New Jersey Court Grants Lender Equitable Subrogation Despite Alleged Negligence

A New Jersey Chancery Division court recently granted a defendant-lender summary judgment on the doctrine of equitable subrogation despite the defendant’s representative authorizing another lender to reopen a line of credit that was secured by a prior-recorded mortgage on the property.  See Wells Fargo Bank v. Nationstar Mortgage, LLC, F-20138-14 (Ch. Div. June 9, 2016).  In the case, the defendant issued a loan to the borrowers and paid off three prior mortgages.  The second mortgage on the property had been an open-ended mortgage.  After the mortgages were paid off and the open-ended mortgage account was closed, the defendant’s representative sent a letter to the plaintiff, which held the open-ended mortgage, and stated that the open-ended mortgage account was erroneously closed and should be reopened.  The plaintiff reopened the account and the borrowers subsequently increased the balance to over $70,000.  The plaintiff commenced a foreclosure action and the parties both moved for summary judgment on the priority of their respective mortgages.  The defendant argued that it had paid off the first mortgage on the property and should be equitably subrogated to that position.  The plaintiff argued that the defendant’s representative had authorized the reopening of the account and, therefore, the defendant had unclean hands and could not seek relief under the doctrine of equitable subrogation.  The court granted the defendant’s motion.  It found that the defendant’s authorization that the account be reopened was, at most, negligent, and that it did not rise to the level of gross negligence or fraud that could bar the application of equitable subrogation. 

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com.