The Appellate Division Applies the Restatement (Third) of Property- Mortgages

Sovereign Bank v. Gillis, 432 N.J. Super. 36 (App. Div. 2013).  This opinion by Judge Sabatino is an example of how a brief introduction can encapsulate an entire, highly detailed opinion.  Here are the first two paragraphs of that opinion:

This appeal concerns whether a refinancing lender that discharges its own previous mortgage and issues another mortgage loan for a higher amount, and which simultaneously pays off the balance owed on a junior lienor’s line of credit without having it closed, can rely upon equitable principles to maintain its priority over that junior lienor.  This question of priority arises here in a context in which the borrowers, after obtaining the refinancing, drew additional funds on the line of credit and then defaulted on both the refinanced mortgage loan and the line of credit.

Applying principles of replacement and modification recognized in the Restatement (Third) of Property- Mortgages (1997) (“the Third Restatement“), we reverse the trial court’s decision allowing the junior lienor that extended the line of credit to vault over the priority of the refinancing mortgage lender.  We consequently direct the trial court, on remand, to determine the proper extent of the refinancing lender’s priority, in an amount that avoids material prejudice to the junior lienor.”

Judge Sabatino’s opinion went on to discuss in detail New Jersey’s “race-notice” system of mortgage lien priority, the doctrine of equitable subrogation, the caselaw from other jurisdictions, and the Third Restatement.  Ultimately, however, as his introduction foreshadowed, the panel rested its decision in favor of the refinancing lender on the fact that that lender was merely replacing and modifying its prior loan, rather than on the principle of equitable subrogation.  Relying extensively on UPS Capital Bus. Credit v. Abbey, 408 N.J. Super. 524 (Ch. Div. 2009), Judge Sabatino stated that “the modification of a mortgage loan by the same lender does not necessarily have to be treated in the same fashion, with respect to priority over an intervening lienor, as a new loan that has been made by a third party.”

In this circumstance, the key consideration was “material prejudice” to the junior lienor.  Accordingly, the Appellate Division reversed the summary judgment that had been entered by the Chancery Division in favor of the junior lienor and remanded to the Chancery Division for consideration of issues bearing on material prejudice, with the goal of determining “an appropriate priority amount” for the senior lienor.

New Jersey has often been a pioneer in applying new Restatements of the Law, though sometimes our courts have not adopted Restatements uncritically.  Other New Jersey cases have adopted the principles from the Restatement (Third) of Property sections on Servitudes and Donative Transfers.  This opinion appears to be the first New Jersey case to endorse concepts from the sections on Mortgages.  The result, however, seems clearly to be the correct one from an equitable perspective.