Wells Fargo Bank (Plaintiffs) brings this action against National Lumber Company (National) seeking equitable subrogation of the mortgages granted by one David Naginewicz (Naginewicz) to Plaintiff and Defendant.
David Naginewicz is the owner of record of the property located at 116 John Street, Ludlow, Massachusetts. He purchased the property on June 25, 2000, for $95,000.00. On that same day, he granted a mortgage to Option One Mortgage Corp. in the principal amount of $76,000.00.
In 2002, Naginewicz refinanced, discharging his previous mortgage, and granting a new mortgage, secured by the property, for the original principle amount of $105,000.00, to Mortgage Electronic Registration Systems, Inc. (MERS) as nominee for Flagstar Bank, FSB (Flagstar).
On or about June 4, 2002, Naginewicz granted a mortgage to National Lumber in order to secure debts incurred by Yankee-Crafted Home Building, Inc., of which Naginewicz served as president. The debt was the result of a credit line Naginewicz had taken out in the name of Yankee-Crafted Home Building on or about March 26, 2001. In his deposition, Steven S. Kaitz, CEO of National Lumber testified that at the time this mortgage was granted, his office had conducted some form of title search and was under the impression that Nationals mortgage was to be a second mortgage on the property.
In 2003, Naginewicz refinanced again, discharging his mortgage to Flagstar and granting a mortgage in the original principal amount of $133,200.00 to Novastar Mortgage, Inc. (Novastar). In preparation for Novastar to grant the mortgage, National agreed to discharge their initial mortgage and accept the grant of a new, identical mortgage in place of the initial mortgage once the Novastar mortgage closed. The new National mortgage was duly recorded with the registry of deeds on December 2, 2003. This procedure was undertaken to properly subordinate the debt and keep the National mortgage as the second mortgage. The second mortgage did not specify an amount owed to National and instead secured full payment of all current and future obligations to National. Kaitz testified at his deposition, that he and National were still under the impression that they were the second mortgagee at that point.
On or about November 8, 2004, Naginewicz refinanced for the third time, discharging the Novastar mortgage and granting a mortgage to MERS, as nominee for WMC Mortgage Corp. (WMC) in the original principal amount of $200,000.00. This mortgage was duly recorded with the registry of deeds on November 12, 2004.
Gregory Bell (Bell) was the closing attorney representing WMC at the closing of the mortgage. He testified that a title search, completed a week prior to the closing, revealed that existence of the second National Mortgage. According to Bell, he contacted Naginewicz to inquire as to the status of the mortgage and was told that National had discharged the mortgage and accepted a new mortgage at the time of the 2003 refinancing. Naginewicz assured him that they would be willing to do the same for this refinancing, in order to properly subordinate the debt so as to keep the National mortgage in second position. Bell planned to contact National prior to the closing to inquire as to whether they would be willing to discharge their mortgage and accept a new mortgage once again, or to take other steps resulting in subordination of their debt.
Bell did not, however, contact National on the matter, nor did anyone in his office. The closing went as scheduled on November 8, with $135,776.01 of the WMC loan used to pay off the Novastar mortgage. The Novastar mortgage was then discharged with no subordination of the National debt. The National mortgage thus took the place of first mortgage, with the WMC mortgage in the second position. National continued to extend credit to Yankee-Crafted Home Building and Naginewicz. In 2004, Yankee-Crafted and Naginewicz owed approximately $104,625.23 to National and most of those balances were overdue. At that point National became aware that they were now first in the line of mortgages. [Note 1] As such National continued to extend credit to Yankee-Crafted and Naginewicz to the aggregate sum of approximately $199,672.78.
Plaintiff, Wells Fargo Bank, National Association on Behalf of the Certificate Holders of Morgan Stanley ABS Capital I Inc. Trust 2005-WMC2 Mortgage Pass-Through Certificates, Series 2005 (Plaintiff) now moves for summary judgment, contending that its mortgage should have priority over the National mortgage. Plaintiff and Defendant came before me to argue their positions and both have submitted written memoranda in support of their respective positions.
Summary Judgment is granted where there are no issues of genuine material fact, and the moving party is entitled to judgment as a matter of law. Ng Bros. Constr., Inc. v. Cranney, 436 Mass. 638 , 64344 (2002); Mass. R. Civ. P. 56(c). Whether a fact is material or not is determined by the substantive law, and [a]n adverse party may not manufacture disputes by conclusory factual assertions. Ng Bros., 436 Mass. at 648; see Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). With respect to any claim on which the party moving for summary judgment does not have the burden of proof at trial, it may demonstrate the absence of a triable issue either by submitting affirmative evidence that negates an essential element of the opponents case, or by demonstrating that proof of that element is unlikely to be forthcoming at trial. Flesner v. Technical Communications Corp., 410 Mass. 805 , 809 (1991). However, the party opposing summary judgment cannot rest on his or her pleadings and mere assertions of disputed facts to defeat the motion for summary judgment. LaLonde v. Eissner, 405 Mass. 207 , 209 (1976). Here there is no factual dispute. Accordingly, summary judgment may enter as to whether Nationals mortgage must be subordinated to the position of second mortgage by the principles of equitable subrogation with the WMC mortgage elevated to supplant it as first mortgage.
The doctrine of equitable subrogation provides that:
One who fully performs an obligation of another, secured by a mortgage, becomes by subrogation the owner of the obligation and the mortgage to the extent necessary to prevent unjust enrichment. Even though the performance would otherwise discharge the obligation and the mortgage, they are preserved and the mortgage retains its priority in the hands of the subrogee.
