The following hypotheticals help illustrate the Court's conclusion.
Hypo # 1. H and W, husband and wife buy Blackacre as tenants by the entirety in January, 1980. The value of Blackacre is a $ 100,000. As a result, each own an undivided interest of $ 50,000 plus the right of survivorship. H and W subsequently encumber Blackacre with $ 50,000 in mortgages. Afterwards, H and W have equity of $ 50,000 of which each would have an undivided one-half interest of $ 25,000 plus the right of survivorship (= 1/2 x (value - mortgages)).
In April, 1980 a federal tax lien of $ 60,000 attaches to H's interest in Blackacre.
All other things being equal, in April 1980, both H and W would retain an undivided one-half interest equal to $ 25,000 plus the right of survivorship; the Government, however, has a claim in H's interest.
In November, 1980, H transfers his encumbered interest to W. W now owns the entire fee; but, because the lien follows Blackacre, her fee is subject to the lien. She receives H's $ 25,000 interest plus the lien. Thus, when added with her original interest, she now owns all $ 50,000 in equity. While the IRS can enforce its entire tax lien without limitation, if the IRS were to foreclose on Blackacre after the transfer, ignoring W's right of survivorship, it could only recover what H would have -- $ 25,000.
The above hypothetical assumed throughout the value of Blackacre remained constant. The Court will now relax that.
Hypo # 2. Same facts a Hypo #1 (i.e., mortgages that are senior to the lien total $ 50,000 lien is $ 60,000), except prior to the transfer from H to W, the value of Blackacre appreciated (due to a rising real estate market) to $ 500,000. Prior to the transfer, all other things being equal, H would own an undivided one-half interest of $ 225,000 (one-half of $ 500,000 less $ 50,000 (mortgage)) plus the right of survivorship, subject to the lien. However, in this hypothetical, H's interest is sufficient to cover his entire tax liability of $ 60,000. Accordingly, the Government could receive $ 60,000 from H's $ 225,000 interest.
After the transfer, the lien follows Blackacre; W owns the fee which is encumbered by the lien; and H owns nothing. It would be absurd to increase the amount the Government could receive to the full $ 225,000 that H transferred when H's liability is only $ 60,000.
Would the result be any different if there was negative equity at the time of the transfer?
Hypo # 3. Same facts as Hypos #1 and 2 -- i.e., mortgages that are senior to the tax lien total $ 50,000; lien is $ 60,000 with no interest or penalties-- except here the value of Blackacre is $ 20,000. Before the transfer, both H and W have a negative equity in the amount of $ 15,000 (= 1/2 x (value - mortgages)) of which H's interest is constrained by the lien.
This hypothetical illustrates that where there is negative (or insufficient) equity, the Government's only hope for recovering any amount of the lien is based on an increase in value of Blackacre. However speculative, this hope prevents the lien from being worthless. Nevertheless, whatever speculative value such a lien has is dependent on whether title is still in the debtor/taxpayer.
Thus, the Court concludes that while the Government need not fix the amount of Mr. Sylvester's tax liability at the time Mr. Sylvester transferred his title and interest to Mrs. Sylvester, it cannot recover more from a foreclosure sale than his interest, up to the value of the total tax liability. Under these facts, the Government may receive a one-half interest in the Property valued at the time Mr. Sylvester transferred his title and interest to Mrs. Sylvester, subject to other liens or mortgages that had priority.
No one disputes that the amount due on the lien as of November 5, 1979 was $ 62,523.21, and because of, inter alia, interest, the total amount due as of September 30, 1993 was $ 274,612.26. It is uncontested that Mr. Sylvester transferred his interest on October 3, 1980. However, it is a genuine issue of material fact what the value of his interest was on that date. Additionally, there is nothing before the Court that suggests the total value of other liens, mortgages, etc., or their priority vis-a-vis the federal tax lien on that date.
