INTERBAY FUNDING, LLC, v. CITIZENS BANK OF MASSACHUSETTS

Plaintiff InterBay initiated this action on July 10, 2007, by filing a complaint seeking a declaration that a mortgage held by Plaintiff and secured by property located at 46 Washington Street in Ayer (Property), has priority over an attachment and execution held by Defendant RBS Citizens (Citizens), as successor to Citizens Bank of Massachusetts. On October 31, 2008, Plaintiff filed a motion for summary judgment. Defendant opposed this motion through a written opposition filed on November 28, 2008. A hearing was held on February 26, 2009, at which all parties were heard. The summary judgment record includes affidavits of Matthew Petraglia, an Underwriting Manager employed by Plaintiff; Marc D. Foley, Esq., closing agent for the mortgage granted to Plaintiff by Robert N. Wilson; and Kevin Boyle, a Division Executive in Citizens Commercial Real Estate Department, in addition to the parties’ briefs and submissions filed in compliance with Land Court Rule 4. The material facts are not in dispute. [Note 1]

Robert N. Wilson, Jr., is the record owner of the Property by deed recorded November 20, 2003, with the Middlesex Southern District Registry of Deeds in Book 41471, at Page 1 (Wilson Deed). Also on November 20, 2003, Mr. Wilson granted a purchase money mortgage on the Property to New Century Mortgage Corporation, securing payment of a thirty year loan in the principal amount of $320,000.00 (New Century Mortgage). [Note 2]

On May 18, 2006, Defendant obtained a prejudgment attachment (Attachment) against “the goods or estate of” Mr. Wilson in the matter of Citizens Bank of Massachusetts v. Robert N. Wilson, Jr., Suffolk Superior Court, C.A. 2006-02068. Defendant had filed suit against Mr. Wilson that day for breach of contract and conversion. [Note 3] Defendant recorded the Attachment with said Deeds on May 19, 2009, in Book 47479, at Page 437.

On June 27, 2006, Mr. Wilson obtained a loan from Plaintiff in the principal amount of $495,000.00, and refinanced the outstanding debt secured by the Property, which included the New Century Mortgage and past-due real estate taxes. This loan was secured by a mortgage on the Property, which mortgage was recorded with said Deeds in Book 47719, at Page 278 (Plaintiff’s Mortgage). In his application for the loan secured by Plaintiff’s Mortgage, Wilson certified that he was not a party to a lawsuit, that there were no outstanding judgments against him, and that Plaintiff’s loan would be secured by a first mortgage on the Property.

Following review of the loan application and other documentation, Plaintiff prepared its “Final Mortgage Approval Terms,” which stated that Plaintiff’s loan was to receive first lien position. Plaintiff also prepared a set of closing instructions (Instructions) which were signed by the closing attorney, Marc D. Foley. The Instructions provided that all liens, judgments, and delinquent taxes were to be paid at closing and that Plaintiff’s loan would take first lien position. Prior to the closing, Plaintiff, through Attorney Foley, obtained a payoff statement for the New Century Mortgage, which showed a payoff amount of $315,107.00. Attorney Foley also obtained a municipal lien certificate showing the past-due taxes on the Property and conducted a title search on the Property, which s did not reveal any liens other than the New Century Mortgage.

On June 28, 2006, by overnight mail, Attorney Foley sent a check in the amount of $315,107.00 to Ocwen Loan Servicing to discharge the New Century Mortgage. A Deed of Release was recorded with said Deeds in Book 48009, at Page 99, on August 18, 2006. Attorney Foley also sent a check in the amount of $15,013.43 to the Town of Ayer to satisfy the outstanding real estate taxes. On March 23, 2007, Citizens caused the recording of an execution against Mr. Wilson in the amount of $233,465.47 (Execution). [Note 4] This action followed and is now before the court on the parties’ cross-motions for summary judgment.

