September 14, 2012
JOHN PALLADINO, PLAINTIFF-APPELLANT,
JEFFREY MELCHIONNA AND FLORA MELCHIONNA, SOUTHSTAR FUNDING, L.L.C. AND MORTGAGE ELECTRONIC REGISTRATION SYSTEMS, INC., DEFENDANTS-RESPONDENTS.
On appeal from the Superior Court of New Jersey, Chancery Division, Union County, Docket No. F-37439-10.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued January 31, 2012 -
Before Judges Reisner and Hayden.
Plaintiff John Palladino appeals from the April 29, 2011 Chancery Division order granting the mortgage held by defendants SouthStar Funding, L.L.C. and Mortgage Electronic Registration Systems, Inc. a lien priority over plaintiff's mortgage by authority of the doctrine of equitable subrogation. After considering the applicable legal principles in light of the record, we affirm.
The basic facts are not in dispute. On March 14, 2006, defendants Jeffrey and Flora Melchionna purchased an investment property in Linden financed by a mortgage of approximately $373,000 from Accredited Home Lenders, Inc. Accredited did not record its mortgage loan until July 20, 2006, over four months later.
Meanwhile, on April 10, 2006, the Melchionnas took out a second mortgage on the same property from Palladino. The Melchionnas received $50,000 in cash, and the loan was secured by a $75,000 mortgage, recorded on April 12, 2006, three months before Accredited recorded its mortgage. Palladino knew, at the time he made the loan to the Melchionnas, that Accredited was the first mortgage holder on the property.
In September 2006, the Melchionnas refinanced the Accredited mortgage with two loans from SouthStar totaling $399,922. SouthStar's title search revealed the Accredited mortgage but failed to uncover the Palladino mortgage. SouthStar paid off the Accredited mortgage of $373,643 as part of the refinancing. The SouthStar mortgage was promptly recorded after the closing. Subsequently, SouthStar named a third party, defendant Mortgage Electronic Systems, Inc., as the "nominee for the lender" and as the mortgagee.*fn1
By January 2011, both Palladino and SouthStar had begun foreclosure proceedings against the Melchionnas. Judge John F. Malone consolidated these proceedings. Shortly thereafter, SouthStar filed a motion seeking to have its mortgage declared the superior lien and Palladino filed a cross-motion asking for his mortgage to be deemed superior.
Judge Malone granted SouthStar's motion and denied Palladino's cross-motion because he found the doctrine of equitable subrogation applied. In an oral decision rendered April 29, 2011, Judge Malone observed that Palladino did not dispute that Accredited, as a purchase money mortgagee, had a priority over his loan, even though Accredited's loan had been recorded later. By paying off the first priority mortgage, the judge found, SouthStar stepped into the place of the first priority mortgagee, and its lien had priority over the second-place lien holder. The judge rejected Palladino's argument that SouthStar's negligence in not finding Palladino's lien deprived it of its equitable position. The judge concluded that, even though its security was defective, SouthStar, as the refinancing lender, was subrogated by equitable assignment to the position of the lender whose lien was discharged by the proceeds of the later loan.
This appeal followed.*fn2
Our scope of review is limited here. Decisions as to the application of an equitable doctrine are left to the sound discretion of the trial judge, and we will not substitute our judgment for that of the trial judge in the absence of a clear abuse of discretion. Kurzke v. Nissan Motor Corp. in U.S.A., 164 N.J. 159, 165 (2000).
On appeal, plaintiff argues that the judge erred in not finding that the first recorded mortgage must prevail; in applying the doctrine of equitable subrogation in a non-fraud case; and in applying an equitable remedy since defendant banks have legal remedies at their disposal to re-coup their losses. We disagree. We have considered Palladino's arguments and find them without merit. R. 2:11-3(e)(1)(E). We affirm substantially for the reasons expressed in Judge Malone's cogent opinion of April 29, 2011. We add the following comments.
