The New Jersey Appellate Division in New York Mortgage Trust v. Deely, 2021 WL 520063 (App. Div. 2021) has recently published the latest in a series of opinions concerning equitable subrogation. Equitable subrogation, “rooted in principles of equity, is used to compel the ultimate discharge of an obligation by the one who in good conscience ought to pay it,” regardless of whose mortgage was recorded first. Prior decisions on equitable subrogation such as Investor Savings Bank v. Keybank Nat’l Ass’n, 424 N.J. Super. 439 (App. Div. 2012), Sovereign Bank v. Gillis, 432 N.J. Super. 36 (App. Div. 2013, and Ocwen Loan Services, LLC v. Quinn, 450 N.J. Super. 393 (App. Div. 2017) were instrumental to the latest ruling in Deely.
The underlying facts in Deely involved a mortgage priority dispute between plaintiff and defendant Bank of America in a residential mortgage foreclosure action. On cross-motions for summary judgment, the Chancery Division applied equitable subrogation to give plaintiff’s mortgage priority, even thought it was recorded after defendant’s mortgage. When applying a de novo review to the grant of summary judgment, the court affirmed the trial court’s decision having recognized that appellate “review of a trial court’s decision to apply an equitable doctrine is limited,” and the panel would not “substitute our judgment for that of the trial judge in the absence of a clear abuse of discretion.”
This opinion is a departure from prior case decisions which have held that a new lender is not entitled to subrogation, absent an agreement or formal assignment, if it possesses actual knowledge of the prior encumbrance. See First Union Nat’l Bank v. Nelkin, 354 N.J. Super. 557 (App. Div. 2002). Instead, the Deely panel opted not to follow the “actual knowledge” rule and adopted a principle from the Restatement (Third) of Property: Mortgages, that makes “material prejudice to the intervening lienor” the directing principle.
In his opinion, Judge Geiger relied in large part on the Gillis holding and explained that “[e]quitable subrogation is appropriate when loan proceeds from refinancing satisfies the first mortgage, the second mortgage is paid in full as part of the transaction, and the transaction is based on a discharge of the second mortgage, so long as the junior lienor, here defendant, is not materially prejudiced. Under such circumstances, equitable subrogation should not be precluded by the new lender’s actual knowledge of the intervening mortgage. To do otherwise would allow [defendant] to reap an undeserved windfall by allowing the junior lienor to vault over the priority of the refinancing mortgage lender.”