Prudential Ins. Co. of America v. Jackson

• Decision Date: 18 February 1994
• Citation: 270 N.J.Super. 510,637 A.2d 573
• Parties: PRUDENTIAL INSURANCE COMPANY OF AMERICA, a New Jersey Corporation, Plaintiff-Respondent, v. Willard JACKSON, Defendant-Appellant, and Old Republic Insurance Company, Household Finance Corporation, Guardian Discount Corporation, C.I.T. Financial Services Inc., a Corp., Jersey City Medical Center, Family Medical Center, Defendants.
• Court: New Jersey Superior Court — Appellate Division

Page 510

270 N.J.Super. 510

637 A.2d 573

PRUDENTIAL INSURANCE COMPANY OF AMERICA, a New Jersey Corporation, Plaintiff-Respondent, v. Willard JACKSON, Defendant-Appellant and Old Republic Insurance Company, Household Finance Corporation, Guardian Discount Corporation, C.I.T Financial Services Inc., a Corp., Jersey City Medical Center, Family Medical Center, Defendants.

Superior Court of New Jersey Appellate Division.

Argued Dec. 7, 1993.

Decided Feb. 18, 1994.

Gregory G. Diebold, Jersey City, argued the cause for the appellant (Hudson County Legal Services Corp., Timothy K. Madden, Director, attorneys; Mr. Diebold, of counsel and on the brief).

Harold N. Kaplan, Westmont, argued the cause for the respondent (Federman and Phelan, attorneys; Mr. Kaplan, of counsel and on the brief).

Before Judges PRESSLER, BROCHIN and KLEINER.

The opinion of the court was delivered by

KLEINER, J.S.C. (temporarily assigned).

Defendant Willard Jackson appeals a foreclosure judgment routinely entered through the Superior Court Foreclosure Unit on July 1, 1993 on behalf of plaintiff Prudential Insurance Company of America. The foreclosure proceedings were initially commenced on June 13, 1991. Defendant filed an answer asserting three separate defenses. On a contested motion, plaintiff obtained an order striking defendant's answer on December 7, 1992. We conclude that the affidavit filed by defendant in response to the motion to strike his answer raised genuine issues of fact which necessitated a plenary hearing. We accordingly are constrained to reverse the entry of the foreclosure judgment, to reinstate the defendant's answer and to remand to the Chancery Division of Hudson County for trial.

The issues posed by defendant's initial answer and in his response to plaintiff's motion to strike raise questions of first impression on the appellate level in this State, although the legal and factually analogous circumstances have been thoroughly discussed in two previously reported decisions: Associated East Mortgage Co. v. Young, 163 N.J.Super. 315, 394 A.2d 899 (Ch.Div.1978), and Heritage Bank, N.A. v. Ruh, 191 N.J.Super. 53, 465 A.2d 547 (Ch.Div.1983).

The factual history of this particular mortgage transaction has been gleaned from a review of the pleadings which include certain stipulated facts jointly submitted to the trial court, as well as information argued by counsel on the motion to strike. On December 6, 1968, defendant Willard Jackson and his wife Katherine, who died March 19, 1991, ¹ purchased a residence at 126 Wade Street in Jersey City. The entire purchase price of $22,800 was obtained by a mortgage loan granted by the Commercial Mortgage Company and guaranteed by the Veterans Administration (VA) ² pursuant to 38 U.S.C.A. §§ 1801 to 1819 (now codified at 38 U.S.C.A. §§ 3701 to 3714). The mortgage bond required monthly payments of principal and interest amortized over a twenty-five year period yielding interest at 6.75 percent per annum plus the payment of one-twelfth of the annual taxes and insurance premiums. The mortgagee was granted the right to pay any installment of any tax, water rent, or other lien levied upon the property and to add any sum thus paid to the mortgage debt to be secured by the mortgage on the real estate. The mortgage was assigned on December 30, 1968 by the Commercial Mortgage Company to the plaintiff.

On January 19, 1990, plaintiff, by its servicing agent Metmor Financial Inc., paid $14,333.25 to the City of Jersey City to satisfy a lien for unpaid water and sewage charges. ³ In February 1990, defendant was informed by plaintiff's servicing agent that he would be required to repay that sum in six monthly installments. When defendant remitted his regular mortgage payment in March 1990, plaintiff did not apply that payment to the principal, interest, taxes and insurance, as was customary, but chose to apply the payment to the outstanding portion of the mortgage debt attributable to the previously satisfied water and sewage debt. Jackson protested this action and ceased paying any further sum. Plaintiff then filed a foreclosure complaint which alleged a default as of March 1, 1990, and asserted that the principal mortgage debt as of February 1, 1990 was $6,480.46 excluding interest, late penalties and any monies paid by plaintiff as advances for taxes and insurance premiums or in satisfaction of the municipal lien, together with interest which had accrued on all sums advanced by plaintiff. The plaintiff also named as defendants six separate judgment creditors holding six docketed judgments against individuals bearing the name "Willard Jackson or Katherine Jackson" or similar names.

