Massachusetts Appellate Court Holds Lender Not Entitled to Equitable Subrogation

A Massachusetts appellate court recently affirmed a trial court’s denial of a lender’s equitable subrogation claim, holding that there was no equitable reason to grant the lender a lien on one spouse’s interest in a property after her husband, the mortgagor, passed away.  See Wells Fargo Bank, N.A. v. Comeau, 87 N.E.3d 577 (Mass. App. Ct. 2017).  In the case, defendant Nancy and her husband, William, owned a house as tenants by the entirety.  In 2003, the couple encumbered the property with a mortgage in the amount of $150,000, and only William executed the note.  In 2005, William refinanced the 2003 loan through a $300,000 loan from plaintiff’s predecessor.  Nancy did not execute the 2005 mortgage or the 2005 note.  William passed away in 2008, and his undivided interest in the property passed to Nancy.  Plaintiff did not make a claim against William’s estate for the unpaid 2005 note, and the statute of limitations on the claim expired.  Plaintiff then brought this action against Nancy, seeking to have the 2005 mortgage equitably subrogated to the 2003 mortgage’s position encumbering Nancy’s interest in the property.  The parties cross-moved for summary judgment and the trial court denied plaintiff’s motion, holding that it was not entitled to equitable subrogation here.

On appeal, the appellate court affirmed.  The court first distinguished the three main approaches courts take regarding how a subrogee’s conduct affects subrogation:  (i) the majority approach, in which equitable subrogation is allowed unless the subrogee had actual knowledge of an intervening lien; (ii) the minority approach, in which the courts bar equitable subrogation if the subrogee has either actual or constructive knowledge of the lien; and (iii) the approach advocated by the Restatement, in which the court does not look at the subrogee’s knowledge but instead applies principles of equity.  The court here then determined that Massachusetts uses the third, equitable approach to subrogation claims.

Applying this analysis, the court held that plaintiff was not entitled to equitable subrogation.  First, the loan documents and other documentary evidence indicate that plaintiff’s predecessor intended to receive an encumbrance on William’s interest in the property subject to any existing encumbrances, which would have included Nancy’s right of survivorship.  Thus, there was no evidence that the lender made a mistake.  Second, the court held that plaintiff could have made a claim against William’s estate for the amount due on the note.  The fact that it did not do so did not entitle it to “materially prejudice[]” Nancy by “expos[ing] her to the risk of a foreclosure if she did not pay a debt that only her deceased husband was obligated to pay.”  Finally, the court stated that equitable subrogation existed to prevent unjust enrichment, which is not at risk here.  “While Nancy’s interest in the property was no longer at risk of being terminated in the event of a future foreclosure relating to the 2003 mortgage, it was William’s liability on the 2003 note that was extinguished by the 2005 loan, not Nancy’s, because she was not liable on either note.”

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com, Michael Crowley at mcrowley@riker.com or Clarissa Gomez at cgomez@riker.com.