NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued May 15, 2013.
On appeal from the Superior Court of New Jersey, Chancery Division, Somerset County, Docket No. F-048348-10.
Robert L. Grundlock, Jr., argued the cause for appellant (Rubin Ehrlich & Buckley, PC, attorneys; Mr. Grundlock, on the briefs).
Vladimir Palma argued the cause for respondent (Phelan Hallinan & Diamond, attorneys; Mr. Palma, on the brief).
Before Judges Parrillo, Sabatino and Maven.
This appeal concerns whether a refinancing lender that discharges its own previous mortgage and issues another mortgage loan for a higher amount, and which simultaneously pays off the balance owed on a junior lienor's line of credit without having it closed, can rely upon equitable principles to maintain its priority over that junior lienor. This question of priority arises here in a context in which the borrowers, after obtaining the refinancing, drew additional funds on the line of credit and then defaulted on both the refinanced mortgage loan and the line of credit.
Applying principles of replacement and modification recognized in the Restatement (Third) of Property – Mortgages (1997) ("the Third Restatement"), we reverse the trial court's decision allowing the junior lienor that extended the line of credit to vault over the priority of the refinancing mortgage lender. We consequently direct the trial court, on remand, to determine the proper extent of the refinancing lender's priority, in an amount that avoids material prejudice to the junior lienor.
The essential facts are substantially undisputed. On May 28, 1998, defendants Joseph and Eulalia Gillis ("the Gillises")borrowed $650, 000 from Washington Mutual Bank, FA ("WaMu") to finance the purchase of a residential property in Warren Township. The mortgage loan had a thirty-year term through June 2028, with an adjustable interest rate initially set at 6.625%. WaMu secured the May 1998 loan with a purchase-money mortgage, which was recorded in the first position of priority.
Subsequently, in December 1998, the Gillises obtained a home-equity line of credit from Broad National Bank, secured by a mortgage recorded in the second position. In October 2001, the Gillises obtained additional funding from Crown Bank, NA ("Crown"), secured by a mortgage recorded in the third position.
On March 18, 2003, the Gillises obtained yet another home-equity line of credit, this time from Independence Community Bank ("Independence"), for the sum of $500, 000, also secured by a mortgage. As a condition of closing, Independence required that the proceeds from the funds borrowed on the line of credit be used to discharge the two preexisting debts that the Gillises held with Broad and Crown. The amount remaining after the discharge (i.e., $58, 252.58) was applied to pay down a portion of the outstanding purchase-money mortgage with WaMu, which at the time had a principal balance of about $534, 000. Both the Broad and Crown mortgages were discharged shortly thereafter the payoff. Consequently, the March 18, 2003 line of credit with Independence stood in a second lien position behind the May 1998 WaMu purchase-money mortgage.
In January 2005, the Gillises sought to refinance their existing mortgage loans. To that end, they borrowed $1.19 million from WaMu, secured by another mortgage on their property ("the WaMu refinanced mortgage") dated January 13, 2005. The WaMu refinanced mortgage loan had a thirty-year term through February 2035, with an adjustable interest rate initially set at 4.027%. The WaMu refinanced mortgage was recorded on January 31, 2005. The principal amount from this refinancing was used to pay off the Gillises' remaining debt of $482, 023.67 that the original May 1998 WaMu purchase-money mortgage secured, as well as the remaining debt of $499, 921.93 that the Independence line of credit mortgage secured.
The parties agree the $499, 921.93 advanced to Independence stemming from the January 13, 2005 WaMu refinancing paid off the Independence debt in full. Independence memorialized the receipt of this sum in a payoff letter that it issued to WaMu, listing an effective date of January 14, 2005. Significantly, at the bottom of the payoff letter, Independence noted in bold and underlined type, "We require all customers to sign an authorization to close a line of credit."
For reasons that are not clear from the appellate record, WaMu failed to obtain written authorization from the Gillises to close out the Independence line of credit. Consequently, the mortgage on that line of credit was not discharged of record, despite an alleged intent to do so. The WaMu refinanced mortgage was instead recorded behind the Independence line of credit mortgage, which remained a lien of record even though ...