The United States District Court for the District of New Hampshire recently granted a lender summary judgment and held that its mortgage was entitled to priority over a prior-recorded mortgage securing a home equity line of credit (“HELOC”) when the HELOC was not fully paid off despite the lender’s actual knowledge of the lien. See Bank of Am., N.A. v. Citizens Bank, 2015 WL 9305653 (D.N.H. Dec. 21, 2015). In the case, Bank of America’s predecessor in interest received a mortgage on a property from a borrower to secure a loan. Later, a second lender obtained a mortgage on the property to secure a HELOC to the borrower. Two years after the second mortgage was recorded, Bank of America’s predecessor agreed to refinance with the borrower and asked the second lender to provide a payoff statement. The bank then issued the new loan and sent the payoff amount to the second lender, but three days after the closing, the borrower borrowed more money against the HELOC. The HELOC therefore was not paid off and remained open, and the mortgage was never discharged. Bank of America eventually filed a lawsuit seeking a determination of priority, and the parties filed cross-motions for summary judgment.
Bank of America argued that it was entitled to be equitably subrogated to the first priority position because it had paid off the first mortgage and the second lender would be unjustly enriched if it was given priority without having paid anything. The second lender claimed, among other arguments, that Bank of America was not entitled to summary judgment because it had actual knowledge of the intervening lien. The Court, though acknowledging that most states prohibit equitable subrogation when the lender has actual knowledge of the intervening lien but that the New Hampshire Supreme Court had not addressed the issue, granted Bank of America’s motion. It held that “[t]he majority rule permits junior lienholders to invoke equitable subrogation if they negligently fail to learn of an intermediate lien, but denies similar protection to lienholders, like Bank of America, who were aware of an intermediate lien but were arguably negligent in failing to pay it off. In both cases, the intermediate lienholder will receive a windfall unless the junior lienholder is subrogated to the position of the senior lienholder. I cannot conceive of a reason why equity would allow such a windfall in one case but not the other.”