Wilshire Credit Corporation v. Shawn J. Passero et al. (2009)

MEMORANDUM OF DECISION

In each of these cases the plaintiff lending institution seeks to foreclose a mortgage on 67 Lake Drive in Montville, Ct. Each lender asserts that its mortgage is entitled to priority over the other's mortgage:  Wilshire Credit asserts that equity requires the subrogation of the RSB Citizens to its mortgage;  RSB Citizens asserts its mortgage was recorded prior in time to the Wilshire mortgage and therefore it is entitled to priority.

CV 085007926.   In July of 2008, Wilshire Credit Corporation filed an action seeking to foreclose a mortgage executed by the defendants, Shawn J. Passero and Katie L. Passero on 67 Lake Drive, Montville, Ct. The mortgage is dated February 17, 2006 and recorded on February 27, 2006 in Vol. 488, page 188 of the Montville Land Records.   Wilshire Credit Corporation alleges it is the assignee of the original mortgagee, Mortgage Lenders Network USA, that the mortgage is in default, that it is the holder of the mortgage and that it has elected to accelerate the balance due on the promissory note underlying the mortgage.   The complaint identified Citizens Bank of Connecticut (now known as RSB Citizens National Association) as holding a mortgage on the property in the amount of $50,000.00.   The RSB Citizen's mortgage, dated May 15, 2005, was recorded on June 9, 2005 in the Montville Land Records at Vol 466, Page 641.   The complaint identifies this mortgage as being prior in right to the mortgage that the plaintiff seeks to foreclose.   A judgment of foreclosure by sale was entered on October 16, 2008.   On December 15, 2008, a motion to reopen the judgment was granted and the Wilshire Credit Corporation made a motion to cite in as a party defendant, Citizens Bank of Connecticut.   In the amended pleadings, Wilshire asserts that the May 15, 2005 mortgage to Citizen Bank should be equitably subrogated to the plaintiff's February 2006 note and mortgage.   RSB Citizens Bank now moves for summary judgment as to the priority of its mortgage over the mortgage held by Wilshire.

CV 08 5009661.   In December of 2008, when it became aware of the challenge to the priority of its mortgage, RSB Citizens filed its own foreclosure action on 67 Lake Drive, Montville, Ct. In this action the plaintiff sought to foreclose the $50,000 mortgage on 67 Lake Drive, Montville, Ct. RSB Citizens alleges that the Wilshire Credit Corporation mortgage is subsequent and subordinate to the mortgage it seeks to foreclose.

In its capacity as a defendant, Wilshire filed three special defenses.   It challenged the validity of the RSB mortgage, it asserted that Wilshire was entitled to equitable subrogation so that its mortgage would be superior in right, even though recorded at a later date, than the RSB Citizens Bank mortgage and it claims that RSB Citzens will be unjustly enriched.   The RSB Citizens Bank, now moves for summary judgment against the Wilshire with respect to the special defenses.

Undisputed Facts

The documents and affidavits filed by the parties in support of and in opposition to these motions for summary judgment agree on these facts.   In 2004 the defendants Katie and Shawn J. Passero acquired title to 67 Lakeview Drive, Montville, Ct. In 2006 the Passeros sought to refinance the existing mortgages on their property on Lake Drive.   They filed an application with the Mortgage Lenders Network USA, Inc. The application filed by the Passeros indicated that the property was subject to two mortgages, one in favor of MERS as Nominee for Mortgage Lenders Network USA, Inc. ($119,000) and one in favor Citizens Bank ($35,000).   The application was granted by Mortgage Lenders Network USA, Inc. for a mortgage in the amount of $165,000, which mortgage was to be a first mortgage on the Lake Drive property.

Prior to closing on the refinance the attorney retained by Mortgage Lenders Network USA Inc. discovered that the Lake Drive property was in fact subject to three mortgages recorded on the Montville Land Records.   The additional mortgage discovered on the land records was the May 2005 mortgage to RSB Citizens Bank. Although this 2005 mortgage to RSB Citizens was discovered by the title search and listed on the title policy, no payoff figures or release of the mortgage were requested.   After the closing, the Mortgage Lenders Network USA, Inc. mortgage on Lake Drive was recorded in the Montville Land Records at Vol. 488 Page 188 on February 27, 2006.   The proceeds of the loan were used to payoff the Mortgage Lenders Network USA mortgage and one of the RSB Citizens mortgages on the property and there was small sum of money disbursed to the Passaros.   The Lenders Network USA loan was subsequently assigned to the Wilshire Credit Corporation by virtue of an assignment dated June 17, 2008 and recorded in Volume 528, Page 393 of the Montville Land Records.

Discussion

Invalidity of the RSB Citizens Bank Mortgage.   The plaintiff has not provided any affidavits or made any legal arguments with regard to its first special defense that the RSB Citizens Bank mortgage is invalid because there is an inadequate description.   The court is satisfied that the description incorporated in the RSB Citizens mortgage complies with the Connecticut Standards of Title 10.1.   Wilshire's first special defense is insufficient.

Equitable Subrogation.   Wilshire Credit Corporation objects to the motion for summary judgment claiming that the undisputed facts in this case entitle it to the right of equitable subrogation.   It argues that its later recorded mortgage should have priority over an earlier recorded mortgage because it would be just to do so.   It argues that when its predecessor agreed to refinance its prior mortgage that it intended to do so in such a way that it would retain its priority in the chain of title.

