In this case, the plaintiffs, BAC Home Loans Servicing, L.P. ("BAC") and BSM Financial, L. P. ("BSM") sought a determination that the mortgage refinance loan they made to defendant Khambao Savankham Kennedy ("Kennedy"), should be binding as well on her adult children, who were also record owners of Kennedy's mortgaged property but were not asked to execute the new mortgage, on the grounds of mutual mistake. The complaint set forth three separate claims for relief: reformation on the basis of mutual mistake; declaratory judgment on the basis of mutual mistake, and quiet title on the basis of mutual mistake. Neither the complaint nor any subsequent pleading through the trial, held before me on March 1, 2016 and April 13, 2016, made any claim for equitable subrogation.
At the conclusion of the trial on April 13, 2016, I afforded the parties thirty days to file requests for findings of fact and rulings of law and other post-trial submissions. [Note 1] By a docket entry on April 13, 2016, the court directed that, "Parties are to file and serve any post-trial memoranda, proposed findings of fact and rulings of law within thirty (30) days, by May 13, 2016, after which the court will take the matter under advisement."
Neither party made any post-trial submissions within the time permitted. In my decision following the trial, dated July 6, 2016, I found that the plaintiffs had failed to prove sufficient facts to support their claim of mutual mistake. The court issued a judgment consistent with the decision, entering judgment against the plaintiffs on all three counts of the complaint. In the decision, I noted that the plaintiffs had made no claim for equitable subrogation, but that since I had raised the issue myself at trial and given the parties an opportunity to address it, I would address that issue in the decision. I did not reach the issue on the merits, however, due to the plaintiffs' failure to make any post-trial submissions on this issue.
Unknown to me at the time I issued the decision, the plaintiffs had sent, via e-mail, their requests for findings of fact and rulings of law, but had done so after the close of business on May 13, 2016, and they have informed the court, and I credit their assertion as true, that they also mailed their submission to the court on May 13, 2016. As e-mail submission is not a permitted manner of filing in the Land Court, and as both the e-mail submission and the mailed submission were made after the permitted time for filing, these filings did not conform to the court's instruction and need not have been considered by the court, even had I known about them. Notwithstanding the plaintiffs' failure to comply with the filing deadline, I acknowledge that I was not aware of either submission at the time I wrote and issued the decision, because the e-mail, coming late, had been missed, and because the mailed submission either never reached the court or was not docketed for some other reason unknown to me. As a result, although I could have disregarded the late-filed submission had I known it was made, the following statement in the decision proved to be incorrect: "I note that even after the issue was raised by the court, the plaintiffs neither sought to amend their pleadings nor did they address a claim of equitable subrogation in any post-trial submissions seeking such relief."
The plaintiffs have moved to amend the judgment, seeking reconsideration of the part of the decision denying their claim (never formally made in an amended complaint) for equitable subrogation. Treating the plaintiffs' motion to amend the judgment in part as a motion to file requests for findings and requests for rulings late, which motion to file late, I ALLOW, I now consider the issue of equitable subrogation on the merits.
Equitable subrogation is a doctrine providing 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." E. Bos. Sav. Bank v. Ogan, 428 Mass. 327 , 330 (1998), quoting Restatement (Third) of Property (Mortgages) § 7.6(a). Within the typical context of a case involving multiple mortgages, the effect of this is that a "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. The party bringing a claim for equitable subrogation must prove that "(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, and (5) subrogation would not work any injustice to the rights of the junior lienholder." Id. (quoting Mort v. U.S., 86 F.3d 890, 894 (9th Cir. 1996)). Equitable subrogation is "a broad equitable remedy and, depending on the individual case, it may apply even where one or more of these factors is absent." Id. at 330.
