In a decision approved for publication on July 10, 2017, New Jersey’s Appellate Division held that if a lender holds a priority lien on a property and replaces it with a new mortgage via a refinancing, that new mortgage is entitled to priority regardless of the lender’s knowledge of other encumbrances so long as the intervening lienors are not materially prejudiced. See Ocwen Loan Servs., LLC v. Quinn, 2016 WL 6156209 (N.J. Super. Ct. App. Div. Oct. 24, 2016), cert. denied, 2017 WL 658798 (N.J. Feb. 13, 2017). There, defendants sold their property to their daughter in 2004 but retained life estates. In 2005, defendants and their daughter then entered into a $260,000 mortgage loan with IndyMac Bank, F.S.B. (“IndyMac”). In 2007, the daughter refinanced the 2005 mortgage and executed a $380,000 mortgage with IndyMac. However, defendants did not execute the 2007 mortgage. $265,269.45 of the proceeds from the 2007 mortgage satisfied the 2005 mortgage, and another $57,305.59 satisfied an unrelated 2006 mortgage.
In 2009, IndyMac filed a foreclosure action against the daughter. IndyMac later assigned the 2007 mortgage to plaintiff and plaintiff amended the complaint to add defendants. Among other things, plaintiff sought to equitably subrogate defendants’ life estate interests to the 2007 mortgage. The trial court granted plaintiff’s motion for summary judgment and held that defendants’ life estates were subject and subordinate to $260,000 of the 2007 mortgage.
On appeal, the Appellate Division affirmed the trial court’s decision. First, the Court held that the principles of replacement and modification, which are “technically distinguishable” from equitable subrogation, applied because the new mortgage was to the same lender as the prior mortgage. Accordingly, and unlike with equitable subrogation, “if a lender who holds a priority lien replaces it with a new mortgage via a refinancing, this replacement lien is given priority regardless of the lender’s knowledge of other encumbrances.” Instead, the relevant determination is whether the intervening lienor would be materially prejudiced by the replacement. Here, defendants previously had agreed to encumber the property with a $260,000 mortgage, and establishing the priority of the 2007 mortgage up to that amount would not prejudice them.
Second, the Court determined that a life estate should not be treated differently than a mortgage for purposes of equitable subrogation or replacement and modification. It affirmed that there is not a “meaningful distinction” between the types of encumbrances and that the presence or absence of material prejudice likewise should determine whether a mortgage should have priority over a life estate.
This decision continues a trend in recent years of courts expanding the doctrines of equitable subrogation and replacement and modification to protect lenders who pay off prior loans and mistakenly fail to gain priority. See Sovereign Bank v. Gillis, 432 N.J. Super. 36 (App. Div. 2013); In re Ricchi, 470 B.R. 715 (Bankr. D.N.J. 2012); HSBC Bank USA, N.A. v. Jasnic, 2011 WL 2410245 (N.J. Super. Ct. App. Div. May 20, 2011).