The article in last week's New Jersey Law Journal entitled "'Clogging' and the Dual Collateral Loan," Vol. 225 No. 42 (Oct. 21, 2019, p. S-3), states that "There is a paucity of New Jersey case law on clogging, but it is comprehensively addressed in Humble Oil & Refining Company v. Doerr, 123 N.J. Super. 530 (Ch. Div., 1973)."

"Clogging" was defined in the article as when a "borrower grants a mortgage on its property to a lender as security for a debt." But the article also noted that the doctrine originated "when borrowers would give lenders a deed to the mortgaged property to be held in trust but which the lender could immediately record upon a default." A savvy predatory lender does not wait for a default before recording the deed; other interests might intervene to defeat or minimize the value of the security.

The subject of clogging was definitively addressed by the New Jersey Supreme Court in Zaman v. Felton, 219 N.J. 199 (2014). In Zaman the court held that:

We reverse the portion of the Appellate Division's opinion that affirmed the trial court's dismissal of Felton's claim that the parties' agreements constituted a single transaction that gave rise to an equitable mortgage. We adopt the eight-factor standard for the determination of an equitable mortgage set forth by the United States Bankruptcy Court in O'Brien v. Cleveland, 423 B.R. 477, 491 (Bankr.D.N.J.2010). We remand to the trial court for application of that standard to this case, and, in the event that the trial court concludes that an equitable mortgage was created by the parties, for the adjudication of two of Felton's statutory claims based on alleged violations of consumer lending laws, as well as several other claims not adjudicated by the trial court.

The eight factors stated in O'Brien are:

1. Statements by the homeowner or representations by the purchaser indicating an intention that the homeowner continue ownership;
2. A substantial disparity between the value received by the homeowner and the actual value of the property;
3. Existence of an option to repurchase;
4. The homeowner's continued possession of the property;
5. The homeowner's continuing duty to bear ownership responsibilities, such as paying real estate taxes or performing property maintenance;
6. Disparity in bargaining power and sophistication, including the homeowner's lack of representation by counsel;
7. Evidence showing an irregular purchase process, including the fact that the property was not listed for sale or that the parties did not conduct an appraisal or investigate title; and
8. Financial distress of the homeowner, including the imminence of foreclosure and prior unsuccessful attempts to obtain loans.

Those factors are, in my opinion, not in order of importance and bear different weight. For example, in my opinion, the factor entitled to the greatest weight is the disparity in value between the amount received by the grantor and the value of the equity conveyed. Incidentally, in Zaman, the trial court opinion on remand stated that "No evidence was placed before the court as to the value of the property." The significance of that factor is also found in Sitogum Holdings v, Ropes, 352 N.J. Super. 555 (Ch. Div. 2002), which cited several cases where the disparity of value was 2 1/2 times the amount received. The least significant factor may be representation of counsel, especially when 1) the grantor's counsel is not knowledgeable about equitable mortgages, and 2) the compulsion of the necessitous grantor overcomes free will and good judgment.

Although the article to which this is addressed related to a "'dual collateral' package that included both a mortgage lien on real estate and a UCC lien on the controlling interest" of the borrower, footnote 1 of Essex Property Services v. Wood, 246 N.J. Super. 487 (Law Div. 1991) [quoted in O'Brien], noted that the concept is applicable to a variety of machinations:

[A]lthough the above transaction came to the court dressed in one particular type of package, the judges sitting in summary actions for possession must be vigilant to note the many varieties in which these matters may be presented.

[The reference to "judges sitting in summary actions for possession" was attributed to the type of case in issue, to wit, a summary action for possession based on a presumed lease.]

The point is that after applying the above eight factors, a transaction found to have been a financing transaction—regardless of the documents constituting the transaction—would also apply to the "dual collateral package." The ability of the grantor to redeem the security, the apparent basis for the court to have denied relief in the H.H. Cincinnati case, is apparently irrelevant inasmuch as many (if not all) cases involving equitable mortgages include the right of the grantor to "redeem" (or re-purchase) the security, usually within some limited period. But according to current case law, that right of redemption must have been given contemporaneously with the transaction.

However, the right of redemption is not determinative of the concept of clogging. As illustrated by the H. H. Cincinnati case, the procedure is the critical aspect that creates the clogging, as argued by the borrowers. If a transaction is found to have been a mortgage secured by real estate, the procedure required is a foreclosure of the right of redemption, and by taking a deed instead of a mortgage, the lender avoids the procedural requirements inherent in a foreclosure—the right has been clogged—upon the failure of the grantor to have redeemed the security. That transaction is void ab initio, as a matter of public policy. Humble Oil and Cleveland, both supra.

D'Agostino v. Maldonado, 216 N.J. 168 (2013), is also critical to the issue of damages relating to an equitable mortgage. In that case, the court applied the New Jersey Consumer Fraud Act (CFA), N.J.S.A. 56:8-1 to -20, to a mortgage foreclosure rescue plan. Plaintiffs Anthony and Denise D'Agostino, in default of their residential mortgage obligations, entered into a series of transactions with defendant Ricardo Maldonado. As a result of those transactions, defendant obtained title to plaintiffs' home, valued at $480,000, for 10 dollars and plaintiffs were given the option to repurchase their home.

Although the predator in D'Agostino advertised "I buy houses," I submit that the CFA would also be applicable when the facts support a violation of the New Jersey Home Ownership Security Act of 2002, N.J.S.A. 46:10B-22 et seq., as the result of a single transaction by a predator who need not be engaged in the business of lending or buying. N.J.S.A. 46:10b-29a(1) provides that "Any violation of this Act constitutes an unlawful practice under P.L. 1960, c.39 (C.56:8-1 et seq.). [Italic added to demonstrate that a single act suffices.]

The limitation of space precludes me from a lengthier discussion of the subject, but for further reference, I suggest resort to the New Jersey Practice Series, Section 20.13 et seq. [Release, Bar Foreclosure and Revival of the Right to Redeem; Clogging Equity of Redemption], 29 N.J. Practice, Law of Mortgages, Sec. 8.1 et seq. [Disguised Security Transactions – In General' foreclosure Rescue Scams"], and Mortgage Foreclosure: Update 2017 (2017 Seminar Material, Sec. 1.16 [Circumventing Process], Institute for Continuing Legal Education., 2017, and several other reported New Jersey opinions.

Mahlon L. Fast was a judge of the Superior Court of New Jersey from 1986 to 2014. He is now of counsel to Ehrlich, Petriello, Gudin & Plaza in Newark.