On this date in 2011, the Supreme Court decided Gonzalez v. Wilshire Credit Corp., 207 N.J. 557 (2011). The Court’s 6-0 decision, authored by Justice Albin, involved the question of whether a post-mortgage- foreclosure agreement was subject to the Consumer Fraud Act, N.J.S.A. 56:8-1 et seq. (“CFA”).
Plaintiff and Monserate Diaz bought a home as tenants in common. Diaz later borrowed $72,000 from Cityscape Mortgage Corporation and signed a note. Plaintiff did not sign the note. But the loan was secured by a mortgage on the home, so that plaintiff’s ownership interest was subject to foreclosure to pay the debt. Cityscape assigned the note and mortgage to U.S. Bank National Association, who retained Wilshire Credit Corp. as its servicer.
Diaz died, and after plaintiff had kept up with payments for a time, she defaulted. U.S. Bank obtained a foreclosure judgment. Before a sheriff’s sale, plaintiff (represented by counsel from Legal Services because plaintiff, who was disabled and on a fixed income, neither read nor spoke English) and Wilshire entered into an agreement under which Wilshire would hold off on the sheriff’s sale, in exchange for which plaintiff would make certain monthly payments.
After about sixteen months had passed, plaintiff had missed four payments. Another sheriff’s sale was scheduled, but was averted when the parties entered into a new agreement. Though plaintiff had had counsel from Legal Services for the first agreement, Wilshire approached her directly , without counsel, for the second agreement. That agreement included unnecessary force-placed insurance, which was far more expensive than comparable insurance. Plaintiff signed the agreement and from then on made all payments timely until the agreement was about to expire.
But instead of dismissing the foreclosure case as that agreement required, Wilshire demanded that plaintiff enter into still another agreement. This time, plaintiff contacted Legal Services. When Wilshire could not justify to Legal Services the amount said to be due under the second agreement, which appeared to be excessive, plaintiff filed suit under the CFA against Wilshire and U.S. Bank.
The Law Division granted summary judgment to defendants, holding that the CFA did not cover post-foreclosure-judgment settlement agreements. The Appellate Division reversed, and the Supreme Court affirmed that decision.
After discussing the background of the CFA as a bulwark of consumer protection, Justice Albin rejected the idea that the second agreement was a settlement agreement. “As a practical matter, both the first and second agreements were nothing more than a recasting of the original loan, allowing Wilshire to recoup for its client, U.S. Bank, past-due payments.” They were “fobearance agreements” that constituted “subsequent performance” of the original loan, and the CFA extends to such “subsequent performance.” N.J.S.A. 56:8-2.
Defendants contended that the agreements could not have been subsequent performance because the loan merged into the final foreclosure judgment. Justice Albin recognized that this “merger doctrine” existed. But he noted that the doctrine “is an equitable principle that requires an examination of all the facts and circumstances.” The Court did not need to resolve the merger issue because “the post-judgment agreements, standing alone, constitute the extension of credit, or a new loan, and … Wilshire’s collection activities may be characterized as ‘subsequent performance’ in connection with the extension of credit.”
Justice Albin looked to the reality of the situation. “Theoretically, plaintiff could have obtained a loan from a bank to pay off U.S. Bank’s judgment under similar terms as set forth in the [post-judgment] agreements. If Wilshire were the servicing agent on that loan, it could not engage in unconscionable collection practices without offending the CFA. And if that is true, it is hard to countenance an end-run around the CFA by declaring the present agreements to be something other than the ‘offering, sale, or provision of consumer credit'” that the CFA covers.
The Attorney General and Legal Services, as amici, had highlighted the frequency and nature of abusive practices by mortgage servicers. Relying on those presentations, Justice Albin stated that “[l]ending institutions and their servicing agents are not immune from the CFA; they cannot prey on the unsophisticated, those with no bargaining power, those bowed down by a foreclosure judgment and desperate to keep their homes under seemingly any circumstances.”
Defendants and an amicus in their support argued that lenders would be discouraged from working out payment agreements with defaulting borrowers if the CFA were applicable to such agreements, and that all settlement agreements would be jeopardized if the Court ruled for plaintiff. Justice Albin rightly rebuffed that contention, noting that “[l]enders extend credit to consumers for purchasing automobiles, houses, home improvements, and for numerous other items despite the applicability of the CFA.” The Court was “confident that lenders and their servicing agents will continue to negotiate work-outs even in a post-foreclosure-judgment setting when it is in their interest to do so. Lenders want a return on their capital, not to buy and sell homes.” The Court vacated the dismissal of plaintiff’s case and remanded the matter for further proceedings.
This decision is one of the most powerful pro-consumer rulings of the twenty-first century. It stands on the shoulders of prior cases such as Lemelledo v. Beneficial Management, 150 N.J. 255 (1997), a leading case in the area of the applicability of the CFA to lenders, and other prior authorities. In just twelve years, Justice Albin’s decision has been cited over 100 times. It ranks among the landmarks of CFA jurisprudence.