Daily Development for
Wednesday, April 22, 1998

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

MORTGAGES; SUBROGATION; REPLACEMENT MORTGAGES: After restructuring its mortgages with debtor without discovering existence of second, junior mortgage due to bank attorney’s error in conducting title search, bank discharged its original mortgages and new mortgages became junior to second mortgagee, and bank was not entitled to have its priority restored under equitable principles.

Hilco, Inc. v. Lenentine, 698 A.2d 1254 (N.H. 1997).

Lenentine had a fourth mortgage on property owned by Mizner. This mortgage secured a debt that had been incurred by Mizner when he purchased certain other property from Lenentine. The debt originally had been “double secured” with the other property as well, but Mizner had defaulted on prior loans on that property and Lenentine’s mortgage on that property had been “sold out.”

Mizner attempted to “work out” the three mortgages senior to Lenentine on this remaining property. He paid off the third mortgage held by Meredith Bank, and Meredith advanced additional funds sufficient to discharge the two other mortgages. Instead of taking assignments of those senior mortgages, however, Meredith paid them off and obtained discharges. It took two new mortgages from Mizner as replacements. Meredith then discharged its own original mortgage. The result was that all three mortgages prior to Lenentine were discharged and Lenentine was first priority of record, followed by the two new Meredith Bank mortgages.

When Meredith did all of the above restructuring, it was not actually aware of Lenentine’s mortgage, due to the negligence of its own attorney in searching the records. (Some circumstances reported in the case suggest that Meredith employees may have had actual knowledge of the Lenentine mortgage, at least at some prior time, but the court appears to assume otherwise.)

Later the Meredith mortgages were replaced and, in one case, increased in size, in connection with retransfers of these mortgages to new parties. Thereafter, both replacement mortgages were transferred again. Again, no one discovered Lenentine’s mortgage.

The court below had found that the holders of these replacement mortgages were equitable subrogated to the original mortgages that the original replacement mortgages had paid off, reasoning, in a manner repeated frequently in many courts, that Lenentine suffered no injury from such subrogation, as it had no equitable expectation that it would vault into first priority over those mortgages unless and until Minzner paid them off.

On appeal: Reversed. Acknowledging that it was unusual to overrule the equitable judgment of a trial court in such matters, the appeals court concluded that the lower court has used the wrong standard. The question was not whether Lenentine would be injured by the subrogation. Lenentine’s equities in that regard were not relevant. The question was whether the lenders seeking subrogation (or - here - their predecessor Meredith) had an “equitable excuse” that would justify setting aside the record priorities. The court held that Meredith had been on constructive notice of Lenentine and that disposed of any equitable arguments it could muster. Negligence of its own lawyer was no excuse.

Comment 1: The editor agrees with the result. Banks ought to look after their own financial dealings very carefully, and we should assume that any actions they take reflect judgments that have made based upon the record. They should not later be able to come into court and claim ignorance of readily discoverable facts. Although Lenentine gets a windfall, the windfall is justified so that the integrity of our record system is observed.

Comment 2: The editor is quick to point out, however, that his views, and the views of this court, represent the distinct minority in this country. The New Hampshire court here, in fact, felt constrained to clarify that the outcome it reached might be in conflict with an earlier case it had decided on similar issues in the past, and overruled that case to the extent it conflicted with the result here.

The majority rule appears to be, that when a lender’s loan proceeds are used to repay a senior lien, the lender, where necessary, will be granted equitable subrogation to that lien where necessary to protect it from junior liens of record of whom the lender has no actual knowledge. Most courts buy the notion that the junior will not be harmed by being left in the same priority position it was in before. Had the junior actually known of the intervening lien, it almost certainly would have bought the notes of the senior lender and left the mortgage in place, and equitable subrogation accomplishes the same result.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 16, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Stacy Woodward at the ABA. (312) 988 5260 or woodwars@staff.abanet.org

Items reported here and in the ABA publications are for general information purposes only and should not be relied upon in the course of representation or in the forming of decisions in legal matters. The same is true of all commentary provided by contributors to the DIRT list. Accuracy of data and opinions expressed are the sole responsibility of the DIRT editor and are in no sense the publication of the ABA.