The New Jersey Appellate Division recently found that a subsequent lender’s inability to produce its origination file resulted in a negative inference that the lender had knowledge of a previously-executed mortgage, despite the fact that the subsequent lender’s mortgage was recorded first. See Wilmington Savings Fund Society, FSB, d/b/a Christiana Trust, not in its individual capacity, but solely as Trustee for BCAT 2015-14BTT, v. 61 Holdings, LLC, 2019 WL 3063740 (N.J. Super. Ct. App. Div. July 12, 2019). In April 2004, the borrower gave a mortgage on his property to World Savings Bank to secure a $220,000 loan. The mortgage was not recorded until January 2005 and was assigned to Wells Fargo. In July 2004, the borrower gave another mortgage on his property to Fleet to secure a $25,000 line of credit, and this mortgage was recorded in August 2004. This line of credit mortgage was assigned to plaintiff. Wells Fargo later initiated a foreclosure action, but did not name plaintiff. It purchased the property at a sheriff’s sale in 2016 and sold the property to defendant. Although the title search defendant commissioned before purchasing the property indicated that plaintiff’s line of credit mortgage was an open lien on the property, the title company later issued an amended commitment that removed the mortgage as an exception based on a 2015 indemnification letter. Plaintiff then brought a foreclosure action, claiming that it had the first lien on the property senior to defendant’s interest because plaintiff’s mortgage was recorded first. During discovery, however, plaintiff was unable to produce the loan’s origination file. Because plaintiff could not produce the origination file, the trial court found that defendant was entitled to a favorable inference that plaintiff had actual knowledge of the prior loan at the time of origination and that plaintiff therefore was not entitled to priority. It further found that Wells Fargo was entitled to be equitably subrogated to the first lien on the property, that defendant stepped into Wells Fargo’s shoes, and that defendant could extinguish plaintiff’s interest via a strict foreclosure. Based on these findings, the trial court denied plaintiff’s motion for summary judgment and granted defendant’s cross-motion, dismissing the complaint with prejudice.
On appeal, the Court affirmed. First, it agreed that plaintiff’s inability to produce the origination file resulted in the inference that plaintiff’s predecessor had knowledge of the April 2004 loan and mortgage. Second, the Court found that World Savings Bank/Wells Fargo was entitled to equitable subrogation because its loan was used to pay off a prior mortgage on the property. As the trial court held, “[a]s the World Savings Bank loan was utilized to pay off the satisfied mortgage, it was reasonable for World Savings Bank to rely upon traditional, equitable principles of priority and expect that its interest would be in ‘first place.’ Unjust enrichment would thus result if the interest held by [plaintiff] were to be vaulted past the interest held by [defendant] solely by virtue of it being first to record. Such a result would contradict the very purpose behind the doctrine of equitable subrogation.” Finally, the Court found that defendant was entitled to step into Wells Fargo’s shoes for the purposes of equitable subrogation. In addition to finding that defendant justifiably relied on the title company’s assessment that plaintiff did not have an open lien on the property, the Court found that defendant’s “entitlement to subrogation is wholly derivative of Wells Fargo’s entitlement to subrogation. That is so because the issue whether equitable subrogation is appropriate must be evaluated from the standpoint of the entities that made the loans at the time they made the loans.” Thus, even if defendant was aware of an open lien, “that awareness does not serve to eradicate Wells Fargo’s entitlement to its priority position.”