Lawsuits arising out of foreclosures and mortgage modifications are common. (Even more common than lawsuits about gyms or health clubs if you can believe that.) Nearly every day there is a decision from the Appellate Division arising out of a residential foreclosure. Most of these fall into the same category -- borrower defaults and loses home through foreclosure then challenges lender's standing to foreclose after the fact -- but some are more interesting. That was the case with GMAC Mortgage, LLC v. Willoughby, a decision released yesterday by the New Jersey Supreme Court involving a mortgage modification agreement entered into to settle a foreclosure lawsuit.
Almost two years ago, I wrote a post about Arias v. Elite Mortgage, a lawsuit over the alleged breach of a mortgage modification agreements. In that case, borrowers entered into a mortgage modification agreement with their lenders that included a Trial Period Plan ("TPP"). As the name suggests, a TPP requires borrowers to make reduced monthly payments in a timely manner for a trial period, after which, if they make the payments, the lender agrees to modify their mortgage. In Arias, the Appellate Division held, as a matter of first impression, that if a borrower makes the trial payments under the TPP, the lender must modify the mortgage, and if it doesn't, the borrower can sue for breach. However, the holding was purely academic because the borrower in that case failed to make one of the trial payments in a timely manner so it could not sue.
In GMAC Mortgage, the New Jersey Supreme Court faced a similar situation with a much less academic result.
In GMAC Mortgage, plaintiff foreclosed on defendant's home after defendant defaulted on her mortgage. After a sheriff's sale was scheduled for the home, the parties entered into mediation under New Jersey's Residential Mortgage Foreclosure Mediation Program, which was set up in response to the collapse of the housing market several years ago.
At mediation, the parties entered into a settlement agreement that "gave [defendant] a path to save her home through a 'permanent modification' of [her] loan." The agreement, the terms of which were written by plaintiff's lawyer on a form provided by the courts, offered defendant a "trial to permanent modification plan contingent on her signed modification documents and an initial down payment." Specifically, the agreement required defendant to make a $6,000 down payment within a few weeks of the settlement and to make monthly payments of $1,678.48 for the next year. The agreement further stated that if all trial payments were made, plaintiff plaintiff would "make modification permanent," but "if defendant missed any payments, plaintiff would "continue with foreclosure."
Defendant complied with the agreement. She made the down payment and the required monthly payments. One year after signing the settlement agreement, however, she received a letter from plaintiff with a "wholly new modification agreement" that was being provided to her "because she 'successfully completed the requirements of [her] Special Forbearance Program." The proposed terms were not as favorable to defendant as the original agreement -- they shortened the maturity date and increased the monthly payments. Defendant did not sign the agreement but did begin making the higher monthly payments.
Plaintiff sent defendant two more modification agreements, each with terms slightly different than the original agreement. When defendant refused to sign them, plaintiff "advised her that her loan would be 'referred to foreclosure.'"By this point, defendant had paid plaintiff more than $58,000 under the original settlement agreement.
In response to plaintiff's notice, Defendant moved to enforce the original settlement agreement. Rather than ruling on the motion immediately, however, the court first sent the parties back to mediation. At mediation, plaintiff proposed a new settlement, consisting of a new down payment, higher interest rate, and new monthly payments. As the deadline to accept the offer neared, defendant provided plaintiff with a cashier's check for the down payment and verbally agreed to the terms. But she never signed the loan modification documents, so plaintiff revoked the offer.
The trial court then denied defendant's motion to enforce the settlement, holding that it was a "provisional settlement as evidenced by [defendant's] submission to subsequent mediation sessions." Shortly thereafter, plaintiff obtained final judgment of foreclosure and the property was sold to plaintiff at sheriff's sale for $100.
Defendant appealed, but the Appellate Division affirmed. The New Jersey Supreme Court then granted certification and reversed.
The Supreme Court noted that the parties "[did] not dispute whether they entered a settlement; they dispute[d] whether it was a provisional or permanent loan modification agreement." It then held that "[a]lthough the Agreement in this case [was] not free of all ambiguity, the terms [were] nevertheless sufficiently definite and detailed to indicate, with reasonable certainty, that the parties intended a permanent loan modification." In support of its decision, the Supreme Court emphasized the plain language of the agreement, which stated that if defendant made "all trial payments," plaintiff would "make modification permanent." Defendant made all of the trial payments, therefore plaintiff was required to make the modification agreement permanent. The Supreme Court further noted that "nothing in [the] Agreement suggested that, after a period of twelve months, [plaintiff] could unilaterally demand that [defendant] agree to a new loan modification on different terms that those that appeared in the [original agreement]."
The Supreme Court was not persuaded by plaintiff's argument, which the trial court relied upon to deny defendant's motion to enforce the settlement, that defendant's participation in mediation sessions and other negotiations with plaintiff after signing the original agreement prevented defendant from enforcing the agreement. Rather, the Supreme Court wrote these efforts off as being the product of desperation on defendant's part, observing: "[Defendant struggled, perhaps not deftly, to save her home by continuing with meditations and negotiations because of her failure to secure the relief to which she was entitled by the chancery court."
Having ruled that defendant should have been entitled to enforce the original settlement agreement, the Supreme Court remanded the case to the trial court to "fashion a suitable and equitable remedy." It noted that defendant would not be entitled to specific performance -- i.e., the return of her home -- if her home was sold to a bona fide, good faith purchaser. But, she might be entitled by damages. The Supreme Court thus left "to the sound discretion of the chancery court the determination whether [defendant] suffered financial damages and, if so, the amount."