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Mortgage Electronics Registration Systems, Inc. v. Massimo

2006 WL 1477125 (N.J. Super. App. Div. 2006) (Unpublished)

MORTGAGES; EQUITABLE SUBORDINATION—Under the doctrine of equitable subordination, a second mortgage lender that approves the refinancing of a first mortgage and even suggests who the refinancing lender should be can’t claim that its own second mortgage loan should have priority over the refinanced loan just because the refinanced loan is later in time to its own.

A property owner executed a note and a mortgage in favor of a mortgage company. Months later, the property owner mortgaged the same property to a bank. Over a year later, the property owner asked the bank for permission to refinance the existing first mortgage with the mortgage company. The bank agreed to discharge its mortgage and then record a new mortgage after the new, refinanced mortgage with the mortgage company was recorded.

Subsequently, the property owner executed a new mortgage to the bank. Again, the property owner asked the bank about the possibility of refinancing the mortgage with the mortgage company and was referred to another mortgage company. Later, the property owner mortgaged the property to the suggested mortgage company. The property owner used most of the mortgage proceeds from the replacement mortgage company to refinance the mortgage with the original mortgage company.

The property owner defaulted on the notes and mortgage. The replacement mortgage company instituted a foreclosure action, and the bank filed a contesting answer. The replacement mortgage company sought to strike the bank’s answer and transfer this matter back to the Foreclosure Unit to proceed as an uncontested matter.

The replacement mortgage company argued that the bank agreed that the original mortgage company had first priority. Indeed, the bank referred the replacement mortgage company to the property owner to refinance the mortgage with the original mortgage company. Thus, according to the replacement mortgagee, some of the property owner’s mortgage proceeds that were used to satisfy the mortgage with the original mortgage company should have had priority over the bank’s mortgage. Accordingly, the replacement mortgage company argued that the Court should apply the doctrine of equitable subordination, strike the bank’s answer, and transfer this matter back to the Foreclosure Unit. (The bank did not oppose the motion).

The Court discussed the rule governing an action to foreclose a mortgage. It pointed out that an action to foreclose a mortgage is deemed uncontested if none of the pleadings responsive to the complaint either contest the validity or priority of the mortgage or create an issue with respect to mortgagee’s right to foreclose it. Furthermore, an allegation in an answer that a party is without knowledge or information sufficient to form a belief as to the truth of an allegation in the complaint does not have the effect of a denial but rather of leaving the foreclosing party to its proofs, and such an allegation in an answer is deemed noncontesting to the allegation of the complaint to which it is responsive. The rule also allows meritorious defenses that are germane to the foreclosure action.

The replacement mortgage company sought to strike the answer of the bank, which contested the priority of the mortgages. This was held to be a germane defense to a foreclosure action. The replacement mortgage company also sought to have its mortgage take priority over the bank.

In discussing the doctrine of equitable subrogation, the Court explained that the doctrine is used to compel the ultimate discharge of an obligation by the one who in good conscience ought to pay it. Subrogation rights are created in three different ways: (1) by agreement; (2) by statute; or (3) judicially as an equitable device to compel the ultimate discharge of an obligation by the one who should in good conscience pay it.

It was undisputed that the bank explicitly agreed to grant priority to the refinancing of the mortgage with the original mortgage company. However, the replacement mortgage company was not a party to this agreement even though the funding from the mortgage with the replacement mortgage was used to pay off the mortgage with the original mortgage company. The Court explained that, in the absence of an agreement or assignment, a mortgagee who accepts a mortgage whose proceeds are used to pay off an older mortgage is equitably subrogated to the extent of the loan so long as the new mortgagee lacks knowledge of the other encumbrances. In such a situation, the new mortgagee, by virtue of its subrogated status, can enjoy the priority afforded the old mortgagee.

It is undisputed that the mortgage with the replacement mortgage company was used to satisfy the first priority mortgage with the original mortgage company. The bank failed to oppose this motion or otherwise allege that the replacement mortgage company had actual knowledge of their encumbrance. Furthermore, the replacement mortgage company received an affidavit of title from the property owner, in which he certified that he had not encumbered the property with any liens as of the date of that mortgage. Accordingly, the Court found the replacement mortgage company lacked actual knowledge of the bank’s mortgage.

In addition to finding that a new mortgagee lacks knowledge of the preexisting encumbrance, application of the doctrine of equitable subrogation requires a court to find either: (1) the old mortgagee was unjustly enriched; or (2) the old mortgagee acted fraudulently. Here, the Court found that the bank would be unjustly enriched if the mortgage with the replacement mortgage company did not take the place of the mortgage with the original mortgage company. The bank allowed the property owner to refinance the mortgage with the original mortgage company retaining its priority. Moreover, the bank recommended that the property owner refinance the original mortgage with the replacement mortgage company. The Court reasoned that it would be grossly unfair to allow the bank to enjoy priority because the property owner refinanced with the replacement mortgage company instead of with the original mortgage company at the direction of the bank. The replacement mortgage company thought that its mortgage would replace the existing original mortgage and enjoy first priority.

Accordingly, the Court held that the replacement mortgage company’s mortgage would enjoy priority over the bank’s mortgage. Also, the Court granted the replacement mortgage company’s motion to strike the bank’s answer and to deem the action uncontested.


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