Daily Development for Thursday, September 10, 2002

By: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
prandolph@cctr.umkc.edu

MORTGAGES; SUBROGATION; SUBROGEE'S RIGHT TO ASSIGNMENT: Mortgagee is required to assign mortgage to a third party lender upon payment of the accelerated debt to mortgagee.

Jerome Avenue Realty Corp. v. Dipaolo, 737 N.Y.S.2d 816 (Sup. 2002).

Mortgagee had accelerated the debt due to default and had initiated foreclosure. Mortgagor had obtained third party financing to pay the accelerated amount in the context of the foreclosure proceeding. Junior encumbrances existed on the property that were not paid by the loan that refinanced the first mortgage. The refinancing mortgagee moved in the first lien mortgagee's foreclosure proceeding to have the first lien mortgage assigned to it. .

The court noted that the satisfaction of the mortgage ordinarily would extinguish the debt, cancel the mortgage, and lead to a merger. But here, the intent of the parties was to prevent a merger from occurring.

Apparently the New York foreclosure statute actually addresses the issue of assignment of the satisfied debt, and provides that the court has discretion to order such assignment. The court held here that where there was no danger of defrauding the junior lienholders, it was appropriate for the trial court to require the first lien mortgagee to assign the mortgage to a third party lender so as to maintain the estate.

Comment 1: Of course, under generally recognized principles of subrogation, the refinancing mortgagee would be subrogated to the position of the first lienholder. Subrogation is in effect an "equitable assignment." But in order to establish this subrogation priority of record, the refinancing lender would have to initiate a declaratory judgment action. Here, it was much simpler to take advantage of the court proceeding already in process and obtain an order requiring the assignment.

Comment 2: Even in states where assignment is not mentioned in the statute, this seems to be an appropriate device for a court to approve. It certainly simplifies the position of the refinancing lender, in that it clarifies that lender's position of record, so that there can be no intervening third parties. As illustrated in another recent New York case, where innocent third parties rely upon the apparent satisfaction of record of a mortgage, problems can arise. Regions Bank v. Cambell, 737 N.Y.S.2d 636 (A.D. 2 Dept. 2002). , discussed under the heading: "Mortgages; Satisfaction; Third Party Reliance."

MORTGAGES; SATISFACTION; THIRD PARTY RELIANCE:Mortgagee can not cancel a mistakenly recorded satisfaction of mortgage where a purchaser has detrimentally relied on such satisfaction. Regions Bank v. Cambell, 737 N.Y.S.2d 636 (A.D. 2 Dept. 2002). Mortgagee filed a notice of pendency and brought a foreclosure proceeding. Shortly thereafter mortgagee's agent mistakenly recorded a satisfaction of mortgage. Subsequently, the property was sold and the purchaser and purchaser's lender obtained title policies omitting the notice of pendency in reliance on the recorded satisfaction. Despite the fact that the debt remained unpaid, equity precludes the mortgagee from canceling the satisfaction and foreclosing on the property.

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