Under the doctrine of equitable subrogation, "a refinancing lender whose security turns out to be defective is subrogated by equitable assignment 'to the position of the lender whose lien is discharged by the proceeds of the later loan, there being no prejudice to or justified reliance by a party in adverse interest.'" Equity Sav. and Loan Ass'n v. Chicago Title Ins. Co., 190 N.J. Super. 340, 342 (App. Div. 1983) (quoting Kaplan v. Walker, 164 N.J. Super. 130, 138 (App. Div. 1978)). Equitable subrogation is a remedy "highly favored in the law." First Fid. Bank, Nat. Ass'n, S. v. Travelers Mortg. Servs., Inc., 300 N.J. Super. 559, 564 (App. Div. 1997) (internal citations omitted). As it is an equitable doctrine, it is applied only in the exercise of the court's equitable discretion. Metrobank for Sav., FSB v. Nat'l Cmty. Bank, 262 N.J. Super. 133, 144 (App. Div. 1993). Hence, "[e]quitable subrogation may only be imposed 'if the cause is just and enforcement is consonant with right and justice.'" Feigenbaum v. Guaracini, 402 N.J. Super. 7, 20 (App. Div. 2008) (quoting Standard Acc. Ins. Co. v. Pellechia, 15 N.J. 162, 173 (1954)).
In the context of mortgages, we have previously described the equitable subrogation doctrine as follows:
Generally, a new mortgage is subrogated to the priority rights of an old mortgage by either agreement or assignment. In the absence of such an agreement or assignment, a mortgagee who accepts a mortgage whose proceeds are used to pay off an older mortgage is equitably subrogated to the extent of the loan so long as the new mortgagee lacks knowledge of the other encumbrances. Metrobank for Sav., FSB v.
Nat'l Cmty. Bank, 262 N.J. Super. 133, 143-44 (App. Div. 1993). In that situation, the new mortgagee by virtue of its subrogated status can enjoy the priority afforded the old mortgage. Ibid. Equitable subrogation may still be afforded even though lack of knowledge on the part of the new mortgagee occurs as a result of negligence. Kaplan v.
Walker, 164 N.J. Super. 130, 138 (App. Div. 1978). On the other hand, the new lender is not entitled to subrogation, absent an agreement or formal assignment, if it possesses actual knowledge of the prior encumbrance. Metrobank, supra, 262 N.J. Super. at 143-44. [First Union Nat'l Bank v. Nelkin, 354 N.J. Super. 557, 565-66 (App. Div. 2002).]
Thus, to the extent that the proceeds of the new mortgage are used to satisfy the old mortgage, even a mortgagee who negligently accepts a mortgage without knowledge of intervening encumbrances will subrogate to a first mortgage with priority over the intervening encumbrances. Trus Joist Corp. v. Nat'l Union Fire Ins. Co., 190 N.J. Super. 168, 179 (App. Div. 1983), rev'd on other grounds, 97 N.J. 22 (1984). See also First Fid. Bank, supra, 300 N.J. Super. at 565 (negligence does not bar subrogation unless subsequent intervening rights are involved). However, application of the doctrine requires a finding that the older mortgagee acted fraudulently or would be unjustly enriched. First Union Nat'l Bank, supra, 354 N.J. Super. at 566.
We agree with the trial judge that the prerequisites for imposing
equitable subrogation are present here. SouthStar is a refinancer that
loaned money to the Melchionnas to discharge the Accredited purchase
money mortgage. The subrogation did not prejudice Palladino in any way
because his interest remained in its prior position, subordinate to
the purchase money mortgage securing the $373,000 loan.*fn3
Moreover, if Palladino succeeded beyond his original
expectation to become the first priority lien holder, he would be
unjustly enriched. Additionally, there is nothing in the record
evidencing that SouthStar had any knowledge, real or imputable through
its agents, of Palladino's lien on the property. As a result, we
concur with Judge Malone that equitable subrogation is reasonable
here, as "the cause is just and enforcement is consonant with reason and justice." Standard
Acc. Ins. Co. v. Pellechia, supra, 15 N.J. at 173.