Sloppy practices make for interesting legal proceedings and decisions. Take for instance a situation where a homeowner refinances a purchase money mortgage and a home equity line of credit. However, because the homeowner fails to submit a letter closing the line of credit, it remains open, and a lien on the property. Then imagine that homeowner selling the house, and the buyer’s title searcher not finding the home equity loan. Then the buyer takes out a mortgage to buy the house, which winds up being second to the still open home equity line.
Then the sneaky seller runs up the home equity loan again and either disappears after closing or files for bankruptcy. Then the buyer defaults on his mortgage, but that mortgage holder who expected a first lien position, is subordinate to the home equity loan.
These facts may seem bizarre but as a long time litigation counsel for many national title insurance companies, I have handled many many such cases. Typically the title agent drops the ball in missing the mortgage or in negligently failing to confirm that it is still open. The new mortgage holder will argue the doctrine of equitable subrogation, in that its money was used to pay off a prior mortgage and therefore it should step into the prior’s shoes as a first lien holder.
Originally, New Jersey law held that if the new lender actually knew about the home equity loan, then the doctrine of equitable subrogation would not be applied. However, that doctrine has been worn down over the years, and I was able to successfully argue on various theories in many cases that actual knowledge did not bar equitable subrogation.
In a published decision, the Appellate Division recently reversed prior case law and held that actual knowledge of the prior lien would not bar the application of equitable subrogation for the benefit of the new lender. In doing so, the court adopted the Third Restatement of Property’s position that where the new lender expected to receive a first lien and as long as the intervening lender would not be prejudiced, then the new lender would have a first lien to the extent and in the amount paid in satisfaction of the prior mortgage. Otherwise, the court held, the home equity lender would reap an undeserved windfall of a first lien position when it was always in a second position.
Mortgage priority disputes are more common than you think. And complex. As an experienced title litigator, I can help you navigate these tricky waters. Call me today.