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National Penn Bank v. Crusader Bank

A-5008-02T5 (N.J. Super. App. Div. 2004) (Unpublished)

MORTGAGES; PRIORITY; TITLE AGENTS—A later mortgage recorded without knowledge of a prior unrecorded mortgage is given priority even if the same title agent handled both transactions because, absent some special factor, the knowledge of the title agent is not imputed to the later mortgagee.

A property owner took out two mortgages from two separate banks. The first mortgage was executed in October 1997, but not recorded until February 2000. The second mortgage was executed in October 1999, and recorded in December 1999. The subsequent loan agreement did not refer to the earlier mortgage. The same title agent and company insured both mortgages. When the borrower defaulted on the later mortgage, the second bank instituted foreclosure proceedings. The lower court upheld the second bank’s priority lien interest.

On appeal, the first bank argued that the second bank’s mortgage did not stand in a superior position because the second bank’s title agent had knowledge of the first bank’s October 1997 mortgage. The second bank denied that it had actual or constructive notice of the mortgage, arguing that there was no “imputation of notice” because no agency relationship existed and because the title agent had no fiduciary duty to disclose to the first bank the existence of the second bank’s mortgage. It also argued that even if an agency relationship existed, the agent’s fraud cancelled any imputation of knowledge.

The Appellate Division pointed out that a first recorded mortgage has priority so long as the lender did not have actual knowledge of the earlier unrecorded mortgage. It ruled that there was no evidence that the second bank had actual knowledge of the earlier mortgage and, since the first mortgage had not been recorded at the time the second mortgage was executed, the second bank was not constructively charged with notice of its existence.

The Appellate Division also held that not every title agent acts as an agent capable of imputing knowledge. This relation only exists if a principal allows the agent to act on its account. Here, although the second bank authorized the agent to act as title agent for its closing, the agent conducted only ministerial functions. Furthermore, any fiduciary duty the agent owed to the second bank was compromised by the agent’s self-interest in keeping the second bank from discovering the existence of the first bank’s mortgage. The Court also noted that the first bank caused its own problem. It waited for over two years without asking the agent about the recording status of its mortgage. A small degree of due diligence would have revealed that the agent had not recorded the October 1997 mortgage before the second bank’s mortgage was recorded.

The Court also agreed with the lower court’s rejection of the first bank’s application to apply the equitable doctrine of asset marshaling, and refused to direct the second bank to foreclose first on the other properties of the debtor. The doctrine does not apply when it will prejudice the party entitled to the “double fund.” Specifically, the lower court held that successfully satisfying the second bank’s debt by foreclosing on the debtor’s other properties was doubtful because of the properties’ limited market value and the first bank’s priority lien on them. To apply the doctrine would have divested the second bank of its priority lien in the mortgaged properties, and left it with an inferior interest in the other collateral.

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