New Jersey Appeal Division Finds Actual Knowledge Does Not Prevent Fair Subrogation
In a decision approved for publication, the New Jersey Appeal Division recently concluded that actual knowledge is not a bar to the doctrine of equitable subrogation for a lender who has paid off a previous mortgage but has not released. an intermediary privilege. See New York Mortgage. Tr. 2005-3 Mortg.-Backed Notes, US Bank Nat’l Ass’n as Tr. V. Deely, 2021 WL 520063 (NJ Super. Ct. App. Div. February 12, 2021). In 2005, borrowers executed a first mortgage of $ 664,000 secured by their home. Three months later, they executed a second mortgage that secured a home equity line of credit account (the “HECLA Mortgage”) which was assigned to the defendant. A few months later, the borrowers refinanced with a mortgage loan of $ 726,000 which was eventually assigned to the applicant (the “NYMT Mortgage”). The proceeds of this loan were used to pay off the previous first mortgage on the property. At the time of closing, the defendant indicated that the HECLA mortgage had a zero balance. However, the HECLA mortgage was never released and the borrowers subsequently successfully requested two modifications to the line of credit increasing the limit from $ 80,000 to $ 200,000 and pulled on it.
In 2013, the borrowers defaulted on the NYMT mortgage with the applicant. The plaintiff’s title search revealed that the HECLA mortgage had not been released and was the first registered mortgage. In its foreclosure complaint, the plaintiff sought a judgment that the NYMT mortgage was the first mortgage under the doctrine of equitable subrogation because it had repaid the first prior lien on the property. The plaintiff sought summary judgment and, in opposition, mortgage lender HECLA argued that the plaintiff had actual knowledge of the HECLA mortgage and that equitable subrogation could not apply. The trial court allowed the plaintiff’s motion for summary judgment, finding that the plaintiff was at most negligent in failing to pay the HECLA mortgage, and that negligence is not a bar to equitable subrogation.
On appeal, the court confirmed. The Court first recognized that it had previously held that actual knowledge of an intervening lien precludes equitable subrogation. See Metrobank for Savings, FSB v. National Community Bank of New Jersey, 262 NJ Super. 133, 143-144 (App. Div. 1993) (“a mortgagee who accepts a mortgage the proceeds of which are used to pay off an old mortgage is subrogated to the extent of the loan only when the new mortgagee is unaware of the Other expenses “. ); First Union Nat. Bank c. Nelkin, 354 NJ Super. 557, 565 (App. Div. 2002) (“[t]The new lender does not have the right of subrogation, in the absence of agreement or formal assignment, if he is effectively aware of the previous charge. “). Nevertheless, he found that the Third reprocessing The recommended approach, which allows for subrogation when the payor expected to receive a first lien and as long as the intervening lender was not prejudiced, was preferable in this situation:
We start from detention in Nelkin and take the judicious approach of the third reformulation. Equitable subrogation is appropriate when the loan proceeds from the refinancing satisfy the first mortgage, the second mortgage is paid in full as part of the transaction, and the transaction is based on a release of the second mortgage, provided that the junior creditor, here the defendant, is not materially prejudicial. See Gilles, 432 NJ Super. at 50. In such circumstances, equitable subrogation should not be ruled out by the actual knowledge of the new lender of the intermediate mortgage. “To act otherwise would allow [defendant] reap an undeserved windfall “by” allowing the junior lender to override the mortgage lender’s priority of refinancing. “
The decision of the Court in the present case adopting the Third reprocessing approach is the culmination of a recent series of cases that implied that New Jersey would ultimately follow the Third reprocessing and find that actual knowledge is not an obstacle to equitable subrogation in such cases. See In re Ricchi, 470 BR 715, 721 (Bankr. DNJ 2012) (“Courts of other jurisdictions, as well as the Restatement, have suggested that equitable subrogation should be applied even in cases where the holder of the refinancing mortgage had a actual knowledge of minor privileges ”); Sovereign Bank c. Gillis, 432 NJ Super. 36, 47 (App. Div. 2013) (finding that the doctrine of “replacement” rather than equitable subrogation applied because the original and subrogated loans originated from the same lender, but actual knowledge should not stand in the way) .