Thus, the motion for summary judgment is denied. The cross-motion for partial summary judgement is granted to the extent that the Court finds that the United States' lien on the Property presently held by the Diemers attaches only to Mr. Sylvester's interest valued at the time of the transfer.
III. Equitable Subrogation
In their cross-motion, the Diemers assert that since a portion of the Avilas purchase money was applied to satisfy liens having priority over the tax lien, they are entitled to stand in the shoes of those mortgage and judgment lienholders having priority over the lien. The ruling the Diemers seek is premised upon the doctrine of equitable subrogation.
Equitable subrogation is a well recognized doctrine under New Jersey law. See e.g., Gaskill v. Wales, 36 N.J. Eq. 527, 533 (E & A 1883); Home Owners' Loan Corp. v. Collins, 120 N.J. Eq. 266, 184 A. 621 (Ch. Div. 1936); Gutermuth v. Ropiecki, 159 N.J. Super. 139, 387 A.2d 385 (Ch. Div. 1977); Equity Savings and Loan Association v. Chicago Title Insurance Co., 190 N.J. Super. 340, 463 A.2d 398 (App. Div. 1983); Goldome Realty Credit Corp v. Harwick, 236 N.J. Super. 118, 564 A.2d 463 (Ch. Div. 1989). The doctrine is founded upon principles of equity. Gaskill, 36 N.J. Eq. at 533. It provides that "where a purchaser retains funds in escrows to satisfy existing mortgage[s] and judgment liens, and in fact ultimately uses such funds to satisfy those liens, such purchaser stands in the shoes of those mortgage and judgment lienholders and may assert their claims to priority as against any subsequent lien claimant." Gutermuth, 159 N.J. Super. at 143. That is, subrogation is the giving to the payor, the rights and remedies of the satisfied creditor.
New Jersey courts have used the doctrine to prevent a later or intervening lienor from being unjustly enriched through his unearned and fortuitous advancement in priority by reason of fraud or mistake of the grantee. See 29 N.J. Practice at 669; Gaskill, 36 N.J. Eq. at 533; Home Owners' Loan Corp., 120 N.J. Eq. at 268 (equitable subrogation used in situations in which "a state of facts fraudulently concealed from the lender, or of which he was ignorant, impaired the lien of the new mortgage."); Kaplan v. Walker, 164 N.J. Super. 130, 138, 395 A.2d 897 (App. Div. 1978) (in addition to the situation where one who, having existing rights and property, pays the debt of another to protect his own rights, subrogation will be extended to one who supplies funds to discharge an old lien when the new security, by fraud or mistake, turns out to be defective).
For example, in Gutermuth, 159 N.J. Super. 139, 387 A.2d 385, purchasers of real property satisfied existing liens and encumbrances on the property at closing. Unknown to the purchasers, a judgment was docketed against the grantee shortly after the conveyance of the property, but before the deed and mortgage were recorded. The Chancery Division held that where a purchaser pays off and discharges outstanding mortgages and judgments, the rights of the purchasers are subrogated to the priority position of the discharged lienors. Id. at 143. In exercising its discretion to grant such relief, the court placed great emphasis on the fact that the later lienholder did not expect his interest to claim priority over all others. Id.; see also Home Owners' Loan Corp., 120 N.J. Eq. at 266 (mortgagee who paid off and discharged all encumbrances at closing, but who's who's agent negligently failed to find an outstanding mortgage, was entitled under doctrine to be subrogated to the position of its discharged creditors); Trus Joist Corp. v. National Fire Insurance Co., 190 N.J. Super. 168, 179, 462 A.2d 603 (App. Div. 1983), reversed on other grounds, 97 N.J. 22, 477 A.2d 817 (1984) (mortgagee, who negligently accepts a mortgage despite knowledge of challenge to mortgagor's title, will be subrogated to the rights of the parties whose liens were satisfied from the proceeds of the loan secured by the mortgage).
