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U.S. Bank National Association v. Hylton

403 N.J. Super. 630, 959 A.2d 1239 (Ch. Div. 2008)

MORTGAGES; EQUITABLE SUBROGATION — Although upon payoff of a first mortgage, the remaining second mortgage moves into first position, if the proceeds from a subsequent mortgage loan are used to satisfy the first mortgage obligation, that subsequent mortgage will have priority over the former second mortgage to the extent that the monies were actually used to make the payoff notwithstanding whether the subsequent mortgagee knew or didn’t know of the surviving second mortgage loan.

A bank brought a foreclosure action against a defaulting homeowner. There were two mortgages on the property replacing a prior mortgage. The bank, which issued a conventional mortgage to the homeowner for $408,000, also sought priority over a home equity mortgage for $35,000 that was executed one month earlier. It claimed that the home equity mortgage did not show up in a title search conducted before its mortgage was executed. Since the bank paid off a mortgage on the homeowner’s property with priority over the home equity mortgage, it argued that it had the right to stand in the place of the prior mortgage holder according to the doctrine of equitable subrogation. The mortgagee for the home equity loan argued that it maintained priority because the foreclosing bank was negligent in not discovering the home equity loan and the bank’s claim should be made against the title search company. The holder of the home equity mortgage also denied that it expected to receive a secondary lien on the property.

The Court pointed out that the doctrine of equitable subrogation only applies if the asserting party was unaware of an already existing lien when its own loan is made or if the holder of the prior lien acted fraudulently or was unjustly enriched. It rejected that because the foreclosing bank had constructive notice of the home equity loan, but negligently failed to discover it, it was not entitled to equitable subrogation. The Court found that even if the bank or its title searcher was negligent, it was not a bar to the bank’s equitable subrogation claim because no third parties were harmed as a result of the bank’s failure to find the home equity loan. It also found that the home equity mortgagee would be unjustly enriched if it could keep priority over the foreclosing bank’s lien since it gained priority status as a result of the homeowner having paid off the mortgage that had priority over the home equity mortgage using the mortgage proceeds from the bank, which would have sought remuneration from the home equity mortgagee to maintain priority had it detected the home equity loan. The Court also noted that the homeowner misled the foreclosing bank by filing an affidavit stating that there were no other liens on the property when he applied for the mortgage after he executed the home equity loan. Based on its findings and conclusions, the Court granted the foreclosing bank’s request to apply the doctrine of equitable subrogation and allow it to gain priority and step into the place of the original mortgage holder to the extent of the $303,103 that was paid to it by the bank.

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