## Facts

- Anthony and Catherine Deely owned a residence in Beach Haven, New Jersey.
- On March 15, 2005, the Deelys executed a \$664,000 mortgage to First Interstate Financial Corp. (FIFC), which was recorded on March 23, 2005.
- On June 21, 2005, the Deelys executed a mortgage to Fleet National Bank securing an \$80,000 home-equity credit-line account (the Fleet mortgage), which was recorded on August 10, 2005.
- Fleet’s interest was later succeeded by Bank of America, N.A. (Bank of America).
- In September 2005, the Deelys refinanced their primary mortgage by executing a \$726,000 mortgage to Mortgage Electronic Registration Systems, Inc. (MERS), as nominee for New York Mortgage Company, LLC; the loan was later assigned to New York Mortgage Trust (New York Mortgage Trust).
- A title agency performed a title search for the refinance transaction, and the refinancing closed on September 16, 2005.
- The bulk of the refinance proceeds was used to satisfy the FIFC mortgage, and that mortgage was discharged.
- At or near the closing, Bank of America (as Fleet’s successor) advised the title agency in writing that the Fleet mortgage had a zero balance after Anthony Deely made a \$16,884.16 payment.
- The HUD-1 settlement statement indicated that the Fleet mortgage was “to be [paid] off prior to closing.”
- Even though the Fleet mortgage balance was represented as zero, a discharge of the Fleet mortgage was never recorded, and the Fleet mortgage remained of record.
- The Deelys later defaulted on the mortgage held by New York Mortgage Trust, which filed a foreclosure action and sought priority over Bank of America’s recorded Fleet mortgage by equitable subrogation.
- The trial court granted summary judgment to New York Mortgage Trust, gave its lien priority through equitable subrogation to the position of the discharged FIFC mortgage, and entered a final judgment of foreclosure.
- Bank of America appealed, arguing equitable subrogation should not apply because the refinancing lender (through its agents) knew the Fleet mortgage existed as an intervening lien.

## Issues

1. Whether a refinancing mortgagee that used loan proceeds to satisfy a prior first mortgage may obtain first-lien priority by equitable subrogation over an intervening recorded HELOC mortgage when the refinancing mortgagee had actual knowledge of that intervening lien.
2. Whether equitable subrogation is improper when the junior lienholder’s mortgage was not discharged of record, and the junior lienholder claims priority based on the recording statutes.
3. Whether the junior lienholder showed material prejudice sufficient to defeat equitable subrogation.

## Decision

- The Appellate Division affirmed the orders granting summary judgment to New York Mortgage Trust and denying summary judgment to Bank of America, and it affirmed the final judgment of foreclosure.
- The court held that equitable subrogation applied to place New York Mortgage Trust in the first-priority position formerly held by the satisfied FIFC mortgage.
- The court rejected Bank of America’s argument that actual knowledge of an intervening lien automatically bars equitable subrogation.
- The court concluded Bank of America was not materially prejudiced because it remained in the same relative position it had occupied before the refinance—junior to a first mortgage—rather than being allowed to move into first priority based solely on the payoff and discharge of the FIFC mortgage.
- The court also considered Bank of America’s written representation that the Fleet mortgage had a zero balance, along with the closing documents indicating the Fleet mortgage was expected to be paid off, in assessing the equities between the parties.

## Legal Principles

- Equitable subrogation may give a party that pays off a senior mortgage the right to stand in the senior mortgagee’s shoes as to lien priority, to prevent unjust enrichment.
- In a refinance context, equitable subrogation can apply even when the refinancing lender had actual or constructive notice of an intervening lien; notice is a factor in the equity analysis, not a categorical bar.
- A key consideration is whether subrogation would materially prejudice the intervening lienholder; lack of material prejudice is commonly shown when the intervening lienholder is returned to the same junior position it held before the refinance.
- Courts may grant subrogation where denying it would allow the junior lienholder to obtain a priority shift it did not bargain for, based on the refinancing lender’s payoff of the prior first mortgage.
- Communications and closing documents bearing on payoff expectations (including a junior lienholder’s representation that a line has a zero balance) may bear on whether equity favors subrogation.

## Conclusion

The Appellate Division affirmed foreclosure in favor of New York Mortgage Trust and held that the refinancing mortgage was equitably subrogated to the discharged FIFC mortgage’s first-lien priority over Bank of America’s intervening HELOC mortgage, because actual knowledge of the intervening lien did not bar subrogation and Bank of America showed no material prejudice beyond losing an unearned priority jump.


New York Mortgage Trust v. Deely, 246 A.3d 838 (2021)