## Facts

- Real property was initially encumbered by a $12,000 first mortgage to Philip Raben and a $40,000 second mortgage to Valley Savings and Loan Association (Valley).
- Attorney Harvey Goldberg arranged later financing and falsely represented to separate lenders that each would receive a first-lien mortgage.
- To obtain a $48,000 loan from Equity Savings and Loan Association (Equity), Goldberg obtained Raben’s subordination and falsely certified that Valley’s mortgage had been cancelled, though it was not paid.
- Because Valley was not paid and Raben subordinated, Valley’s mortgage moved into first priority ahead of Equity.
- About a year later, Goldberg obtained a $54,000 loan from Spencer Savings and Loan Association (Spencer) for Trunc Enterprises, Inc., which then held title.
- Goldberg disclosed only Valley’s mortgage to Spencer, concealed the Equity and Raben mortgages, and used Spencer’s proceeds to satisfy Valley’s mortgage.
- After the fraud was discovered, Chicago Title Insurance Company (Chicago) paid Spencer under a title policy, took an assignment of the Spencer mortgage, and purchased the Raben mortgage.
- Based on record title after Valley’s satisfaction, Equity appeared senior, with Chicago holding junior mortgages through the Raben and Spencer instruments.

## Issues

1. Whether a refinancing lender (or its assignee) whose loan proceeds satisfy a prior senior mortgage is entitled to equitable subrogation to that discharged mortgage’s priority when an intervening lien exists and the refinancing lender was fraudulently induced to believe it would receive a first lien.
2. Whether subrogation should be denied because record title would otherwise place the intervening lienholder in first position.

## Decision

- The Appellate Division reversed the trial court’s priority determination.
- Chicago, as assignee of Spencer, was equitably subrogated to Valley’s former first-priority position because Spencer’s funds discharged Valley’s mortgage.
- The court treated the payoff as the equivalent of an equitable assignment of Valley’s mortgage to Spencer, rather than a cancellation, to prevent Equity from receiving an unearned priority improvement.
- The court found no inequity in subrogation because the intervening lienholder suffered no prejudice or justified reliance beyond losing a windfall created by the refinancing payoff.

## Legal Principles

- A refinancing lender whose security is defective may be subrogated by equitable assignment to the lien position of the lender whose mortgage was discharged by the refinancing proceeds, when there is no prejudice to or justified reliance by an adverse party.
- Equitable subrogation may apply even where the intervening lien was of record, if subrogation merely restores the priority structure that would have existed had the satisfied senior mortgage been assigned instead of cancelled.
- The doctrine is applied to prevent unjust enrichment of an intervening lienholder whose priority position improves solely because the refinancing lender paid off a senior encumbrance.

## Conclusion

The court held that Chicago, standing in Spencer’s shoes, took the priority of the Valley mortgage through equitable subrogation because Spencer’s funds satisfied the former first lien and the intervening lienholder had no justified reliance interest that would make subrogation inequitable.


Equity Sav. & Loan Ass’n v. Chicago Title Ins. Co., 190 N.J. Super. 340 (App. Div. 1983)