A Mortgage Priority Dispute Between Banks: Equitable Subrogation

Investors Savings Bank v. Keybank Nat’l Ass’n, 424 N.J. Super. 439  (App. Div. 2012).  It is not often that a suit between two banks results in a published opinion.  This case, in which Judge Skillman wrote for the panel, involved a dispute as to which of two mortgages had priority.  Plaintiff bank refinanced a loan that had preceded defendant’s loan in time.  After defendant obtained a judgment against the borrower, plaintiff brought a declaratory judgment action and sought priority for its mortgage, under the doctrine of equitable subrogation.  On cross-motions for summary judgment, the Chancery Divsion ruled for plaintiff.  Judge Skillman agreed that since the loan that plaintiff had refinanced would have had priority, plaintiff’s loan succeeded to that priority.

Equitable subrogation would not have been applicable, however, if plaintiff had actual knowledge of defendant’s mortgate.  Judge Skillman found that there was no evidence to suggest actual knowledge, and the borrower had lied about not having other mortgages or judgments, so plaintiff could not have learned about defendant’s mortgage from the borrower.  Defendant contended that plaintiff had been grossly negligent in not finding out about defendant’s mortgage, in that plaintiff did not perform a continuation search.  But Judge Skillman determined that even such a search might not have discovered defendant’s judgment, which was recorded only three days before the closing between plaintiff and the borrower.

Finally, defendant contended that subordinating its mortgage to that of plaintiff was an unconstitutional taking of its property.  Judge Skillman noted that this argument had not been raised below.  Moreover, it was plainly without merit.  A taking can occur “if a judicial decision articulates a new rule of law that alters a clearly established right of private property.”  Here, New Jersey courts have applied equitable subrogation in “similar circumstances for nearly a century.”  The Chancery Division’s decision was therefore affirmed.