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NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION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 ...