BANK OF AMERICA, N.A., successor by merger to BAC HOME LOANS SERVICING, L.P., f/k/a COUNTRYWIDE HOME LOANS SERVICING, L.P. v. MILTON J. MIRANDA, SOLANGE D. MIRANDA, MILTON AUTO SALES, LLC, DIAMOND FINANCIAL, LLC and COMMONWEALTH NATIONAL BANK.

INTRODUCTION

The Plaintiff in this case, Bank of America, N.A. (“BOA”), is seeking equitable subrogation of the mortgage it holds on property located at 18 Eastwood Road, Shrewsbury, Massachusetts. BOA seeks to establish a superior lien position to a mortgage held by Defendant Diamond Financial, LLC (“Diamond”). Diamond and BOA have cross-moved for summary judgment. [Note 1] The cross-motions were taken under advisement following a hearing on August 6, 2013. Now, on the basis of the material undisputed facts demonstrated in the summary judgment filings, I have determined that BOA is entitled to equitable subrogation of its mortgage to the lien priority position of the $330,368.29 mortgage lien paid off by BOA’s predecessor in interest, Equity Advantage, LLC.

UNDISPUTED MATERIAL FACTS

Defendants Milton J. Miranda and Solange D. Miranda purchased the property located at 18 Eastwood Road, Shrewsbury, Massachusetts (the “Property”) on July 31, 2002, and financed 95% of the $302,000 purchase price with a $286,900 mortgage loan from Moneyone Corporation. On August 24, 2004, the Mirandas refinanced with a $336,150 mortgage loan from Argent Mortgage Company, LLC (“Argent”). The Argent mortgage was recorded in the Worcester District Registry of Deeds at Book 34520, Page 185. An instrument dated August 30, 2004, purporting to assign the Argent mortgage and note from Ameriquest Mortgage Company to Mortgage Electronic Registration Systems, Inc. (“MERS”), was recorded in 2006 at Book 37261, Page 93. [Note 2]

Pursuant to a Mortgage and Security Agreement, recorded on June 30, 2006 at Book 39286, Page 256, Milton Auto Sales, LLC, Milton J. Miranda and Solange D. Rosado-Miranda (together defined as the “Borrower”) borrowed $50,000 from Diamond, granting Diamond a mortgage on two premises – the Property and a second property (on which the Miranda’s auto supply business was located) at 603 West Boylston Street in Worcester, Massachusetts. According to Diamond, the loan was “intended to give Milton Miranda short term working capital as he remodeled his auto sales office and established his affiliated cash wire business to Brazil.” The Mortgage and Security Agreement lists the collateral for the loan, as including:

* the two mortgaged premises, and all fixtures, furniture, equipment associated with the operation of a construction business and located at either of the mortgaged premises;

* all easements, covenants, agreements, licenses, permits and rights appurtenant to or benefitting the mortgaged premises;

* all machinery, equipment, furniture, inventory, building supplies and appliances owned by the Borrower and used in the construction, operation, maintenance or occupation of the mortgaged premises;

* all contracts and agreements, leases, licenses, permits and approvals, warranties and representations relative to the above;

* the Borrower’s right, title and interest arising out of any agreement relating to its construction business.

The Mortgage and Security Agreement requires that the Borrower remain the owner of the collateral, free and clear of all voluntary or involuntary liens, encumbrances, attachments, security interests and mortgages of any nature whatsoever, except tax liens and “the Mortgage and security interest created herein.” Exercise of the Statutory Power of Sale is listed as one of nine rights and remedies available to Diamond upon the Borrower’s default under the Agreement.

The Mortgage and Security Agreement specifies that Diamond’s rights “are subject to prior rights of Sovereign Bank and its successor lenders under current or future loans made to acquire assets in the premises, remodel the subject premises or acquire new equipment for use at the premises.” The Agreement contains no reference to, or acknowledgement of, the prior recorded Argent mortgage on the Property. Diamond did not have any appraisal of the Property performed on its behalf, and did not obtain a title policy in connection with its mortgage.

On September 29, 2006, the Mirandas refinanced the Argent mortgage with a mortgage loan from Equity Advantage, LLC (“Equity Advantage”) in the amount of $344,000, secured by the Property. [Note 3] Based on the appraisal conducted as part of the loan application process, the loan amount would have represented approximately 79% of the Property’s $435,000 appraised market value as of September, 2006. In conjunction with the refinancing, $330,368.29 of the Equity Advantage loan proceeds were used to pay off the full balance of the Argent mortgage, resulting in a discharge of the Argent mortgage, dated October 10, 2006 and recorded on October 30, 2006 at Book 40063, Page 370.