East Boston Sav. Bank v. Ogan, 428 Mass. 327 , 330 (1998); quoting Restatement (Third) of Property (Mortgages) s. 7.6(a) (1997).
In this case, subrogation would restore the parties to the position they were in prior to the third and final refinancing of 116 John Street.
In order for the principle of equitable subrogation to apply, the court considers five elements: (1) The subrogee made the payment to protect his or her own interest; (2) the subrogee did not act as a volunteer; (3) the subrogee was not primarily liable for the debt paid; (4) the subrogee paid off the entire encumbrance; (5) Subrogation would not work any injustice to the rights of the junior lien holder.
Option One Mortgage v. Oakhem, citing Ogan, 428 Mass. at 330.
Upon consideration of the evidence and arguments of counsel, I find and rule that all elements are satisfied and that the WMC mortgage, now held by Plaintiffs, should be repositioned to first mortgage with the National mortgage taking its rightful position as second mortgage, as required by the doctrine of equitable subrogation.
WMC (and now Wells Fargo) accepted the refinanced mortgage from Naginewicz to protect their own interests to secure payment of the advanced funds. Because they accepted the new mortgage for their own protection, they did not act as volunteer. According to the testimony of Bell, they were taking over from Novastar what they thought was first mortgage status. They paid off the entire sum owed to Novastar when they discharged the prior first mortgage. In addition, the equitable subrogation would not prejudice National because they were aware that, but for Bells mistake, they were, and would remain, a second mortgagee and should act accordingly.
National argues that in the 2004 refinancing of the mortgage, Bell did not make a mistake, as that term is defined by case law, when he failed to have National discharge their second mortgage in order to subordinate the debt in light of the refinancing of the Novastar mortgage with WMC. National properly asserts that East Boston Savings Bank v. Ogan is the controlling case on this matter but interprets it incorrectly.
National attempts to distinguish Bells mistake from the mistake made in Ogan by asserting that the mistake in Ogan was in not discovering a lien or mortgage, rather than Bells knowing about a mortgage but negligently failing to subordinate the debt as planned. Though it is true that the situations are facially distinct, the underlying principles are the same. An error was made in both situations. [Note 2] The Ogan court chose not to give a bright line definition of how much knowledge the subrogee must have had in order to have made a mistake. Ogan, 428 Mass. 327 at 331. Instead, the court stated that the tenets of equity should guide equitable subrogation rather than the degree of knowledge. Id. The evidence in this case demonstrates that while Bell knew that the National mortgage existed, and that he intended to take steps to subordinate that debt, he simply forgot to follow through. To say that Bells clerical error entitles National to a higher position in the line of creditors would be in direct contravention of equity. Fairness demands that National only receive what they intended: second mortgage position.
National alternatively argues that equitable subrogation of the debt would unduly prejudice them because they lent Naginewicz and Yankee-Crafted additional funds in reliance on their place as first mortgagee. It is true that National extended a large amount of credit to Naginewicz after becoming aware that they were the first mortgage. Unfortunately this only reflects poor judgment on the part of the decision makers at National. According to Kaitz, he believed that the only reason for Nationals positioning as first mortgage was that Bell had made a big mistake. Since he knew that Nationals position was the result of such a mistake, a reasonable way to move forward would have been to alert WMC of said mistake before extending any credit to Naginewicz that they would not have extended had they been in the second position. [Note 3] Therefore any additional credit National extended was simply a risky business judgment on their part and they should bear the cost of such risk. This is especially true here because Kaitz knew that they only achieved first position by mistake.
In rebuttal of Nationals argument, Plaintiff properly cites Provident Co-op. Bank for the assertion that in order to prevent unjust enrichment, each party is entitled to the place they intended to occupy. Provident Co-op. Bank v. Talbot, 358 Mass. 180 , 189 (1970) emphasis added. Kaitz testimony leaves no doubt that National intended to be a second mortgage. The lack of detail on the National mortgage [Note 4], coupled with the discharge and re-mortgage associated with the 2003 refinance of the first mortgage, further illustrates that intent. Likewise, WMC intended to follow in the shoes of Novastar, undisputedly a first mortgagee, who followed Flagstar (a first mortgagee), who followed Option One (a first mortgagee). Instead, due to the mistake by Bell, the priorities were reorganized so that WMC became a second mortgagee despite the fact that they intended to be a first mortgagee. National, who by admission, intended to be a second mortgagee, became first mortgagee. Equitable subrogation is the proper way to reprioritize the debt to the positions each intended to occupy, with the WMC mortgage as first mortgage and National as the second mortgagee. To do otherwise would be to unjustly enrich National.
Plaintiff and Defendant both make arguments here regarding the validity of the dragnet clause. Because equitable subrogation is ordered here, that argument is moot and the court need not examine the merits of the arguments further.
Thereby Plaintiffs motion for summary judgment is GRANTED and equitable subrogation, placing the WMC mortgage held by Plaintiff in the priority position, is ORDERED to the extent of the amount advanced by Plaintiff to discharge the Novastar Mortgage. [Note 5]
Judgment to enter accordingly.
Charles W. Trombly, Jr.
Dated: October 23, 2008
[Note 1] National also took a mortgage to a property in Hardwick, also owned by the management of Yankee-Crafted, and subsequently foreclosed on that property when the owners could not repay the debt secured by that mortgage.
[Note 2] National does not assert any evidence that proves otherwise.
[Note 3] The position they had originally and recently occupied.
[Note 4] As referenced in the facts; there was no monetary amount listed on the National Mortgage. It simply secured a line of credit with National Lumber. Rarely are such mortgages first mortgages.
[Note 5] $135,776.01