A motion for summary judgment may be granted only where there are no genuine issues of material fact in dispute that would preclude disposition of the case as a matter of law. See Community Nat'l Bank v. Dawes, 369 Mass. 550 , 553-56 (1976). “Rule 56 (c) of the Massachusetts Rules of Civil Procedure...provides that a judge shall grant a motion for summary judgment if the pleadings, depositions, answers to interrogatories, and admissions on file, together with affidavits, if any, show that there is no issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” Attorney General v. Bailey, 386 Mass. 367 , 370-71 (1982) (internal quotations omitted). In reviewing a motion for summary judgment, the court shall not assess “the credibility of witnesses or the weight of the evidence or make its own decisions of facts.” Hub Assocs. v. Goode, 357 Mass. 449 , 451 (1970). The moving party bears the burden of affirmatively showing that there is no triable issue of fact. See Ng Bros. Constr., Inc. v. Cranney, 436 Mass. 638 , 644 (2002).

Plaintiff argues that it is entitled to be equitably subrogated and given first lien position on the Property because Plaintiff’s Mortgage loan proceeds were used to fully satisfy the New Century Mortgage loan and the unpaid real estate taxes. Defendant contends that because it was Plaintiff’s negligence that failed to discover Defendant’s Attachment, Plaintiff is not entitled to equitable subrogation and Defendant is entitled to retain the first lien position on the Property. For the reasons set forth herein, this court agrees with Plaintiff.

Equitable subrogation provides that, “[o]ne 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 Savings Bank v. Ogan, 428 Mass. 327 , 330 (1998). Put another way, “the new mortgage given by a mortgagor, who used the proceeds of the new mortgage to extinguish an earlier mortgage, may receive the same priority once given to the earlier mortgage.” Id.

In determining whether to apply the doctrine of equitable subrogation, the court must establish the following: “(1) [whether] 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, and (5) subrogation would not work any injustice to the rights of the junior lienholder.” Id. The question whether to apply subrogation depends on a balance of the competing interests because “the right to subrogation rests upon equity.” East Boston Savings Bank at 329 (quoting Massachusetts Hosp. Life Ins. Co. v. Shulman, 299 Mass. 312 , 316 (1938)).

In the instant action, Plaintiff was not primarily liable for the debts encumbering the Property, nor did Plaintiff act as a volunteer in this transaction. [Note 5] Plaintiff delivered $315,107.00 to pay off the New Century Mortgage and $15,013.43 to pay off the outstanding real estate taxes due to the Town of Ayer in order to obtain discharges of both debts, and clear title to the Property. Plaintiff expected to have first lien position to the Property. Defendant will not be harmed if Plaintiff is equitably subrogated to the extent of the amounts paid to discharge the New Century Mortgage and the real estate taxes because Defendant was junior to both debts when it first recorded its Attachment against the Property.

Defendant argues that, because it had recorded the Attachment against the Property prior to Plaintiff’s Mortgage, Plaintiff was on constructive notice of Defendant’s interest and, for that reason, is not entitled to equitable subrogation. Defendant points to cases outside this jurisdiction, which stand for the proposition that those with constructive notice are not entitled to equitable subrogation. However, this is not the rule in Massachusetts. The fact that Plaintiff’s title search failed to discover Defendant’s Attachment will not bar recovery if Plaintiff is otherwise entitled to subrogation by the evidence and substantial merits of the case. North Easton Coop. Bank v. MacLean, 300 Mass. 285 , 292 (1938). As Plaintiff has met the elements necessary for equitable subrogation, Defendant should not be entitled to benefit from Plaintiff’s error. If Defendant were correct and this court were to find that Plaintiff should not hold the first lien position, then Defendant would be unjustly enriched by the $330,120.43 Plaintiff paid to discharge the New Century Mortgage and the past due real estate taxes. Indeed, had Plaintiff not discharged these debts, they would have remained encumbrances against the Property superior to Defendant’s interest. By equitably subrogating Plaintiff’s Mortgage, Defendant remains in the same priority position it had previously held and expected.

This court finds and rules that Citizens’ interest as a judgment creditor is subordinate to the mortgage interest of Plaintiff to the extent of the amount advanced by Plaintiff to discharge the New Century Mortgage and the real estate taxes paid to the Town of Ayer.

Judgment to issue accordingly.

Karyn F. Scheier

Chief Justice

Dated: July 27, 2009