The evidence established that BSM loaned Kennedy $184,500.00 in a mortgage refinance transaction in 2007, and that $141,660.77 of this amount was used to pay off the balance on a 2003 loan and obtain a discharge of the mortgage securing the 2003 loan. The defendants DeLeon's and Bounphasaysonh's fee interest in the mortgaged property, having been obtained in 2004, after the 2003 refinance, but before the 2007 refinance, was subject to the 2003 mortgage, but became free of any mortgage as a result of the plaintiffs' mistake in paying off the 2003 loan without requiring the two new part-owners of the property to execute the new mortgage. The benefit thus conferred on DeLeon and Bounphasaysonh is the basis of the plaintiffs' equitable subrogation claim.
I credit the plaintiffs' argument, based on the evidence presented, that the first four elements necessary for a finding of equitable subrogation are met, and I so find and rule. BSM paid off the 2003 loan to protect its own interest, it did not do so as a volunteer, it was not liable for the 2003 loan it paid off, and it paid off the entire 2003 loan. However, I am less sanguine about whether the trial record contains sufficient evidence from which I can conclude that the fifth element of the test for application of the doctrine of equitable subrogation has been met. Although the court may act on the basis of a finding that less than all five elements have been met, see id., at 330, under the circumstances of this case, I am reluctant to apply the doctrine without a finding that "subrogation would not work any injustice " Id. Although DeLeon and Bounphasaysonh are fee owners and not junior lienholders, a full consideration of the equities requires this fifth element of the test to be contextually applied to consider the prejudice to additional parties unfairly impacted by the particular circumstances of the case.
The test as set out in East Boston Savings Bank only expressly contemplates a consideration of the prejudice to a "junior lienholder." The test as stated in that case represents a specific application of the general principles of equitable subrogation to a particular context, and does not preclude examination of broader equitable considerations in similar circumstances. Equitable subrogation is not limited to cases involving multiple lienholders, but is more generally applicable to situations where "[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." E. Bos. Sav. Bank v. Ogan, supra, 428 Mass. at 330. Applying this principle where there are multiple mortgages encumbering a property does indeed necessitate consideration of the impact on junior lienholders, but applying it in other contexts may require consideration of prejudice to other parties. Indeed, the fifth element of the test, as expressed in Han v. United States, the case from which the court in East Boston Savings Bank derived its test, recognized the need for this broader evaluation by requiring a showing that, "(5) Subrogation [would] not work any injustice to the rights of others." Han v. United States, 944 F.2d 526, 529 (9th Cir. 1991) (emphasis added); E. Bos. Sav. Bank v. Ogan, supra, 428 Mass. at 330. [Note 2] The scope of this evaluation is in accord with the underlying principle of equitable subrogation that "[i]f the circumstances are such that subrogation to a prior mortgage will relieve the payor, and if no prejudice to any innocent person will result, the payor may have subrogation " See Restatement (Third) of Property (Mortgages) § 7.6, cmt. (d) (1997) (emphasis added). [Note 3] While a junior lienholder may be just such a prejudiced other person, it is possible as well for others to be substantially prejudiced; it would be fundamentally inequitable to ignore the impact on these other innocent interests simply because they hold a fee interest instead of a junior mortgage interest. Accordingly, the flexibility afforded to the application of this "broad equitable remedy" allows the court to consider the injustice to a party other than a junior lienholder, such as a part-owner. E. Bos. Sav. Bank v. Ogan, supra, 428 Mass. at 330. [Note 4]
DeLeon and Bounphasaysonh are part-owners of the fee in the subject property, and thus are not, strictly speaking, "junior lienholders", but with respect to the equitable subrogation analysis, they are in the same position as a junior mortgagee whose interest might be affected by a change in position of a "later in time" mortgage to the priority of an earlier mortgage. Having acquired their interest in 2004, after the 2003 mortgage loan but before the 2007 refinance, the possible subrogation of the 2007 mortgage to the first position of the 2003 mortgage would affect them in the same way it would affect a mortgagee who was second in line to the 2003 mortgage, by making their interest subject to foreclosure, as was the case in East Boston Sav. Bank. Thus, the question for the court is whether application of the doctrine would work any injustice to the rights of DeLeon and Bounphasaysonh, notwithstanding that they may have received a corresponding benefit from the discharge of the 2003 mortgage.
