The Latest on Equitable Subrogation, From Judge Geiger

New York Mortgage Trust v. Deely, ___ N.J. Super. ___ (App. Div. 2021). Every few years, the Appellate Division publishes an opinion about 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. Some recent examples of equitable subrogation decisions are here (Sovereign Bank v. Gillis, 432 N.J. Super. 36 (App. Div. 2013), which figured prominently in this new ruling), here, and here. This opinion by Judge Geiger is the latest in that series.

This was a mortgage priority dispute between plaintiff and defendant Bank of America in a residential mortgage foreclosure case. On cross-motions for summary judgment, the Chancery Division applied equitable subrogation to give plaintiff’s mortgage priority, even though it was recorded after defendant’s mortgage. Applying de novo review to the grant of summary judgment, but recognizing that appellate “review of a trial court’s decision to apply an equitable doctrine is limited,” and that the panel would not “substitute our judgment for that of the trial judge in the absence of a clear abuse of discretion,” the Appellate Division affirmed.

The opinion is notable for the panel’s decision to deviate from First Union Nat’l Bank v. Nelkin, 354 N.J. Super. 557 (App. Div. 2002). That case 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.”

Judge Geiger and his colleagues chose not to follow this “actual knowledge” rule. Instead, they adopted a principle from the Restatement (Third) of Property: Mortgages, that makes “material prejudice to the intervening lienor” the polestar. Gillis, mentioned above, had adopted other principles of the Third Restatement, apparently the first New Jersey case to have done so. That opened the door for this decision.

Judge Geiger 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.” The panel relied on Gillis for this holding.