534 B.R. 588
Bankr. D. Vt.2015Background
- Douglas and Sandy Jones own and occupy a homestead in Vermont; only Douglas signed a 2007 mortgage to Nationstar, Sandy did not. The mortgage failed to comply with 27 V.S.A. § 141 (spousal-join requirement).
- Loan proceeds ($149,607.50) paid off a prior first mortgage and several secured and unsecured obligations; Nationstar seeks to have portions of its claim treated as secured despite the defective mortgage.
- Parties stipulated the mortgage is voidable under Vermont law; cross-motions for summary judgment asked the court to decide equitable relief (subrogation and unjust enrichment) and classification/amount of Nationstar’s claim.
- The property was appraised at $146,000; Nationstar filed a proof of claim for $153,359.70 and in this adversary limited its secured request to portions of its disbursements.
- The court found no material factual disputes and considered whether equitable subrogation and an equitable lien (unjust enrichment) justify secured status for parts of Nationstar’s claim.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Nationstar is entitled to equitable subrogation for amounts it paid to satisfy prior liens on the homestead | Subrogation shouldn’t apply because lender was negligent/volunteer and statute voids the mortgage | Subrogation applies to let Nationstar step into prior secured creditors’ rights for amounts used to pay liens on the Property | Granted in part: Nationstar subrogated to prior mortgage and tax lien; secured claim of $77,558.26 |
| Whether Nationstar may be subrogated for amounts used to pay debts secured by non-real-property collateral (tractor, car, mobile home) | These sums should not be secured by homestead; subrogation cannot expand prior lien rights | Sought secured status for these disbursements because funds came from the loan on the homestead | Denied: subrogation limited to rights of prior lienholders; cannot create greater security than existed — these amounts are not secured by the homestead |
| Whether Nationstar is entitled to an equitable lien (unjust enrichment) on the homestead for the remaining disbursements used to pay other secured debts | Deny equitable lien because lender failed to obtain spouse’s signature and could have avoided the mistake; homestead statute’s purpose must be preserved | Grant an equitable lien to prevent unjust enrichment because plaintiffs benefitted from those funds | Granted in part: court imposed a limited equitable lien equal to one-third of the remaining disputed amount ($14,293), balancing benefit to plaintiffs against lender’s lack of diligence and statutory purpose |
| Final classification and amounts of Nationstar’s claim in bankruptcy | Plaintiffs treated Nationstar as wholly unsecured and oppose securing additional sums | Nationstar sought partial secured treatment totaling more than prior liens | Judgment: Nationstar’s claim allowed as secured $91,851.26 and unsecured $61,508.44 (total claim $153,359.70) |
Key Cases Cited
- GMAC Mortg., LLC v. Orcutt, 506 B.R. 52 (D. Vt. 2014) (articulates a four-part equitable subrogation test and supports subrogation where lender paid prior liens to protect its collateral interest)
- Nationwide Mut. Fire Ins. Co. v. Gamelin, 786 A.2d 1078 (Vt. 2001) (recognizes equitable subrogation and its purpose to make whole a secondarily liable party compelled to pay a debt)
- Chase v. Ameriquest Mortg. Co., 921 A.2d 369 (N.H. 2007) (permitting subrogation even where lender paid another’s mortgage to protect its interest)
- Ripton v. McQuivey’s Adm’r, 17 A. 44 (Vt. 1889) (historical Vermont authority refusing equitable lien where claimant failed to exercise due diligence in title inquiry)
- Red River State Bank v. Reierson, 533 N.W.2d 683 (N.D. 1995) (limits equitable lien where imposing it would undermine the purpose of a state homestead statute)
- Mercier v. Partlow, 546 A.2d 787 (Vt. 1988) (describes homestead statute purpose: protect family home from creditors)