The relevant evidence offered by the plaintiffs is both scant and insufficient. The evidence offered by the plaintiffs is limited to these bare facts: that the earlier loan to which the defendants' interest was subject, was paid off with the proceeds of the 2007 loan in the amount of $141,660.77, and the mortgage securing this debt was discharged. Therefore, the plaintiffs argue, a benefit has been conferred on DeLeon and Bounphasaysonh, and the plaintiffs' mortgage should be subrogated to the position of the prior mortgage to which the defendants' interest was subject.
However, the plaintiffs offered no other evidence at trial concerning the two mortgage loans. The trial record is devoid of information concerning the interest rate on either loan, the monthly payments on either loan, the term of the 2003 loan (the 2007 loan was on a thirty-year amortization schedule), and whether mortgage insurance, insurance escrow or tax escrow, or other non-interest costs were features of either loan. Any of these factors may have affected the relative burden of the two loans. If, for instance, the interest rate and other features of the 2007 loan required significantly higher payments than the corresponding features of the 2003 loan, it may be that subrogating the 2007 mortgage to the position of the 2003 mortgage would work a significant injustice to DeLeon and Bounphasaysonh by subjecting them to significantly stiffer loan obligations than those in the 2003 loan, all imposed without their knowledge of the making of the loan, without their consent to more onerous terms, and without any relative benefit to them from the replacement of the 2003 mortgage with the new mortgage. Showing that subrogating the 2007 mortgage to the position of the 2003 mortgage would not work such an injustice to DeLeon and Bounphasaysonh was the burden of the plaintiffs, and I find that they have failed to meet this burden. Accordingly, as a matter of discretion I decline to apply the doctrine of equitable subrogation as requested by the plaintiffs.
For the reasons stated above, it is
ORDERED that the plaintiffs' Motion to Amend Judgment is DENIED.
[Note 1] Transcript, Vol. II, p. 18.
[Note 2] A significant number of both state and federal courts have implemented a consideration of injustice to the "rights of others" as an element of the test. See, e.g., Caito v. United Cal. Bank, 20 Cal. 3d 694, 704 (1978) In re Hartman, 100 B.R. 46, 48 (D. Kan. 1989); Eastern Sav. Bank v. CACH, LLC, 124 A.3d 585, 590 (Del. 2015); 1313466 Ont., Inc. v. Carr, 954 A.2d 1, 4 (Pa. Super. Ct. 2008); Chase v. Ameriquest Mortg. Co., 155 N.H. 19, 27 (2007); Suntrust Bank v. Riverside Nat'l Bank, 792 So. 2d 1222, 1227 (Fla. App. 4th Dist. 2001).
[Note 3] In formulating the test for equitable subrogation in East Boston Savings Bank, the Supreme Judicial Court relied on §7.6(a) of the Restatement, and it is thus appropriate to interpret the test through the lens of this section. See E. Bos. Sav. Bank v. Ogan, supra, 428 Mass. at 330.
[Note 4] At least one other court has, in applying equitable subrogation, specifically considered the potential prejudice to an owner omitted from a refinancing, even when there is no junior lienholder. See First Am. Title Ins. Co. v. Stevenson (In re Stevenson), Nos. 06-00306, 07-10005, 2008 Bankr. LEXIS 644, at *21 (U.S. Bankr. D.D.C. Mar. 17, 2008) ("To determine whether [the omitted owner] would be prejudiced by equitable subrogation, it is necessary to compare [his] rights as they existed under the Wells Fargo deed of trust with [his] rights today if the court were to subrogate Fremont's successor in interest to Wells Fargo's previously held lien position allowing subrogation would not weaken any position that [he] was induced to take as a result of the Fremont Refinance.")