In the recently published decision of Ocwen Loan Services v. Quinn, the Superior Court of New Jersey, Appellate Division, affirmed a decision of the Superior Court, Passaic County, granting summary judgment in favor of a plaintiff-mortgagee, holding that the life estates of two defendants, who did not sign the plaintiff’s mortgage, were subordinated to the plaintiff’s mortgage based on the equitable principles recognized by the court in Sovereign Bank v. Gillis, 432 N.J. Super. 36 (App. Div. 2013), and the principles of replacement and modification.
In the affirmed ruling of the trial court, the Hon. Margaret Mary McVeigh allowed the plaintiff to “step into the shoes of its prior mortgage which its own funds satisfied,” but 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.
The court concluded that this result put the defendants in the same position they were in when they signed the prior $260,000 mortgage to which they had subordinated their life estates, and for that reason, affirmed the trial court order. In so doing, it permitted the lender to foreclose on the life estates — at least to the extent of the amount of the prior mortgage and the advances for taxes and insurance — rather than having to wait for the termination of those estates.
The case involved a mortgage foreclosure action with respect to a Sept. 21, 2007, refinance loan in the amount of $380,000 executed by defendant Marla Wuebbens Quinn in favor of IndyMac Bank FSB. 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, agreeing to remain responsible for maintenance and upkeep of the property including payment of taxes and insurance.
The 2007 mortgage paid off a prior mortgage loan in the amount of $260,000 dated Dec. 2, 2005, also in favor of IndyMac, which was executed by Quinn, her husband Thomas Francis Quinn, and the Wuebbens. It was undisputed that 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.
IndyMac commenced the foreclosure action in May 2009 as a result of Quinn’s default on the 2007 mortgage, and the Wuebbens were later added as defendants due to their life estate interests in the property and the resulting title issue arising that arose because they did not execute the 2007 mortgage.
Plaintiff moved for summary judgment seeking to equitably subrogate the Wuebbens’ life estates to the 2007 mortgage, and the Wuebbens cross-moved to dismiss on the grounds that their life estates retained priority over the 2007 mortgage and were not subject to the principles of equitable subrogation. The Wuebbens argued that, despite the title commitment failing to disclose their interest in the property, IndyMac had knowledge of the existence of their life estates because the 2007 mortgage paid off the 2005 mortgage they did sign, which was also in favor of IndyMac, and for that reason, the 2007 mortgage could not take priority over their life estates.
In awarding summary judgment in favor of the plaintiff, Judge McVeigh found “[t]he 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.” Because the 2007 mortgage paid off the 2005 mortgage, to which the Wuebbens subordinated their life estates, the trial court found that they were not prejudiced by having the 2007 mortgage take its place, reasoning that the “life estates of [the Wuebbens] are subject to the refinance because of their participation in the signing of the original mortgage.”
The court affirmed Judge McVeigh’s decision, finding that equitable subrogation is a highly favored remedy, which may be imposed at 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.” Also 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.”
For purposes of the analysis, the court did not find a meaningful distinction between the Wuebbens’ life estate interest in the property and a mortgage interest, instead determining that the applicable standard is the “presence or absence of material prejudice” to the defendants. Therefore, the court concluded that the trial court appropriately found the Wuebbens were not prejudiced in any meaningful way by the replacement of the 2005 mortgage with the 2007 mortgage, given that it is undisputed that the Wuebbens agreed to subordinate their life estates to the 2005 mortgage lien.
However, the court noted that plaintiff’s priority was properly 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.
This decision is a significant victory for lenders.
Had the court found in favor of the Wuebbens, the plaintiff would have been precluded from enforcing its mortgage lien for potentially decades, while it waited out the duration of the Wuebbens’ life estates.
Ocwen Loan Servs., LLC v. Quinn.
2017 N.J. LEXIS 164 (N.J. Feb. 7, 2017).
About the Authors
Day Pitney New York associate Rachel G. Packer represents lenders, investors and servicers in general litigation and other civil matters. She can be reached at [email protected].
Joy Harmon Sperling , Day Pitney New Jersey partner and chair of its Consumer Finance and Creditors’ Rights group, primarily represents consumer lending institutions – such as mortgage servicers, as well as lenders and investors – in the defense of claims by borrowers in individual and class-action claims throughout the nation. Email Joy at [email protected].
(1) The New Jersey Supreme Court denied certiorari on February 7, 2017. Ocwen Loan Servs., LLC v. Quinn, 2017 N.J. LEXIS 164 (N.J. Feb. 7, 2017).
