Sovereign Bank v. Gillis
432 N.J. Super. 36
| N.J. Super. Ct. App. Div. | 2013Background
- In 1998, WaMu loaned $650,000 to the Gillises secured by a first-priority purchase-money mortgage.
- In 1998 and later, the Gillises secured second and third liens via Broad, Crown, and Independence lines of credit.
- In 2003, Independence funded a $500,000 line of credit with funds used to discharge Broad and Crown debts; remaining funds partially paid WaMu’s balance.
- WaMu refinanced in 2005, providing $1.19 million to the Gillises; the refinanced mortgage was recorded behind the Independence lien, which remained a lien of record.
- Independence’s line of credit was not closed despite payoff, and Gillises continued to borrow against it until default on both WaMu’s refinanced loan and Independence.
- Deutsche Bank and Sovereign Bank filed separate foreclosures; the trial court granted Sovereign priority over Deutsche’s refinanced loan.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether equitable subrogation can grant priority to WaMu’s refinanced loan over Independence | Deutsche argues for priority under subrogation; WaMu paid off the prior lien and intended discharge. | Sovereign argues subrogation is barred due to actual knowledge and failure to properly close the Independence lien. | Rejected; replacement/modification framework governs priority, not strict subrogation. |
| Whether actual knowledge negates the refinancing lender’s priority under the common law | WaMu should retain priority despite knowledge of Independence. | WaMu’s knowledge should defeat subrogation-based priority. | Overruled; analysis focuses on material prejudice under replacement/modification rather than knowledge. |
| Whether the priority question is properly analyzed under replacement/modification principles | Same-lender refinancing can preserve original priority via replacement/modification. | Traditional race-notice with subrogation exceptions should apply. | Yes; priority governed by replacement/modification approach per Third Restatement guidance. |
| What constitutes material prejudice to the junior lienor in the replacement/modification framework | Cap priority to reflect the preexisting balances and terms; excess funds should not create windfall. | Priority should extend to cover the full refinanced amount. | Materials to be determined on remand; court to cap Deutsche’s priority to avoid prejudice to Sovereign. |
Key Cases Cited
- Investors Sav. Bank v. Keybank Nat’l Ass’n, 424 N.J. Super. 439 (App.Div. 2012) (equitable subrogation when payor pays off prior lien; not unjustly enriched)
- Nelkin v. First Union Nat’l Bank, 354 N.J. Super. 557 (App.Div. 2002) (actual knowledge exception to subrogation)
- Trus Joist Corp. v. Nat’l Union Fire Ins. Co., 190 N.J. Super. 168 (App.Div. 1983) (equitable subrogation principles and priorities)
- Equity Sav. Loan Ass’n v. Chicago Title Ins. Co., 190 N.J. Super. 340 (App.Div. 1983) (subrogation and priority under certain circumstances)
- Abbey v. Washington Mutual Bank, 408 N.J. Super. 527 (App.Div. 2009) (replacement and modification priority when refinancing by same lender)
- Prestance Corp. v. Bank, 160 P.3d 17 (Wash. 2007) (support for Restatement mortgage subrogation approach)