Reverse Mortgage Monthly Payments Subject to Judgment Execution Creditors' Attachment, NJ Appeals Court Says

In a decision published on March 8, 2012 involving a novel issue in New Jersey debtor/creditors' rights laws, a New Jersey appellate panel held that a mortgage company's obligation to make monthly payments to a homeowner pursuant to a reverse mortgage is subject to attachment by a creditor holding a judgment against the homeowner. Cameron v. Ewing, Superior Court of New Jersey, Appellate Division, Docket No. A-3628-10T2.

The trial court determined that the monthly stream of reverse mortgage payments were beyond the reach of judgment creditors, and thus denied the creditor's motion to compel the mortgage company to turnover the payments as part of the creditor's attempt to collect its judgment via garnishment on the mortgage company.  

The judgment creditor appealed, and the Appellate Division reversed having concluded that the mortgagee's obligation to make monthly payments to the defendant judgment debtor is properly construed to be a "debt" against which plaintiffs, the judgment creditors, may obtain an order directing execution and garnishment under N.J.S.A. 2A:17-50 and -63 and Rule 4:59-1(c).  The appeals court also held that the reverse mortgage payments are "rights and credits" subject to an order for installment payments by the judgment debtor.  N.J.S.A. 2A:17-64.  

The appeals court returned or remanded the case to the trial court to determine the percentage of the reverse mortgage payments properly subject to execution.  N.J.S.A. 2A:17-56. 

This is an important decision for creditors' rights.  It is not unusual for individuals to engage in asset transfers in an attempt to avoid payment of a judgment or a debt they expect will turn into a judgment in the near future.    The fact pattern of this case strongly suggests that the defendant did exactly that by entering into the reverse mortgage with Wells Fargo only 2 months before agreeing to accept a $400,000 consent judgment with the plaintiffs.  Defendant, who was 85 years old at the time, gave Wells Fargo a mortgage on his NJ residence in an amount up to $360,000. The end result of the transaction was that Wells Fargo agreed to pay the defendant $959.01 per month for as long as he lived in the house.  Although not mentioned in the Appellate Division's published decision, the intent of the reverse mortgage was obviously to strip off the equity in the defendant's house so that defendant could avoid payment of the judgment that he knew was coming down the pike. 

Plaintiffs discovered the existence of the reverse mortgage in the course of post-judgment discovery.  Defendant's other income consisted of monthly Social Security benefits and a modest public employee pension. On plaintiffs' behalf, the Hunterdon County Sheriff served a writ of execution on Wells Fargo, levying against "monies due to defendant from a reverse mortgage from Wells Fargo Home Mortgage." When Wells Fargo refused to comply, plaintiffs filed a motion in aid of litigants' rights seeking an order compelling  Wells Fargo to withhold the monies due defendant under the reverse mortgage and pay them over to the sheriff. 

Plaintiffs argued Wells Fargo's obligation to pay defendant $959 a month was a "debt due," and therefore subject to garnishment under N.J.S.A. 2A:17-63.  Alternatively, plaintiffs argued they were entitled to an order compelling defendant, as judgment debtor, to pay over his reverse mortgage receipts in regular installments,  pursuant to N.J.S.A. 2A:17-64.  Wells Fargo argued its monthly payments to defendant should not be deemed property subject to garnishment under Rule 4:59-1.  

By statute, New Jersey law entitles a judgment creditor to execute on "debts" due to the judgment debtor as well as earned income, trust fund income, and profits.   

When a judgment has been recovered in the Superior Court, and where any wages, debts, earnings, salary, income from trust funds, or profits are  due and owing to the judgment debtor, or thereafter become due and owing to him, to the amount of $ 48.00 or more a week, the judgment creditor may, on notice to the judgment debtor unless the court otherwise  orders, apply to the court in which the judgment was recovered, or to the court having jurisdiction of the same, and upon satisfactory proofs, by affidavit or otherwise, of such facts, the court shall grant an order directing that an execution issue against the wages, debts, earnings, salary, income from trust funds, or profits of the judgment debtor. 

N.J.S.A. 2A:17-50 (emphasis added).   A bank levy is the most common form of execution against a judgment debtor, where the sheriff acting under a writ of execution and the authority found in N.J.S.A. 2A:17-50 levies on the judgment debtor's bank account; the judgment debtor's deposits with the bank serve as a debt owed by the bank to the customer.  See also R. 4:59-1(d) (regarding "issuance of an execution against wages, debts, earnings, salary, income from trust funds or profits") (emphasis added).

In the case of regular, recurring payments, New Jersey statutory law entitles the creditor to a garnishment order.

After a levy upon a debt due or accruing to the judgment debtor from a third person, herein called the garnishee, the court may upon notice to the garnishee and the judgment debtor, and if the garnishee admits the debt, direct the debt, to an amount not exceeding the sum sufficient to satisfy the execution, to be paid to the officer holding the execution or to the receiver appointed by the court, either in 1 payment or in installments as the court may 

deem just. 

N.J.S.A. 2A:17-63 (emphasis added). 

In its written decision, the Appellate Division noted that the New Jersey Supreme Court previously construed that the term "debt", appearing in  the execution statute, as being given not only its ordinary legal meaning as "an obligation for the payment of money founded upon a  contract, express or implied," but more broadly as  "that which one person is bound to pay to another under any form  of obligation."  Passaic Nat'l Bank & Trust Co. v. Eelman, 116 N.J.L. 279, 281 (Sup. Ct. 1936). "Whatever the law enjoins one to pay takes the legal classification of a debt."  Id. at 282.  The court in Passaic Nat'l Bank determined that a "debt" encompassed a municipal police officer's pension that  was not otherwise expressly exempted from execution.             

The court in Passaic Nat'l Bank held that "debt" should be interpreted in light of the Legislature's apparent intent in enacting the law on execution.  The meaning "may be enlarged or restricted to effectuate the manifest reason and obvious purpose of the law."  Id. at 283.  The court concluded  that the Legislature intended to subject to execution not only earned income, but also other installment obligations. 

Evidently, the legislative purpose was to include all obligations that, like wages and salaries, income from trust funds, and profits, are payable in periodic installments or stated sums at not less than the prescribed minimum rate.  It was patently not the intention to limit the operation of the statute strictly to contractual obligations to pay for the judgment debtor's labor or personal service. 

Ibid.

"Consistent with these principles, the monthly reverse mortgage payments due from Wells Fargo are properly deemed debts owing to defendant," the Appellate Division concluded. The appeals court pointed to federal law which states that a reverse mortgage transaction enables an elderly  homeowner to convert his or her home equity into a liquid asset,  12 U.S.C. § 1715z-20(a)(1), and that plaintiffs as judgment creditors are entitled to pursue that asset.  

This decision should be lauded by judgment creditors and their attorneys.  Here, the defendant attempted to pledge his only asset with equity for the purpose of avoiding a debt that he knew would be reduced to a judgment very shortly.   Had the Appellate Division upheld the trial court's ruling it would have amounted to a field day for judgment debtors to avoid execution of their real estate.