Lenders, unfortunately, are confronted with the situation in which the validity or priority of a mortgage is challenged based on a prior mortgage not being paid off due to acts ranging from simple negligence on the part of an attorney, settlement agent or title agent, to forgeries of discharges or some other fraudulent conduct. There are several ways in which lenders and other lienholders may seek to establish the validity or priority of their liens in the face of such claims. Two such methods, and their recent evolution, will be discussed here: equitable subrogation and ratification.

Equitable Subrogation

“When a lender advances money to pay off a mortgage, the new mortgagee may be subrogated to the priority rights of an old mortgagee by assignment or by express agreement with the debtor or creditor.” Metrobank For Sav., FSB v. Nat'l Cmty. Bank of New Jersey, 262 N.J. Super. 133, 143 (App. Div. 1993). When no such assignment or agreement exists, the new lender nonetheless may use the doctrine of equitable subrogation to be subrogated to the priority rights of the old mortgage. “The prototypical situation in which a court will apply the doctrine of equitable subrogation is where a mortgage with priority over other liens on a property is refinanced by a new mortgage used to pay off the outstanding balance on the old mortgage.” Investors Sav. Bank v. Keybank Nat. Ass'n, 424 N.J. Super 439, 444 (App. Div. 2012).

Traditionally, a lender utilizing the doctrine of equitable subrogation has to prove it had no knowledge of the alleged title issue threatening the validity or priority of its mortgage. “[A] mortgagee who accepts a mortgage whose proceeds are used to pay off an older mortgage is equitably subrogated to the extent of the loan so long as the new mortgagee lacks knowledge of the other encumbrances. In that situation, the new mortgagee, by virtue of its subrogated status, can enjoy the priority afforded the old mortgagee.” U.S. Bank, N.A. v. Hylton, 403 N.J. Super. 630, 638 (App. Div. 2008) (citations omitted); see also, Metrobank, 262 N.J. Super. at 143-44 (same). However, “[e]quitable subrogation may still be afforded even though the lack of knowledge on the part of the new mortgagee occurs as a result of negligence.” U.S. Bank, 403 N.J. Super. at 638.