New Jersey Appellate Division Holds Actual Knowledge of Intervening Mortgage No Longer Bars Equitable Subrogation

In New York Mortgage Trust v. Deely, Docket No. A-1261-19 (App. Div. Feb. 12, 2021), approved for publication, the Appellate Division held that actual knowledge of a prior intervening mortgage does not bar the application of equitable subrogation and formally adopted the Restatement (Third) of Property’s approach.    

The factual scenario giving rise to the application of equitable subrogation typically involves refinancing where a borrower finds a new lender with better loan terms.  Proceeds from the new loan are used to pay off a prior loan, and the new lender’s mortgage is equitably subrogated into the lien position of the prior mortgage it paid off.  Equitable subrogation relieves the harsh results of the recording act which prioritizes liens based on the date a mortgage is recorded, and avoids the unjust enrichment of an intervening lienor at the expense of the new lender. 

However, a new lender’s actual knowledge of an intervening mortgage has historically prevented equitable subrogation.  The rationale is that a new lender who is actually aware of an intervening mortgage will not unjustly enrich the intervening lienor.    

The Appellate Division departed from prior case law and adopted the Third Restatement.  The court held that “equitable subrogation is appropriate when loan proceeds from refinancing satisfies the first mortgage . . .  so long as the junior lienor . . . is not materially prejudiced.”  To hold otherwise would allow a junior lienor to “vault over the priority of the refinancing mortgage lender” – a result that would be “an inequitable result that is contrary to the parties’ expectation.”

Cooper Levenson represented the lien priority interest of plaintiff in this matter.  The Appellate Division affirmed summary judgment granting plaintiff’s mortgage lien priority over defendant’s mortgage.  The opinion was authored by Judge Gieger on a panel with Judge Alvarez and Judge Sumners.

The late Mark Soifer, Esq. and the late Michael Jacobson, Esq. participated in the summary judgment proceedings and were instrumental in providing the legal analysis for success at the trial level and on appeal. 

Click here to read the opinion.

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