In Ocwen Loan Services v. Quinn, a decision rendered in October of 2016, but recently approved for publication at 2016 N.J. Super. LEXIS 167 (App. Div. 2016), the New Jersey Appellate Division affirmed the ruling of the Superior Court, Passaic County, granting summary judgment in favor of a plaintiff-mortgagee and against defendants who both held a life estate in the subject property. (The New Jersey Supreme Court denied certiorari on Feb. 7, 2017.)
In so doing, the court found that, although the defendants did not sign the plaintiff’s mortgage, their life estates were subordinated based on the principles of replacement and modification, as well as the equitable principles recognized by the court in Sovereign Bank v. Gillis, 432 N.J. Super. 36 (App. Div. 2013).
The facts regarding the underlying foreclosure action were undisputed. The plaintiff sought to foreclose on a Sept. 21, 2007, refinance loan in the amount of $380,000 executed by defendant Marla Wuebbens Quinn in favor of IndyMac Bank, F.S.B. Previously, on Nov. 12, 2004, Quinn’s parents, defendants Louisa Wuebbens and David Wuebbens, deeded the subject property to Quinn and retained life estates for themselves. In the deed reserving the life estates, the Wuebbens agreed to remain responsible for maintenance and upkeep of the property, including the payment of taxes and insurance. The 2007 mortgage paid off a prior 2005 mortgage loan in the amount of $260,000, also in favor of IndyMac, which was executed by Quinn, her husband Thomas Francis Quinn, and the Wuebbens. The title commitment IndyMac obtained for the 2007 mortgage did not disclose the existence of the Wuebbens’ life estates, and they were therefore not asked to, and did not, execute the 2007 mortgage.
In May of 2009, IndyMac commenced the foreclosure action as a result of Quinn’s default on the 2007 mortgage. The Wuebbens were later added as defendants due to their life estate interests in the property and the resulting title issue that arose because they did not execute the 2007 mortgage.
The plaintiff moved for summary judgment seeking to equitably subrogate the Wuebbens’ life estates to the 2007 mortgage. In response, the Wuebbens cross-moved to dismiss, arguing that their life estates retained priority over the 2007 mortgage and were not subject to the principle of equitable subrogation. The Wuebbens argued that, despite the title commitment failing to disclose their interest in the property, IndyMac nonetheless had knowledge of the existence of their life estates because the 2007 mortgage paid off the 2005 mortgage they had executed in favor of IndyMac. They therefore asked the court to conclude that the 2007 mortgage could not take priority over their life estates.
In the trial court’s ruling, the Hon. Margaret Mary McVeigh allowed the plaintiff to “step into the shoes of its prior mortgage which its own funds satisfied,” finding that “[t]he life estates of [the defendants] are subject to the refinance because of their participation in the signing of the original mortgage.” However, the trial court capped the amount of plaintiff’s priority at $260,000 — the amount of the prior-satisfied mortgage — plus an additional $43,019.85 for taxes and insurance advanced by the plaintiff and its predecessors while the mortgage loan was in default. (Although not directly addressed in the Appellate Division’s opinion, the trial court also awarded interest on both the outstanding debt and the plaintiff’s advances for taxes and insurance.)
In her decision, Judge McVeigh reasoned that, based on equitable principles, this result put the defendants in the same position they were in when they signed the prior $260,000 mortgage and agreed to subordinate their life estates.
In entering summary judgment in favor of the plaintiff, Judge McVeigh found:
The same equitable princip[les] that allow one mortgage to take the place of another in priority are applicable when deciding priority between a life estate and the mortgage. Just as equity is concerned with the prejudice to the lenders of mortgages, here too we look at the prejudice to the parties.
The trial court further found that, because the 2007 mortgage paid off the 2005 mortgage, which did have priority over the Wuebbens’ life estates, the Wuebbens were not prejudiced by having the 2007 mortgage take its place.
The Appellate Division affirmed Judge McVeigh’s decision finding that equitable subrogation is a highly favored remedy which may be imposed in the court’s discretion and only in the interest of justice. Relying on its decision in Gillis, the court distinguished the principles of replacement and modification from traditional equitable subrogation determining that, if a lender with a priority lien interest replaces such interest with a new refinanced mortgage, “the replacement lien is given priority regardless of the lender’s knowledge of other encumbrances.” Relying on the Restatement (Third) of Property – Mortgages (1997), the court further determined that “the pertinent limiting factor is not the new lender’s knowledge [of the prior encumbrance], but instead whether there has been ‘material prejudice’ to the intervening lienor.”
In rendering its decision, the court did not find a significant distinction between the Wuebbens’ life estate interests in the property and a mortgage interest. The court therefore concluded that the trial court appropriately found that the Wuebbens were not prejudiced by the replacement of the 2005 mortgage with the 2007 mortgage, as they had previously agreed to subordinate their life estates to the 2005 mortgage lien. The court also concluded that the trial court properly found that the plaintiff’s priority was capped at $260,000 — the amount of the 2005 mortgage — and that the Wuebbens’ life estates would retain priority over the portion of the 2007 mortgage in excess of that amount.•