New Jersey Appellate Division Holds Unrecorded Mortgages Enforceable And Sufficient To Trigger Statutory Interest Caps Under N.J.S.A. 31:1-1

• Jurisdiction: New Jersey,United States
• Law Firm: Riker Danzig LLP
• Subject Matter: Finance and Banking, Charges, Mortgages, Indemnities, Financial Services
• Author: Mr Michael O'Donnell, Kevin Hakansson, James V. Mazewski and Kori Pruett
• Published date: 16 January 2023

In the recently-issued decision of Deutsch v. Iedu Tech., No. A-1541-21, LEXIS 2309 (App. Div. Nov. 23, 2022), the New Jersey Appellate Division reaffirmed the principle that unrecorded mortgages are enforceable in certain circumstances.

In August 2016, Defendants Iedu Technology, LLC, Xiu Quin Liu, and Juijun Wang (collectively "Defendants") borrowed $500,000 from Plaintiff Jacob Deutsch ("Plaintiff"), executing a promissory note ("the note") bearing an eighteen percent interest rate per year. The note required Defendants to pay $7,500 per month of interest-only payments for one year, following which the entire loan balance would come due on August 30, 2017. In the event Defendants defaulted, the note provided that the entire loan amount would be payable, along with interest, costs of collection, and attorneys' fees.

As collateral to secure payment, the note granted Plaintiff mortgages on five real properties that Defendants' owned in Jersey City, New Jersey. However, these mortgages were never recorded. Defendants made the required interest payments owed on the note from September 2016 through January 2017, in February 2017 paid Plaintiff $100,000, and in March 2017 paid Plaintiff a further $142,600. Subsequent to issuing this March payment, Defendants consulted with an attorney who advised them that the note was usurious and illegal, claiming the maximum interest rate statutorily permitted for such loans had been exceeded. Defendants thereafter ceased remitting all payments owed on the note.

In March 2020, Plaintiff filed suit seeking a judgment for the loan amount along with interest, attorneys' fees, and costs, to which Defendants asserted the usurious nature of the loan as a defense. Plaintiff ultimately moved for summary judgment, arguing that there was no evidence Defendants had ever intended to grant Plaintiff a security interest in any of the mortgaged properties as the mortgages were never recorded, and thus the mortgages should be treated as nonexistent and of no force and effect.

The crux of Plaintiff's argument hinged upon the application of N.J.S.A. 31:1-1, which establishes a maximum interest rate of sixteen percent "for written contract[s] specifying a rate of interest." However, under N.J.S.A. 31:1-1(e), loans "in the amount of $50,000[] or more" are exempted from this sixteen percent rate cap, unless the loan is one "where the security given" on the loan "is a first lien on real property" used for residential purposes. In such an...