Setting Priorities: When You Refinance A First Mortgage, Is It Still A FIRST Mortgage?

by: Peter J. Gallagher (@pjsgallagher) (LinkedIn)

It is a question I have been asked a number of times over the past few years: If a lender refinances an existing mortgage, does the new lender step into the shoes of the old lender in terms of priority? In other words, if you refinance a first mortgage, does it remain a FIRST mortgage or is it a new mortgage that is junior to other mortgages that may have been recorded after the first mortgage? Granted this is not a question as weighty as, say, "what is the meaning of life?" but if you are a lender, it is an important one. I have written about this topic before, but the Appellate Division's recent decision in Ocwen Loan Services, Inc. v. Quinn, added a new wrinkle. In that case, the question was whether a refinanced first mortgage retains its first status over a life estate, as opposed to another mortgage or lien, that was recorded prior to the original mortgage.

In Ocwen, defendants conveyed their residential property to their daughter but retained a life estate in the property. (In other words, the daughter owned the property, but defendants could live there until they died.) One year later, defendants, their daughter, and her husband acquired a loan from plaintiff that was secured by a mortgage on the property. Two years after that, the daughter refinanced the mortgage for a higher amount. The title commitment that plaintiff obtained did not disclose the recorded life estates, so defendants were not required to sign the mortgage. Through the refinancing, the daughter, among other things, paid off the prior mortgage, which defendants had signed.

Two years later, the daughter defaulted on the refinanced mortgage and plaintiff foreclosed. The parties cross-moved for clarification on the status of defendants' life estate. Plaintiff argued that the life estate was subordinate to the refinanced mortgage, meaning defendants could not rely on it to stop the foreclosure. Defendants argued that the foreclosure had to be dismissed because "they did not sign the [refinanced] mortgage nor pledge their life estates in connection with the [ ] loan refinancing."

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NJ Supreme Court Keeps Its Priorities Straight: A Later-Filed Mortgage Can Have Priority Over An Earlier-Filed One

by: Peter J. Gallagher (@pjsgallagher) (LinkedIn)

If you are like me, nothing piques your interest more than a case about the priority of liens and mortgages. I am joking of course. I am not (quite) that boring. But, there are occasionally cases that come along on seemingly dry issues that are nonetheless interesting. The New Jersey Supreme Court's decision in Rosenthal & Rosenthal, Inc. v. Benun is one of those cases. I wrote about the Appellate Division's decision in Rosenthal here, and now the Supreme Court has issued its own opinion, affirming the Appellate Division's judgment.

In Rosenthal, plaintiff was a factoring company (factoring is the sale of accounts receivable at a discount price). It entered into two factoring agreements with several entities owned by Jack Benun and his family (the "Benun Companies"). Each of the factoring agreements was personally guaranteed by defendant, Vanessa Benun, Jack Benun's daughter, and each of her personal guarantees was secured by a mortgage on property she owned in Ocean Township. These mortgages were recorded in 2000 and 2005 respectively. Each mortgage contained both a "dragnet clause" — a provision stating that if the borrower ever becomes liable to the lender on any other loan, the mortgage will also secure that loan — and an anti-subordination clause.

In 2007, after both of the above mortgages were recorded, Ms. Benun gave the law firm Riker Danzig a mortgage on the same property in Ocean Township that secured her personal guarantees on the two factoring agreements. The purpose of this mortgage was to secure payment of almost $1.7 million owed to Riker Danzig by Mr. Benun at that time. After the mortgage was recorded, plaintiff's counsel sent an email to Riker Danzig acknowledging the Riker Danzig mortgage. More importantly, plaintiff also continued to make disbursements to the Benun Companies under the factoring agreements after the Riker Danzig mortgage was recorded and acknowledged by plaintiff.

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High Priority: Sometimes A Later-Filed Mortgage Can Have Priority Over An Earlier-Filed One

by: Peter J. Gallagher (@pjsgallagher)

Another day, another post about mortgage priority. Last week, I posted about how refinancing a first mortgage impacts its priority — click here if you don't remember — and now comes an even more interesting, and more unique, case about mortgage priorities.

In Rosenthal & Rosenthal, Inc. v. Benun, plaintiff was a factoring company (factoring is the sale of accounts receivable at a discount price). It entered into two factoring agreements with several entities owned by Jack Benun and his family (the "Benun Companies"). Each of the factoring agreements was personally guaranteed by defendant, Vanessa Benun, Jack Benun's daughter, and each of her personal guarantees was secured by a mortgage on property she owned in Ocean Township. These mortgages were recorded in 2000 and 2005 respectively. Each mortgage contained both a "dragnet clause" — a provision stating that if the borrower ever becomes liable to the lender on any other loan, the mortgage will also secure that loan — and an anti-subordination clause.

In 2007, after both of the above mortgages were recorded, Ms. Benun gave the law firm Riker Danzig a mortgage on the same property in Ocean Township that secured her personal guarantees on the two factoring agreements. The purpose of this mortgage was to secure payment of almost $1.7 million owed to Riker Danzig by Mr. Benun at that time. After the mortgage was recorded, plaintiff's counsel sent an email to Riker Danzig acknowledging the Riker Danzig mortgage. More importantly for the purpose of the Appellate Division;s decision, plaintiff also continued to make disbursements to the Benun Companies under the factoring agreements after the Riker Danzig mortgage was recorded and acknowledged by plaintiff.

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“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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Enforcement Action Against Rating Agency Allowed To Proceed

by: Peter J. Gallagher (@pjsgallagher)

In an interesting decision issued today, Judge Katz (Essex County) denied a motion to dismiss filed by the ratings agency Standard & Poor's ("S&P") in an enforcement action brought against S&P by the New Jersey Attorney General. In Hoffman v. McGraw-Hill Financial, Inc., the Attorney General alleged that S&P violated the Consumer Fraud Act ("CFA") by misrepresenting to New Jersey consumers that S&P's analysis and rating of structured finance securities was independent and objective. The opinion contains decisions on both procedural personal jurisdiction issues and substantive CFA issues that all litigators should find interesting.

[Lawsuits against ratings agencies are nothing new. Several years ago, I wrote an article about these lawsuits and, at the time, the relative success the rating agencies had defending against them. (If you did not save your copy of the article, click here for another copy.) Historically, the rating agencies argued that their ratings were proetced under the First Amendment, but at least one court rejected this argument in the context of a motion to dismiss in a lawsuit that eventually settled.]

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