Defendant filed a timely answer and asserted three separate defenses: unclean hands, the violation of the duty of fair dealing, and the failure of plaintiff to comply with the statutory and regulatory prerequisites for foreclosure of this VA-insured mortgage. Thereafter, plaintiff filed a motion to strike the answer and for leave to enter a default against defendant, thus permitting the foreclosure proceeding to be processed as if uncontested by the Superior Court Foreclosure Unit for the entry of a foreclosure judgment. The certification of proof as filed indicated the mortgage debt was $24,764.25 as of October 1, 1991. This sum was a computation of the balance on the principal, interest, late charges, taxes, insurance premiums and the advance paid by Metmor Financial to satisfy the water and sewage lien of $14,333.25.

The motion was initially denied without prejudice and was ultimately refiled and postponed for disposition on the same date that the matter was scheduled for trial. Prior to the commencement of trial, after oral argument, the motion was granted, default was entered against the defendant, and thereafter on July 1, 1993, a judgment of foreclosure was executed by the court reflecting a balance due as of that date of $31,476.34.

In support of its position, both before the trial court and on appeal, defendant relies upon Associated East Mortgage Co. v. Young, supra. In Associated, the mortgagor in a foreclosure proceeding of a residential mortgage approved by the Department of Housing and Urban Development (HUD) pursuant to the National Housing Act, 12 U.S.C.A. § 1715(1)(d)(2), filed a counterclaim seeking a declaratory judgment that the foreclosing mortgagee was legally bound to provide the mortgagor with forbearance relief and the recasting of its mortgage. The court noted that pursuant to a series of regulations codified in the Code of Federal Regulations (C.F.R.), 24 C.F.R. § 203.600 et seq., a HUD-approved mortgagee is required to provide special servicing to assist a defaulting mortgagor as a prerequisite to foreclosure. Id. at 320-23, 394 A.2d 899. Additionally, a mortgagee may be granted and, under specified circumstances, may itself grant special forbearance relief including the suspension or reduction of mortgage payments for a period not to exceed eighteen months. 24 C.F.R. § 203.614(a) to (b). Id. at 322, 394 A.2d 899.

The regulation cited is merely illustrative of the varied types of available forbearance relief, including recasting of the mortgage, available to a HUD-approved mortgagor prior to foreclosure. Id. at 321-23, 394 A.2d 899. These varied forms of forbearance relief are outlined and detailed in a handbook issued by HUD and provided to lenders servicing HUD-insured home mortgages. Id. at 323, 394 A.2d 899.

In Associated, the court noted that one objective of HUD is aimed at minimizing the possibility of foreclosure by utilizing collection techniques adapted to the individual differences of mortgagors and focusing upon the individual and particular circumstances which caused a HUD mortgagor to default. Id. at 324, 394 A.2d 899. The HUD handbook provides that HUD approval of a mortgagee as a provider of HUD mortgages may be suspended or terminated if the mortgagee utilizes poor servicing techniques in dealing with its mortgagors and, after notification by HUD, fails to correct its servicing deficiencies. Id. at 324, 394 A.2d 899.

In its thorough analysis of all of the pertinent servicing options of HUD-approved mortgages, the court noted that certain techniques included in the handbook provided to servicing mortgagees had also been specifically incorporated in the C.F.R., while other forbearance techniques found in the handbook were not. Id. at 321-28, 394 A.2d 899. The court concluded that, "C.F.R. has the effect of statute or law, unlike the Handbook which has been held to be merely advisory." Id. at 327, 394 A.2d 899.

In Associated, Judge Kentz analyzed the various regulations and advisory handbook suggestions which were allegedly disregarded by the mortgagee in servicing the defendant Young's mortgage. The court, however, did not conclude that those procedural deficiencies as alleged created an affirmative cause of action in the Youngs to compel compliance with the forbearance techniques. However, the court did conclude that the failure of the mortgagee, Associated, to abide by either the regulations or the handbook advisory suggestions constituted "unclean hands" on the part of the mortgagee which a court of equity will not countenance, and Associated was denied a judgment of foreclosure. Id. at 330-31, 394 A.2d 899.

As the mortgagor had escrowed its monthly mortgage payments during the course of the litigation, Judge Kentz ordered that the escrow fund be credited to the mortgage account and specifically ordered in part: "If thereafter any delinquency continues on the first mortgage, Associated and the Youngs shall endeavor to establish a mutually agreeable plan to restore the account to a current status in accordance with the applicable provisions of the C.F.R. and the Handbook." Id. at 331, 394 A.2d 899.

In the case sub judice, the plaintiff Prudential urged the trial court to adopt what it contended was a contrary result as set forth in Heritage...