Unfair, Deceptive Practices In Connection With Post-Foreclosure Judgment Loan Workout Negotiations Subject To NJ Consumer Fraud Act

A recent ruling by a New Jersey appellate court recently held that unfair or deceptive practices by a lender or loan servicer in connection with the negotiation of an agreement to cure a default in a mortgage following the entry of the judgment of foreclosure(1) is subject to the provisions of the New Jersey Consumer Fraud Act (CFA), N.J.S.A. 56:8-1 to -106.(2) That court also held that this was the case even though the mortgagor/homeowner did not actually sign the promissory note (and, consequently, not liable for repayment thereof) that was the subject of the foreclosure action.(3) It stated that "[t]here [was] little doubt that, if [homeowner] had been the initial debtor and her attempts to cure default had taken place before entry of the order of foreclosure, the transactions would have been covered by the CFA ..." and "f[ound] no principled reason to distinguish the present structurally identical transactions, albeit by a non-debtor mortgagor, executed after a judgment of default had been entered."

Inasmuch as the New Jersey CFA allows for an award of triple damages and attorneys' fees to a winning homeowner, this ruling may operate to encourage more attorneys to take on cases on behalf of New Jersey homeowners who, when seeking loan modifications from their lender or loan servicer, get jerked around or are otherwise subjected to unfair or deceptive practices.(4)

For the ruling, see Gonzalez v. Wilshire Credit Corp., DOCKET NO. A-2634-08T2, 988 A.2d 567; 2010 N.J. Super. LEXIS 16 (App. Div. 2010).

(1) The court observed that the homeowner who filed suit "... essen[tially] claims that Wilshire committed consumer fraud in calculating the amounts due transforming, as the result of the terms of annually or biannually renegotiated agreements, a default curing obligation into a never-terminating cash cow."

(2) The court points out that the CFA, at N.J.S.A. 56:8-2, provides (bold text is my emphasis, not in the original text):

• The act, use or employment by any person of any unconscionable commercial practice, deception, fraud, false pretense, false promise, misrepresentation, or the knowing, concealment, suppression, or omission of any material fact with intent that others rely upon such concealment, suppression or omission, in connection with the sale or advertisement of any merchandise or real estate, or with the subsequent performance of such person as aforesaid, whether or not any person has in fact been misled, deceived or damaged thereby, is declared to be an unlawful practice . . . .

The court then went on to explain the meaning of the word "unconscionable" as used in the CFA when referring to commercial practices that are prohibited, and quoted its earlier ruling in Associates Home Eq. Serv's v. Troup, 343 N.J. Super. 254, 278 (App. Div. 2001) in that regard (bold text is my emphasis, not in the original text):

• The word "unconscionable" must be interpreted liberally so as to effectuate the public purpose of the CFA. Kugler v. Romain, 58 N.J. 522, 543 (1971). It is not intended to "erase the doctrine of freedom of contract, but to make realistic the assumption of the law that the agreement has resulted from real bargaining between parties who had freedom of choice and understanding and ability to negotiate in a meaningful fashion." Id. at 544. The standard of conduct contemplated by the unconscionability clause is "good faith, honesty in fact and observance of fair dealing [,]" and the need for application of that standard "is most acute when the professional seller is seeking the trade of those most subject to exploitation — the uneducated, the inexperienced and the people of low incomes." Ibid. Whether a particular practice is unconscionable must be determined on a case-by-case basis. Id. at 543.

(Note: The legal analysis for determining whether a commercial practice is "unconscionable" under the New Jersey CFA appears to differ (and be much looser) from the analysis for determining the unconscionability of a contract under the common law. See, for example, Muhammad v. County Bank of Rehoboth Beach, Delaware, 189 N.J. 1; 912 A.2d 88 (2006), in which the New Jersey Supreme Court cited Sitogum Holdings, Inc. v. Ropes, 352 N.J. Super. 555, 564-66, 800 A.2d 915 (Ch.Div.2002) for the general proposition "that unconscionability traditionally entails discussion of two factors: procedural unconscionability, which "can include a variety of inadequacies, such as age, literacy, lack of sophistication, hidden or unduly complex contract terms, bargaining tactics, and the particular setting existing during the contract formation process," and substantive unconscionability, which generally involves harsh or unfair one-sided terms.")

