“Get Your Priorities Straight!” Refinanced First Mortgage Maintains Priority Over Junior Liens

by:  Peter J. Gallagher (@pjsgallagher)

New Jersey is a "race-notice" jurisdiction when it comes to mortgage priority. What this means, in its simplest terms, is that if Party A obtains a mortgage on a piece of property before Party B does, but Party B records its mortgage first (i.e., it wins the "race" to the clerk's office), then Party B's mortgage has priority unless Party B had "actual knowledge" of Party A's previously-acquired interest. But what happens when a first mortgage is refinanced? The original mortgage is technically paid off and replaced with the refinanced mortgage. Does this "newly-recorded," refinanced mortgage maintain the first priority status of the original mortgage or does it go to the back of the line? The answer to this question — as discussed in a recent decision from the Law Division, Wells Fargo Bank, NA v. Kim — is that the refinanced mortgage generally takes the original mortgage's first priority position.

In Kim, defendant borrowed $328,000 from Washington Mutual Bank, FA ("WaMu") to buy a home and secured repayment of this loan with a purchase money mortgage on the home. Later, defendant obtained a home equity loan from Plaintiff, Wells Fargo Bank, N.A. ("Wells Fargo") that was also secured by a mortgage on defendant's home. Defendant then refinanced her original, purchase money mortgage with WaMu. Defendant used the entire amount of the refinance loan, which was secured by a mortgage on defendant's home, to pay off the original purchase money mortgage (i.e., she did not borrow and more money through the refinance) and the purchase money mortgage was discharged of record. WaMu did not obtain a subordination of the Wells Fargo mortgage in connection with the refinance.

Approximately three years after the refinancing, defendant defaulted on the Wells Fargo home equity loan, and Wells Fargo moved to foreclose. Defendant did not file a contesting answer and the court entered default against her. However, U.S. Bank Trust, N.A. ("U.S. Bank"), the successor to WaMu's interest in the refinance loan and mortgage, filed a contesting answer claiming that its mortgage stood in first priority position ahead of  Wells Fargo's mortgage.

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In Life, There Are No [Personal] Guarantees (Especially When They Are Buried In An Ambiguous Provision Of A Contract)

by: Peter J. Gallagher (@pjsgallagher)

In a recent unpublished decision, the Law Division refused to enforce a purported personal guarantee in a commercial contract. Individuals and entities that include such guarantees in their contracts with customers should read the decision (or just continue reading below).

In Century Star Fuel Corp. v. Jaffe, defendant entered into a contract with plaintiff whereby defendant obtained a line of credit from plaintiff that defendant could use to purchase heating oil from plaintiff. The one-page contract, which was prepared by plaintiff, contained a single signature line for defendant’s president to sign on behalf of defendant. It also contained what the court described as “boilerplate language” providing the following: “Applicant . . . agrees and acknowledges that the person who signs this Application has the Authority to do so; and Personally Guarantees all present and future extensions of credit.” Defendant was identified as the “Applicant” in the signature line. Plaintiff alleged that this clause was unambiguous and rendered defendant’s president personally liable for defendant’s debts. Defendant disagreed and argued that the clause was unenforceable because its president never intended to be personally bound. Both parties moved for summary judgment. The trial court sided with defendant.

 

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No, You Cannot Enforce A Mortgage That Has Already Been Paid In Full

by: Peter J. Gallagher (@pjsgallagher)

The Appellate Division recently dealt with an unusual situation involving a borrower trying to enforce a mortgage, which had been satisfied years earlier, against a lender that was foreclosing on a different loan. While disputes occasionally arise between lenders regarding which loans have priority over others for the purpose of foreclosure, it is highly unusual for a borrower to attempt to enforce a mortgage, much less one that had been fully satisfied. Nonetheless, this was precisely what the Appellate Division faced in Valley National Bank v. Meier.

The facts of Meier were not disputed. In 1999, the Meiers obtained a loan from Community Bank of Bergen County for $168,000, which was secured by a purchase money mortgage. At the time, Mr. Meier was the president, CEO, and chairman of the board of Community Bank, which later merged with Valley. Six years later, the Meiers obtained a home equity loan from Community Bank that was also secured by a mortgage on the same property. Two years after that, Mr. Meier paid off the original mortgage, allegedly using pre-martial assets to do so. At some point prior to paying off the mortgage, the Meiers divorced. Instead of getting a discharge of the mortgage after paying off the note, Mr. Meier received a written assignment of the mortgage which he subsequently recorded.

 

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