The Equity Advantage mortgage was recorded on October 12, 2006 at Book 39953, Page 94. The title search conducted on behalf of Equity Advantage prior to the closing inexplicably did not identify the Diamond mortgage. [Note 4] As there was no subordination of the Diamond mortgage, the Equity Advantage mortgage was recorded behind the Diamond mortgage. The Equity Advantage mortgage was still in a junior lien position when, by instrument dated October 25, 2011, MERS assigned it to BAC Home Loans Servicing L.P. f/k/a Countrywide Home Loans Servicing L.P. (“BAC”).

Plaintiff BOA, as successor to and merger with BAC, is the present holder of the Equity Advantage mortgage. As the Mirandas were in default under said mortgage, BOA initiated foreclosure proceedings. However, the foreclosure proceedings were halted when BOA learned of the prior recorded Diamond mortgage and the lack of any subordination agreement. On December 22, 2011, BOA filed its complaint for equitable subrogation.

DISCUSSION

Diamond and BOA have cross-moved for summary judgment. Their arguments focus on whether or not the test for equitable subrogation set out in East Boston Savings Bank v. Ogan, 428 Mass. 327 (1998) has been fully satisfied so as to permit BOA’s mortgage lien to be placed in the same first lien position as the Argent mortgage had prior to its discharge. For the reasons discussed below, I conclude BOA is entitled to summary judgment in its favor, subrogating BOA’s mortgage to the extent of the mortgage proceeds used to pay off the Argent mortgage.

Equitable subrogation allows for the adjusting of priorities among existing mortgages by granting to a later mortgagee the priority status intended by the parties to the transaction, but only as long as the interests of the intervening mortgagee are not prejudiced. Id. at 329. In the East Boston Savings Bank case, the Supreme Judicial Court recognized that the determination of whether to apply subrogation to adjust mortgage priorities “depends on a balance of the interests of the competing mortgagees….” Id. Such balancing requires the court to examine the actions of the subrogee to determine that: “‘(1) the subrogee made the payment to protect his or her own interests, (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. at 330, quoting from Mort v. United States, 86 F. 3d 890, 894 (9th Cir. 1996).

Diamond makes no assertion that factors (1) through (4) have not been met in this instance. Diamond’s summary judgment arguments, instead, focus solely on factor (5), contending that subrogating BOA to the first lien holder position held by Argent would unjustly prejudice Diamond. Diamond contends that in the five year period between the recording of the Equity Advantage mortgage in October 2006 and the filing of the instant lawsuit in December 2011, the value of the Property has dropped below $300,000 so that, if returned to its initial second lien position, Diamond would have no way of recouping any of the loan balance due under its mortgage once BOA forecloses. Moreover, Diamond asserts that BOA should be barred from seeking equitable relief in the nature of subrogation where it has alternative remedies at law. More specifically, Diamond argues that BOA should look to the title insurance company and the closing attorney’s malpractice insurance to recover any losses it might suffer by retaining second priority status. Indeed, Diamond asserts that Ticor, the title insurer, is the real party in interest in this case and is directing the litigation in order to avoid its obligation to pay out on a title insurance claim.

Diamond’s arguments are unavailing. First, the summary judgment record does not support Diamond’s claims that subrogation would cause it unjust prejudice. Subrogation would merely restore Diamond to its original junior lienholder position behind the Argent mortgage. Moreover, contrary to Diamond’s claim that equitable subrogation would leave it in a far worse financial position than it was when its mortgage was originally recorded is not borne out by the evidence in the summary judgment record. Any reduction in the value of the property as collateral would plainly be the result of real estate market conditions, and not subrogation. As observed in the East Boston Savings Bank case, a second mortgagee accepts risks inherent in that type of security, such as a renewal or extension of time for payment on the first mortgage, which are not necessarily prejudicial to the junior lienholder. 428 Mass. at 331. Here, Diamond took a second mortgage with no guarantee that the property value would increase or stay the same. Thus, if BOA is subrogated to the priority position of the Argent mortgage which secured a debt of over $330,000, Diamond would be in the same position it would have been in if the Argent mortgage had not been discharged. That is, as the holder of a second mortgage behind Argent, its ability to recover its money following foreclosure of the Argent mortgage would still depend on the value of the Property at the time of foreclosure.

