedly a strong deterrent against unlawful conduct on the part of the lender. (Connell, supra, at p. 420-421, 555 A.2d 745).
See also, among a number of cases with similar statements, Westervelt v. Gateway Financial Service, 190 N.J.Super. 615, 620-621, 464 A.2d 1203 (Ch.Div.1983), noting that "the policy of the Act is to give generous protection to borrowers" and that, while forfeiture of all principal and interest "seems a harsh result, it was open to the legislature to decide that strong measures were needed to deal with a harsh business". See also, HIMC Investment Co. v. Siciliano, 103 N.J.Super. 27, 37-38, 246 A.2d 502 (L.Div.1968), from which the opinion in Connell quoted extensively.
In 1987 the Legislature relaxed a number of the stringent limitations in the Act.
Prior thereto, a lender was prohibited from passing along most of the costs and expenses incurred in connection with a second mortgage loan. The lender could not require a borrower to pay for appraisal fees, search fees, title examination charges, surveys, title insurance or credit reports. The Act specifically prohibited many of those items and also included a "catch-all" prohibition against the lender's receiving or collecting any other thing of value other then the charges authorized by this Act. See, N.J.S.A. 17:11A-46(g). 5
The 1987 changes specifically authorized a number of those previously prohibited charges. A new provision in the Act, N.J.S.A. 17:11A-44.9, said that a lender may "collect fees for title examination, abstract of title, survey, title insurance, credit reports, appraisals and recording fees when these fees are actually paid" by the lender to a third party.
The provisions concerning insurance on mortgaged property were also changed. Previously N.J. S.A. 17:11A 49.1 had said that a lender could not require a borrower to increase insurance on...
To continue reading
Request your trial
-
In re Topcroft, Inc.
...15 U.S.C. § 78cc(b)). See also Oxford Consumer Discount Co. v. Stefanelli, 55 N.J. 489, 262 A.2d 874 (1970); Moran v. American Funding, Ltd., 238 N.J.Super. 263, 569 A.2d 841 (1989). ...
- Sitkowski v. Zoning Bd. of Adjustment of Borough of Lavallette