It is undisputed that the Avilas would be equitably subrogated to the various liens they satisfied. The Diemers submit that because every deed conveying lands includes all the right, title and interest in law and in equity of the grantor, see N.J.S.A. 46:3-13, when the Property was conveyed to them, the right of equitable subrogation was similarly transferred.
That subrogation does not run with the land finds support in New Jersey case law. Gaskill v. Wales, 36 N.J. Eq. 527, the "controlling pronouncement of New Jersey law" on the subject of equitable subrogation, In re Bridge, 18 F.3d 195, 203 (3d Cir. 1994), stated that subrogation is not an absolute right. Gaskill, 36 N.J. Eq. at 533. It is a device of equity designed to prevent the subordination of one who in good conscience satisfied existing debt but, without the aid of equity, will nevertheless be prejudiced by mistake or fraud. Thus, it is to be applied with "due regard to the legal and equitable rights of others." Id.
Indeed, subrogation exists only: (1) by agreement; (2) by a judicial device of equity; or (3) by statute. Home Owners' Loan Corp., 120 N.J. Eq. at 267-268; see also City of Union City v. Veals, 247 N.J. Super. 478, 484, 589 A.2d 1028 (App. Div. 1991). In other words, "subrogation rights neither arise spontaneously nor are they free floating or open-ended." Veals, 247 N.J. Super. at 484. Guided by these principles, the Court must reject the Diemers argument that subrogation runs with the land.
In fact, the Court finds that the Diemers do not have an equitable right of subrogation. First, there was no agreement to subrogate, nor was there any formal assignment. See Metrobank v. National Community Bank, 262 N.J. Super. 133, 143, 620 A.2d 433 (App. Div. 1993). Second, as discussed above, N.J.S.A. section 46:3-13 does not create a right of subrogation. As a result, if subrogation were to apply here it would have to be because the equities so demand.
As an equitable doctrine, subrogation is only granted in the exercise of the Court's equitable discretion. Id. at 144. The equities here are not in favor of the Diemers. The Diemers took no affirmative action to protect their rights in the Property which resulted in them having an expectation that they would have an advantage over the tax lien. Equity demands that under these facts subrogation would only be is available if the Diemers paid a debt of another with a view to protecting their rights and interest in the Property. Meier v. Planer, 107 N.J. Eq. 398, 152 A. 246 (Ch. Div. 1931) (entity who merely pays an existing debt and has no interest menaced by it is only a voluntary payor and has no claim to subrogation); Deskovick v. Porzio, 78 N.J. Super. 82, 187 A.2d 610 (App. Div. 1963) (same); Home Owners' Loan Corp., 120 N.J. Eq. at 267-268 (subrogation not only exists in favor of one who, to protect his rights, pays the debt of another, but also one who, through fraud or mistake, takes new security which turns out to be defective); Kaplan, 164 N.J. Super. 130, 395 A.2d 897 (same).
The Diemers did nothing to change their position or that of the Government. Therefore, if the Diemers were allowed to be subrogated, they would be unjustly enriched at the expense of the Government. On the other hand, if this Court does not subrogate the Diemers, they will suffer no loss that they would not have had they known the tax lien was valid and still purchased the Property. It would be a most inequitable decision to reward the Diemers for doing nothing.
Based on the foregoing, the Court finds that the Diemers are not entitled to be equitably subrogated to the tax lien and therefore will deny the Diemers cross-motion for partial summary judgment.
For the reasons expressed above, the Court will deny the Government's motion for partial summary judgment. It will grant in part the Diemers' cross-motion for summary judgment but will deny their cross-motion seeking dismissal on the grounds of equitable subrogation.
The Court notes that it will need a hearing to determine the value of the debtor/taxpayer's interest in the Property in 1980, as well as the priority and value of other liens or judgments at that time.
An appropriate order is attached.
Dated: August 1, 1994
ALFRED M. WOLIN, U.S.D.J.