A further factor to be considered in evaluating whether subrogation would work an injustice on Diamond’s rights as junior lienholder is that its $50,000 loan was originally secured by more than a second mortgage on the Property. In addition to the Property, Diamond’s mortgage was also secured by the Mirandas’ business property in Worcester, [Note 5] as well as personal property collateral.

Diamond’s other arguments are equally unavailing. The fact that BOA has the benefit of title insurance does not alter its right to equitable subrogation. Subrogation will only give BOA the same mortgage lien priority on the Property as the Argent mortgage had at the time of payoff–leaving BOA with only a $330,368.29 first lien, and not the $440,000 first lien BOA intended when it acquired the Equity Advantage mortgage. Presumably, BOA will pursue other remedies, such as a title insurance claim or a malpractice action, to redress its lost priority on the remaining $110,000.

The undisputed facts in the summary judgment record also do not support Diamond’s contention that BOA should not benefit from subrogation where (a) the closing agents of BOA’s predecessor in interest acted fraudulently or recklessly in failing to have an adequate title search conducted, and (b) BOA negligently failed to have its own title search conducted prior to accepting assignment of the Equity Advantage mortgage. Diamond contends that, at the very least, BOA should be charged with constructive knowledge of the Diamond mortgage, and that such knowledge should be fatal to BOA’s claim for subrogation. However, the Supreme Judicial Court has declined to adopt a bright line rule concerning subrogee knowledge. Even where there is actual knowledge of a prior recorded lien, the court needs to determine if, in the circumstances, “the subrogee acted with sufficient knowledge to merit denying subrogation where it would otherwise be the correct result.” East Boston Savings Bank v. Ogan, 430 Mass at 331.

Here, the undisputed material facts do not support Diamond’s contentions that Equity Advantage acted fraudulently or recklessly when it proceeded with the closing based upon the title reports conducted by its agent. Nor is there anything in the summary judgment record to support Diamond’s contention that BOA acted fraudulently or recklessly in the circumstances. Moreover, any failures of Equity Advantage to ensure a complete and accurate title examination, and any lack of diligence on BOA’s part in failing to conduct a new title examination are immaterial if such failures and/or lack of diligence did not cause Diamond to change its position by, for example, extending further credit to the Mirandas after discharge of the Argent mortgage. Indeed, Diamond, itself does not establish the point of time when it first became aware that its mortgage had ascended to a higher lien priority as a result of the Argent mortgage discharge.

Nor is Diamond’s laches defense supported by the facts. The Equity Advantage mortgage was not assigned to the Plaintiff until two months before this lawsuit was filed. And there is nothing in the record to suggest that Equity Advantage became aware that its mortgage was recorded behind Diamond’s in the period of time between the 2006 closing and the 2011 assignment. BOA’s filing of this lawsuit less than two months after the assignment does not constitute undue delay on its part. And, as discussed above, any potential loss in the Property’s collateral value would be a result of market conditions, rather than the actions of BOA or its predecessor in interest.

CONCLUSION

As noted, Diamond does not dispute that Equity Advantage, and therefore BOA, intended to hold a superior lien priority. It also does not dispute that Equity Advantage paid off the entire balance owing on the Argent mortgage; that it did so to protect its own interest; that it was not acting as a volunteer, and that it was not primarily liable for the debt paid.

Further, the undisputed facts demonstrate that subrogation of the Equity Advantage (now BOA) mortgage to the same priority held by the Argent mortgage (in the amount of the outstanding mortgage balance paid off by Equity Advantage) would not work any injustice to the rights of Diamond as junior lienholder. Diamond would be in the same position after subrogation as it would have been when it originally acquired a second mortgage interest behind the Argent mortgage. Further, Diamond failed to demonstrate that it took any actions (or failed to take any actions) in reliance on Equity Advantage’s failure to learn of the Diamond mortgage. In contrast, Diamond would be unjustly enriched if advanced to a superior lien priority solely due to Equity Advantage’s errors.

Therefore, I find, on balance, that BOA is entitled to be equitably subrogated to the priority position of the Argent mortgage as of the date and time the Argent discharge was recorded, but only to the extent of the $330,368.29 disbursed by Equity Advantage to pay off the Argent mortgage.

Judgment to enter accordingly.