By Timothy Ziegler, Esq.

Frenkel Lambert Weiss Weisman & Gordon, LLP*

USFN Member (NY, FL, NJ)

Governor Phil Murphy signed into law New Jersey Assembly Bill 5664, the “Community Wealth Preservation Program,” on January 12, 2024. The bill, which became effective immediately, amends and supplements N.J.S.A. 2A:50-64 and N.J.S.A. 22A:4-8 and affects most aspects of sheriff’s sales. The main gist of the statute is that it provides specific parties with certain advantages over other potential bidders. Foreclosed upon defendants, next of kin of the foreclosed upon defendants, tenants, or nonprofit community development corporations (hereinafter collectively referred to as “Preferred Purchasers”) are given a first and second right of refusal to purchase the property for an “upset price.” Preferred Purchasers, plus any individuals who intend to occupy the property, are also given advantages, including reduced deposit requirements and extended time to complete the sale.      

Foreclosing plaintiffs are now required to provide an upset price, which is defined as “the minimum amount that a foreclosed upon property shall be sold for in a sheriff’s sale as determined by the foreclosing plaintiff.” The upset price must first be provided at least four weeks prior to the scheduled sale date and then again on the day of the sale. The upset price may change between the initial notice and the day of sale, but it shall not increase by more than three percent absent certain defined circumstances. 

             The upset price is now a key component of the sheriff’s sale process, as the Preferred Purchasers, if certain requirements are met, have the opportunity to purchase the subject property at the upset price prior to the sheriff opening the bidding. If that right is exercised, the Preferred Purchaser is only required to provide a 3.5 percent deposit and will be given 90 business days to pay the balance of the upset price to the sheriff. 

            If a Preferred Purchaser does not exercise their right to purchase, the sheriff will conduct an auction for the property. If the successful bidder at the auction is an individual who intends to occupy the property for 84 months, they will also enjoy the benefit of only having to pay a 3.5 percent deposit and will likewise have 90 business days to pay the balance of their bid to the sheriff. If the property is purchased in this matter, the bidder will be required to occupy the property for at least 84 months. 

For any bidder who is not a Preferred Purchaser or does not intend to occupy the property for 84 months, they will be required to pay a 20 percent deposit with the balance due pursuant to the sheriff’s conditions of sale, which is generally 30 calendar days.

            The upset price and revised bidding rules are not the only changes to the sale process. The law also adds new requirements and responsibilities for foreclosing plaintiffs and their counsel. Foreclosing plaintiffs are now required to send the notice of sale to the defendant as well as to the subject property, and the notice must be mailed in an envelope which “plainly states on its exterior that the envelope is a notice for the sale of the foreclosed upon residential property.” The plaintiff is also required to disclose the occupancy of the property, and if vacant, provide access to the property to the successful bidder.

            These sweeping changes leave many questions unanswered.   

Who is responsible for the property during the 90 business days that a purchaser has to complete the sale? Not only will this extended timeframe increase foreclosure timelines, but tax, utility, and insurance bills will continue to come due, and the property will continue to need maintenance. If the foreclosing plaintiff continues to pay these amounts, there is no mechanism in the statute for recoupment if the purchase is completed. On the other hand, if the purchase is not completed, an election to not pay the reoccurring costs would leave the plaintiff open to potential tax sales, maintenance violations. and possible damage to a now uninsured property.  These potential costs and risks are new factors that must be considered by lenders.      

Is the requirement to add additional language to the outside of the envelope compatible with the Fair Debt Collection Practices Act (“FDCPA”)? The FDCPA not only prohibits communication with unauthorized third parties, 15 U.S.C.§ 1692(c)(b), but also prohibits using language on the outside of the envelope when communicating with the consumer, 15 U.S.C.§ 1692f (8). If the laws do conflict, federal preemption will require compliance with the FDCPA over that of the state law.

What happens to junior mortgages if a Preferred Purchaser exercises their right to purchase at the upset price? The law is silent as to junior liens and how they may be affected. If no sale was held, it would follow that the junior mortgages would remain as valid liens on the property. Additionally, pursuant to 28 U.S.C. §2140, the United States requires a judicial sale in actions where it is named as a defendant. Therefore, liens held by the United States, which include mortgages held by the Secretary of Housing and Urban Development, would remain attached to the property. Thus, junior mortgage holders will need to be vigilant in monitoring how senior foreclosure matters are resolved as their liens may survive the action.

Inquiries have been made to members of the New Jersey legislature and there has been indication that further amendments may be forthcoming to address some of the aforementioned concerns. However, no new legislation has been introduced as of the date of this article and any clarification may first come through the courtroom. 

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USFNews - March 20

* Denotes firm is a 2023 USFN Award of Excellence recipient.