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Palma v. Del Mastro

A-0299-03T3 (N.J. Super. App. Div. 2004) (Unpublished)

MORTGAGES; JUDGMENTS; PRIORITY—A refinancing mortgagee can step ahead of an existing judgment creditor under the doctrine of equitable subrogation because the judgment creditor could not have expected that its judgment would enjoy a first-lien priority at the time it was filed and should not be permitted to obtain a windfall by moving ahead of the new lender in priority.

A couple divorced. Pursuant to their judgment of divorce, the husband conveyed their jointly held residence to his wife. At that time, the property was encumbered by a mortgage. The wife had the option to refinance the mortgage in her name alone. She obtained a mortgage-refinance commitment from a lender, which in turn paid the existing mortgage. Before the transfer, her lawyer obtained a title search and judgment search from the lender’s title company disclosing no judgment liens. However, a third party had already obtained a default judgment against the husband. It was docketed as a lien against all of the husband’s real property just five days after the judgment search was completed.

The mortgage refinance closed, but no continuation judgment search for the gap period was conducted. At the time of the mortgage closing, none of the parties were aware of the judgment lien. A title insurance policy was issued to the lender insuring its mortgage as a valid first lien, which it was not. The third party’s lien had not been satisfied at closing and was therefore a priority lien against the property.

The title company also filed a complaint on behalf of the lender, seeking a declaratory judgment that the lender’s mortgage lien was prior to the third party’s judgment lien by reason of equitable subrogation. The judgment creditor defended against reversal of lien priority. The lower court granted the lender’s motion for summary judgment, holding that its lien was a superior to the judgment lien.

On appeal, the judgment creditor argued that equitable subrogation was inapplicable, because equitable remedies are only available when there is no adequate remedy at law. Here, the lender had a legal remedy. It could sue the title agent as well as its title insurer for not commencing a continuation judgment search. The judgment creditor contended that because equitable subrogation was a remedy granted to a lender, the title insurer could not avail itself of that doctrine. Here, the lender was not a party to the action. Essentially, the judgment creditor argued that the title insurer should not have been relieved of the responsibility for its own negligence by applying the equitable subordination doctrine.

The Appellate Division held that unavailability of an adequate remedy at law is not a condition precedent to the application of equitable subrogation. It found that the doctrine of equitable subrogation could be applied in favor of the lender, when the new lender’s mortgage, as a result of the failure to complete a continuation judgment search, turned out to be inferior in priority. The negligence of the title company and its title insurer would not bar the reversal of lien priority.

According to the Court, the judgment creditor had suffered no prejudice. She could not possibly have expected that her judgment would enjoy a first-lien priority at the time she filed her judgment lien. When filed, the earlier existing mortgage held a first-lien position and the judgment creditor should not be permitted to obtain a windfall by moving ahead of the new lender in priority.

The judgment creditor also claimed that the title insurer did not have standing to bring the declaratory judgment action. She claimed that the remedy was only available to a lender whose security turns out to be defective. The Court found, however, that the lender specifically granted the title company the right to stand in its shoes and prosecute any adverse title claims in its name. The title insurance policy itself provided that the title company had the right to prosecute any action to establish the lien of the insured mortgage or to prevent a reduced loss or damage to the insured.

Generally, standing requires that a litigant have a sufficient stake in the matter and real adversariness, with a substantial potential for real harm flowing from the outcome of the case. Therefore, the Court felt that it was irrelevant whether the lender or title insurer was a party. Both had legal interest in, and the authority to defend against, any claim affecting the lender’s title. Thus, the Court affirmed the lower court’s conclusion that the lender’s lien was superior to the judgment lien.

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