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 “Possession” is not Synonymous with “Mortgagee in Possession.”

July 11, 2017

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In New Jersey, banks are commonly sued as a result of accidents occurring on properties subject to mortgage foreclosure actions, especially those properties that have been vacated and abandoned by the debtor-homeowner.  A bank is generally not liable for such accidents if it is not the legal owner of a property it forecloses upon.  The bank becomes the legal owner once it receives title to the property subsequent to a foreclosure sale which, in New Jersey, involves a public auction hosted by the County Sheriff.    However, New Jersey Courts have held that a “mortgagee in possession”, despite not having legal title, may be liable for premises liability actions, as well as other actions.  Much confusion has ensued as to what is and what is not a “mortgagee in possession” since the Courts have repeatedly held that it is a legal issue to be decided on a case by case basis.
In <a href="http://law.justia.com/cases/new-jersey/appellate-division-published/2017/a4176-15.html"><em>Woodlands Community Association, Inc. v. Nationstar Mortgage, LLC</em></a> the court provided clarity and laid out the analytical framework relative to this issue.  Adam Mitchell purchased a condominium unit in 2007 with the proceeds from a bank.  He executed a mortgage encumbering the unit.  The mortgage was assigned to Nationstar.  Mitchel eventually defaulted and then vacated the unit.   He also owed the Association unpaid monthly assessment fees.
Subsequent to his default and abandonment, Nationstar replaced the locks on the unit and winterized it.  Nationstar had the only set of keys.   The Association sued Nationstar for unpaid monthly assessment fees.  The trial court granted summary judgment in favor of the Association, holding that Nationstar was a mortgagee in possession due to its exclusive control of the unit.
The Appellate Division reversed, counseling that use of the word “possession” in the designation “mortgagee in possession” is somewhat misleading.  Rather, dominion and control are more descriptive of a mortgagee in possession, not actual possession.  Since Nationstar was not occupying or using the unit, was not collecting rents or otherwise profiting from the unit, and was not making repairs to the unit, the Appellate Division held that it was not a mortgagee in possession.  Acts such as changing locks and winterizing the unit are “minimal efforts taken … to secure [the bank’s] interest in the mortgaged property …”.  Stated another way, the bank was merely protecting the value of its security interest by preventing break-ins, vandalism, and water loss.
While the issue is one to be decided on a case by case basis, defense attorneys who represent banks in these types of cases should keep the above analysis in mind since it may be possible to escape from liability on summary judgment.
Thanks to Michael Noblett for his contribution to this post.
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