Community Wealth Preservation Program Deemed Unconstitutional as NJSBA Seeks Changes to Current Law
A Mercer County judge held that important aspects of the Community Wealth Preservation Act, N.J.S.A. 2A:50-64 (CWPA), are unconstitutional as applied and invalidated a provision that grants the right of second refusal to nonprofit community development corporations to bid on foreclosed properties. The CWPA was touted as a program to promote equity and fairness in foreclosure sales by providing opportunities for foreclosed-upon residents and their next of kin, tenants and other prospective owner-occupants, as well as nonprofit community development corporations, to purchase and finance the foreclosed-upon home. The program has run into hurdles in its implementation and interpretation by practitioners, which the New Jersey State Bar Association attempted to resolve in recommended amendments to S4470 (Timberlake)/A5702 (Speight), pending in the Legislature.
“For all of the Act’s good intentions, there were some unintended consequences, specifically, the Act’s effect on junior lienholders,” said Hon. Patrick J. Bartels, P.J.Ch. in his opinion on Aug.st 28. Judge Bartels remanded all pending and future cases relative to CWPA claims based on the holding in Tyler v. Hennepin County, 598 U.S. 631 (2023) which found that forfeiture of a homeowner’s surplus equity is a takings under the Fifth Amendment of the U.S. Constitution.
Junior lienholders filed multiple as-applied challenges to the constitutionality of the CWPA because sheriff’s sales to nonprofits that bid the upset price pursuant to the CWPA ostensibly extinguished junior liens despite available surplus in the property. This is because the CWPA granted a right of second refusal to nonprofits to bid the upset price, which comprised of only the first mortgage on the property and a fixed amount of expenses.
In a letter to the sponsor of the law and the cleanup bill pending in the Legislature, the NJSBA urged consideration of amendments to the law to protect not just lienholders, but homeowners who stood to lose significant surplus because the properties would not be competitively bid. Moreover, the inability to incorporate junior lienholders in the upset price and ensuing uncertainty because of their exclusion from same would result in questionable titles, which would make these properties uninsurable and potentially restrict a future owner’s ability to borrow against the property or sell it later.
“The NJSBA appreciates the laudable goals of the [CWPA] and reviewed this legislation in light of those goals,” the NJSBA said in a letter to the sponsors. “Practically speaking, however, the implementation of some of the mandates in the legislation could further impair the foreclosing defendant such that the [CWPA] would not benefit the homeowners who take advantage of [the CWPA].”
While Judge Bartels did not consider the constitutionality of section (d) of the law, pertaining to the right of second refusal of next of kin or tenants, he signaled his concerns about this section because such a sale could bar a property owner from recovering the remaining surplus equity in the home.
The NJSBA continues to monitor the CWPA and the bill.