First Fidelity Bank v. Travelers Mortgage Services, Inc.

300 N.J. Super. 559, 693 A.2d 525 (App. Div. 1997)
  • Opinion Date: May 15, 1997

MORTGAGES; SUBROGATION—A third mortgage lender with actual knowledge of the second mortgage tried to subrogate itself into a first position based upon the use of its loan proceeds to pay off the first mortgage. Without a subordination agreement or an assignment of the first mortgage, it could not.

In August, 1985, mortgagors executed a first mortgage on real property. In January, 1989, the mortgagors executed a note and second mortgage on the same property to First Fidelity Bank (“First Fidelity”). First Fidelity was aware it had a second mortgage. In May, 1990, the mortgagors took a third mortgage from Travelers Mortgage Services, Inc. (“Travelers”). Travelers knew of the mortgage of First Fidelity but insisted that it receive a first lien on the property as a condition of the mortgage. Some of the proceeds from the Travelers mortgage were used to satisfy the first mortgage, but Travelers failed either to take an assignment of the first mortgage or to obtain a subordination agreement from First Fidelity. These omissions became important when First Fidelity brought a foreclosure action against Travelers and the mortgagors.

The issue is whether Travelers should have seniority because it satisfied the first mortgage which had priority over First Fidelity’s mortgage. In granting summary judgment, the Chancery Court found that the First Fidelity mortgage was a first lien and, therefore, had priority over the mortgage held by Travelers. Travelers appealed claiming that, despite its negligence, First Fidelity had been unjustly enriched because it was receiving a lien of higher priority than it expected, while Travelers had been harmed because it expected a first lien and paid off the first mortgage, but got only a junior lien. Travelers felt that even though the mortgage of First Fidelity was listed in its title commitment, the Chancery judge should not have found Travelers had actual knowledge of First Fidelity’s lien. Travelers sought application of the doctrine of equitable subrogation for its loss. Equitable subrogation is judicial relief whereby a party that has paid money to settle a mortgage receives the benefit of that mortgage despite failing to comply with applicable procedures and is applied to prevent unjust encroachment by the holder of a junior lien.

The Appellate Division refused to absolve Travelers of its negligence and upheld the Chancery Court ruling, holding that negligence by Travelers was irrelevant since Travelers had actual knowledge of the First Fidelity lien, yet failed to keep alive the first mortgage either through assignment or by obtaining a stipulation of subrogation from First Fidelity. Furthermore, the goal of preventing unjust enrichment is trumped when a party with actual knowledge of a junior lien seeks to subrogate the junior interest without a stipulation or formal assignment.