(3) The court stated the following in giving its ruling (bold text is my emphasis, not in the original text; footnotes in original text omitted):

• We acknowledge that the transactions at issue in this case did not directly involve the original mortgage loan but, instead, agreements to cure default between a mortgagor who was not a party to that loan and the assignee and servicer of that loan. However, as the Lemelledo Court observed: "the CFA could not possibly enumerate all, or even most, of the areas and practices that it covers without severely retarding its broad remedial power to root out fraud in its myriad, nefarious manifestations." Lemelledo, supra, 150 N.J. at 265 (citing Federal Trade Comm'n v. Sperry & Hutchinson Co., 405 U.S. 233, 240, 92 S. Ct. 898, 903, 31 L. Ed. 2d 170, 177 (1972)). Instead, the applicability of the CFA "hinges on the nature of a transaction, requiring a case by case analysis." Papergraphics, supra, 389 N.J. Super. at 13. While we would hesitate greatly to hold that most "settlements" are subject to the CFA's strictures, we regard these particular agreements to be so closely allied to the cures of default recognized in N.J.S.A. 2A:50-57 as to warrant coverage.

• There is little doubt that, if Gonzalez had been the initial debtor and her attempts to cure default had taken place before entry of the order of foreclosure, the transactions would have been covered by the CFA under Lemelledo and Troup. We find no principled reason to distinguish the present structurally identical transactions, albeit by a non-debtor mortgagor, executed after a judgment of default had been entered.

• The CFA offers a remedy to "[a]ny person who suffers any ascertainable loss of moneys or property, real or personal, as a result of the use or employment by another person of any method, act, or practice declared unlawful under this act" and affords legal and equitable relief, treble damages and reasonable attorneys' fees to successful litigants. N.J.S.A. 56:8-19.

• We find that Gonzalez' status as a signatory to the agreements to cure default entered with Wilshire provides her with standing under the CFA. In the circumstances presented, Wilshire's arguments regarding the lack of privity between Gonzalez and Wilshire arising from the making of the initial loan and the issue of her status as a "consumer" of that loan are irrelevant. A separate contractual relationship between Gonzalez and Wilshire exists that involves the loan, but does not arise directly from it.

• Further, we find that the monetary damages that Gonzalez claims to exist as the result of Wilshire's allegedly unconscionable practices, if proven, constitute the statutorily-required "ascertainable loss." Weinberg v. Sprint, Corp., 173 N.J. 233, 237 (2002) (holding that to have standing under the CFA, "a private party must plead a claim of ascertainable loss that is capable of surviving a motion for summary judgment.").

• We disagree with the motion judge's conclusion that Gonzalez could obtain relief in this matter only by a motion to vacate, modify or enforce the "settlement" with Wilshire. Such a motion would not effectively address the unconscionable practices that Gonzalez claims to have occurred here. Moreover, contrary to the conclusion of the motion judge, we do not find the casting of this matter as a CFA claim to signify an improper motive on counsel's part. The remedies of treble damages and an award of attorneys' fees were created to address just such a circumstance as has allegedly arisen here.

• As the Court stated in Wanetick v. Gateway Mitsubishi, 163 N.J. 484 (2000): "two of the three main purposes of the Act are `to punish the wrongdoer through the award of treble damages, and, by way of the counsel fee provision, to attract competent counsel . . . .'" Id. at 490 (quoting Lettenmaier v. Lube Connection, Inc., 162 N.J. 134, 139 (1999)). See also Cox v. Sears Roebuck & Co., 138 N.J. 2, 24-25 (1994); Sema v. Automall 46 Inc., 384 N.J. Super. 145, 151 (App. Div. 2006).

• We thus conclude that Gonzalez has offered sufficient factual evidence of unconscionable conduct on the part of Wilshire to withstand a motion for summary judgment Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520, 540 (1995), and that the motion judge was mistaken in his determination that the CFA is inapplicable to her claim. Manalapan Realty v. Manalapan Tp. Comm., 140 N.J. 366, 378 (1995).

(4) All states and the District of Columbia have some form of consumer protection law (regrettably, many are less effective and consumer-friendly than others) that may be applicable in situations similar to this one. For more on this point, see the National Consumer Law Center report: CONSUMER PROTECTION IN THE STATES: A 50-State Report on Unfair and Deceptive Acts and Practices Statutes.