## Facts

- Borrowers obtained a $650,000 purchase-money mortgage from WaMu in 1998, recorded in first position on a New Jersey residence.
- The borrowers later incurred junior liens, which were consolidated into a second-position, open-ended HELOC held by Independence Community Bank and later succeeded to by Sovereign Bank.
- In January 2005, WaMu refinanced its own 1998 mortgage with a new mortgage of about $1.19 million.
- The refinance proceeds paid off the 1998 WaMu mortgage and paid the then-existing balance on the Sovereign/Independence HELOC.
- WaMu did not close the HELOC or obtain a discharge; the line remained open for additional advances.
- After the refinance, borrowers drew additional funds on the still-open HELOC and later defaulted on both obligations.
- In the ensuing foreclosure priority dispute, the trial court granted summary judgment giving Sovereign’s HELOC priority over the refinanced WaMu mortgage held by Deutsche Bank as trustee.

## Issues

1. Whether a same-lender refinancing mortgage retains the priority of the lender’s prior mortgage under the Restatement (Third) of Property: Mortgages replacement/modification rule, despite the lender’s knowledge of an intervening HELOC and failure to close it.
2. To what extent, if any, the refinancing lender’s priority should be limited where the refinance increased the principal amount and the intervening HELOC later advanced additional funds on an open line.
3. Whether equitable subrogation governs, or whether the Restatement replacement/modification framework provides the controlling analysis.

## Decision

- The Appellate Division reversed the judgment that subordinated the refinancing mortgage to the HELOC.
- The court held that, in a same-lender refinance, the new mortgage may retain the priority of the prior mortgage to the extent it functions as a replacement and does not materially prejudice an intervening lienholder.
- The court rejected the trial court’s approach treating the refinancing lender’s knowledge of the HELOC and failure to close it as dispositive against any priority preservation.
- The matter was remanded for a determination of the appropriate amount and scope of Deutsche Bank’s priority consistent with the material-prejudice standard.

## Legal Principles

- Under the Restatement (Third) of Property: Mortgages, when a mortgage is released and replaced by a new mortgage to the same lender, the new mortgage generally retains the former mortgage’s priority except to the extent changes materially prejudice an intervening lienholder.
- Modifications or replacement terms (including increased principal, altered interest rate, or changed maturity) affect priority only to the extent they materially burden the junior lienholder.
- The material-prejudice inquiry is fact-dependent and requires assessing how the refinance altered the junior lienholder’s risk and position relative to the pre-refinance priority structure.
- Equitable subrogation is typically associated with third-party payoff situations; in a same-lender refinance, the replacement/modification analysis supplies the principal framework, and lender knowledge of the junior lien is not, by itself, a bar.

## Conclusion

The court preserved the refinancing lender’s ability to maintain its prior priority in a same-lender refinance under the Restatement replacement/modification rule, and remanded for calculation of the priority amount that avoids material prejudice to the intervening HELOC lienholder.


Sovereign Bank v. Gillis, 432 N.J. Super. 36, 74 A.3d 1 (App. Div. 2013)