Vacating Sheriff's Foreclosure Sale - Lack of Notice to Homeowner

In this article I discuss the rights and remedies available to a New Jersey homeowner who has lost his or her property to a sheriff's sale because the lender failed to provide actual notice of the sheriff's sale date. The state of confusion that can be created by the lender's failure to communicate with the borrower can be grounds to vacate a sheriff's sale under New Jersey law. But the homeowner must get to the court quickly upon learning of the sale.

For purposes of this article I ask my readers to make the following assumptions: (1) a foreclosure suit has been filed in New Jersey; (2) the borrower has requested a loan forbearance/modification from the lender either by initiating the court ordered mediation process or by participating in any of the lender's voluntarily homeowner assistance programs; (3) during the period of time when the borrower and lender are in the midst of the loan forbearance/modification process a sheriff's sale is scheduled in the foreclosure case; (4) the lender agrees to adjourn the sheriff's sale periodically over several months to permit the borrower with the opportunity to comply with the conditions of any interim loan forbearance/modification agreement; (5) after several adjournments of the sheriff's sale the bank ultimately denies the borrower's forbearance/modification request and a new sheriff sale date is scheduled; (6) the lender neglects to inform the borrower in writing of the new sheriff's sale date, and consequently the borrower is unaware that his or her property is scheduled for sale; and (7) consequently the property is sold at the sheriff's sale and the homeowner learns about it after the fact.

Typically, lenders will offer a 3-month interim forbearance agreement to test the borrower's ability to pay while the lender reviews the borrower's current financial information. If the borrower fully complies with the conditions imposed by the 3-month forbearance agreement, then the lender will provide a formal loan modification agreement. Obviously, the borrower is at a serious disadvantage in terms of having any leverage to negotiate with the bank, instead finding himself or herself in a "take it or leave it" situation. Meanwhile, the foreclosure case is proceeding forward and eventually a sheriff's sale is scheduled. Most borrowers, being prudent persons, will either hire counsel to negotiate an adjournment of the sheriff's sale or are able to secure the cooperation of the lender to adjourn the sale either voluntarily or through the court ordered mediation process now available to homeowners in New Jersey.

In the current mortgage foreclosure practice, there are multiple factors at play which often create a circuitous series of events leaving the borrower in a complete state of confusion about the status of the sheriff's sale on his or her property. The bank usually employs an outside loan servicing company to handle the loan and an attorney to process the foreclosure case. These two (2) factions do not necessarily communicate properly with the borrower, often passing the buck to one another. So for example, if the borrower calls the bank directly to find out what the status of his or her loan modification or the sheriff's sale date the bank will likely direct the borrower to contact the loan servicing company. Because most loan servicing companies use automated phone systems it can be extremely difficult for the borrower to reach a live voice; even if the borrower is fortunate enough to get through to a customer service representative they will often instruct the borrower to call the bank's attorney. If the bank's attorney is a firm that is processing hundreds or thousands of foreclosure cases, good luck in getting a return phone call!

So what happens in the scenario when after numerous months of waiting for an answer on a loan modification the bank denies the borrower's loan modification request, proceeds with a rescheduled sheriff's sale but neglects to provide the homeowner with written notice of the adjourned sheriff's sale, and the property is acquired by the bank or another third party purchaser at the sale?

Under Jersey law, a homeowner is entitled to receive actual notice of a sheriff's sale date including any postponements or adjournments of the sale. This is an important due process right because a sheriff's sale triggers the 10-day redemption period under NJ law for the homeowner to redeem or repurchase the property by paying off the full amount of the foreclosure judgment, or for the homeowner to file a Chapter 13 bankruptcy within the same 10-day period which extends the 10-day redemption period for an additional 60 days pursuant to 11 U.S.C. 109(g).

In the absence of the lender's compliance with this actual notice requirement, the prudent homeowner should consider filing a motion to vacate the sheriff's sale and invalidate the sheriff's deed. But time is of the essence for the homeowner to preserve his or her remedies, especially if an innocent third party has purchased the property at a sheriff's sale and the sheriff is in the process of, or has delivered, the deed thus consummating the sale.

It is well settled that New Jersey Chancery courts have the authority to set aside a sheriff’s sale based on “considerations of equity and justice.” First Trust National Assoc. v. Merola, 319 N.J. Super. 44, 49 (App. Div. 1999). Our Chancery courts have long recognized “that a judicial sale may be set aside ‘by reasons of fraud, accident, surprise, or mistake, irregularities in the conduct of the sale, and so on’….” Id., quoting Karel v. Davis, 122 N.J. Eq. 526, 529 (E. & A. 1937).

New Jersey Cour Rule 4:65-2 (R. 4:65-2) requires that notice of a sheriff's sale be posted by the sheriff in the sheriff's office and also on the property being sold. See also N.J.S.A. 2A:61-1 (requiring posting on the premises of the property being sold at least three weeks prior to the sale). In addition, the party who obtained the order for the sale must serve the owner of the property with notice of the sale at least ten days in advance of the sale by registered or certified mail, return receipt requested. R. 4:65-2. The Rule is clear – it requires that the property owner receive “actual notice” of the sale. See New Brunswick Sav. Bank v. Markouski, 123 N.J. 402, 426 (1991) (Court held that readily identifiable holders of property interests adversely affected by the sale are entitled to actual notice of the sale).

In a case that merits close attention in this current economic crisis, in First Mut. Corp. v. Samojeden, 214 N.J. Super. 122 (App. Div. 1986), the Appellate Division extended the actual notice requirement under R. 4:65-2 to apply to adjourned sheriff sale dates, concluding that effective notice is the guiding principle of procedural due process:

Although we recognize that our rules do not expressly provide for the giving of notice of adjourned sales, we are nevertheless persuaded that their implicit predicate is the affording of actual knowledge of the effective sale date to those persons whose interests would be irrevocably affected by the sale and, most particularly, the owners and encumbrancers of the property whose equity and investment are likely to be lost unless they take the protective action of either redeeming after the sale or purchasing at the sale. . . We so conclude for obvious jurisprudential reasons. Effective notice is the cornerstone of procedural due process. Our rules of court are constructed on that cornerstone and the focus of their interpretation must be consistent with that overriding concern.

214 N.J. Super. at 126.

Faced with a circumstance where the notice provisions of R. 4:65-2 have not been met, a New Jersey foreclosure court may either set the sale aside or allow a period of redemption. Orange Land Co. v. Bender, 96 N.J. Super. 158, 164 (App.Div.1967); see United States v. Scurry, 193 N.J. 492, 506 (2008) (allowing borrower a reasonable period of time to redeem her property, which had been sold at a sheriff's sale, because she had not received the required ten days of notice of the sale). But, when there is no intervening bidder at a sheriff’s sale and the homeowner does not have actual notice of any adjourned sale date then vacation of the sale is the appropriate remedy. See First Mut. Corp. v. Samojeden, 214 N.J. Super. at 128-129.

I recently succeeded in vacating a sheriff's sale for one of my clients based on the principles set forth in this article. Results of any court case may vary depending upon the circumstances, however.