“The law relating to the priority of interests has its roots in early Connecticut jurisprudence.   A fundamental principle is that a mortgage that is recorded first is entitled to priority over subsequently recorded mortgages provided that every grantee has a reasonable time to get his deed recorded.”   Independence One Mortgage Corp. v. Katsaros, 43 Conn.App. 71, 73 (1996).   “It is presumed that one who takes a mortgage on real estate has knowledge of all prior encumbrances of record affecting it.”   Saving Bank of Manchester v. Dana, Superior Court, judicial district of Tolland, Docket No. CV 96 61038 (1997).

“Equitable subrogation has been applied in certain limited circumstances to rearrange the priorities of parties in a case.   Any such rearrangement is based upon fairness and justice ․ Our Supreme Court has stated that in numerous cases it has been held that one who advances money to discharge a prior lien on real or personal property and takes a new mortgage as security is entitled to be subrogated to the rights under the prior lien against the holder of an intervening lien of which he was ignorant.”  Independence One Mortgage Corp., supra, 73-74.   Thus in order to be entitled to the equitable relief this doctrine allows, the holder of the subsequent mortgage must show that it was ignorant of the intervening lien.

While the Passeros failed to disclose the existence of three mortgages on their property in their application for a refinance of their mortgage, Wilshire's predecessor in title discovered this error prior to the closing of the loan.   The attorney who represented the bank at the closing of this mortgage asserts that in her title search she discovered that there were three mortgages on the Passero's property:  the first mortgage recorded in Volume 434, p. 293 of the Montville Land Records, a second mortgage in favor of the Citizens Bank in the amount of $35,000.00 recorded at Volume 466, p. 636 of the Montville Land Records and immediately thereafter, a third mortgage in favor of Citizens Bank recorded in Volume 466, p. 641 of the Montville Land Records.   The attorney further admits, “although I noted the existence of the third mortgage on my title notes, I did not note the amount of that mortgage.   I combined the recording information for the second and third mortgage on the title insurance commitment issued by me on February 1, 2006, and provided to the original lender prior to recording.”   The attorney also acknowledged that pursuant to her closing instructions she was obliged to establish that the new mortgage would be in the first mortgage position on the property.

The defendant, R.S.B. Citizens Bank, asserts that it properly recorded on the land records notice of its claim of the May 2005 mortgage on the Passero property, that it had nothing to do with the conduct of the attorney who searched the title for the refinance.

Wilshire Credit Corporation cannot in this case rely upon this doctrine of equitable subrogation because, in fact, it had actual and constructive notice of the third mortgage through its closing agent, Attorney Mary Rossetti.   It was not “ignorant” of the existence of the May 2005 mortgage.

Wilshire explicitly recognizes that it is not entitled to equitable subrogation under Connecticut Jurisprudence.  “Wilshire acknowledges that ․ equitable subrogation will not apply where the party seeking equitable subrogation had constructive notice by the recording of the instrument on the land records.”  (Wilshire brief, p. 12.)   Wilshire requests that this court adopt the position of the Restatement (3rd) of Property:  Mortgages.   The position taken by the Restatement is that the actual or constructive knowledge of the intervening lien is irrelevant to the application of the this equitable doctrine.   The Restatement position, however, is clearly at odds with longstanding Connecticut jurisprudence.   The court will not accept Wilshire's invitation.

Based upon the undisputed facts of this case, equitable subrogation does not lie in this case in favor of Wilshire.

Unjust Enrichment.   Finally, Wilshire asserts in its third special defense that RSB Citizens has been unjustly enriched by the Wilshire's payoff of two mortgages that were prior in right to the May 2005 mortgage.   It asserts it is entitled to a “priority over the (RSB Citizens) mortgage to the extent it paid off the First and Second Mortgages.”   Where as here, Wilshire's predecessor in title had actual and constructive notice of the existence of the RSB Citizens mortgage it cannot claim that RSB Citizens has been unjustly enriched by the payoff of the first and second mortgages.   Wilshire's predecessor in title could have refused to fund the closing until a release of the May mortgage was secured or it could have refused to fund the loan.

Conclusion

The motions for summary judgment filed by RSB Citizens Bank are granted.   There is no basis to claim that RSB Citizens Bank has done anything that would reflect unclean hands.

In CV 085007926, Wilshire Credit Corporation v. Shawn Passero, the defendant RSB Citizens Bank motion for summary judgment seeking a determination that its May 2005 mortgage recorded at Vol. 466 Page 641 of the Montville Land Records is prior in right and a superior lien than the plaintiff Wilshire Credit Corporation's mortgage recorded in Vol.488 Page 188 of the Montville Land Records is granted.   The plaintiff is not entitled to relief under the doctrine of equitable subrogation.

In CV 08 5009661, RSB Citizens v. Katie Passero, the plaintiff RSB Citizens Bank's motion for summary judgment with regard to the special defenses filed by the defendant Wilshire Credit Corporation is granted.   The plaintiff's May 2005 mortgage recorded at Vol. 466 Page 641 of the Montville Land Records is prior in right and a superior lien to the Wilshire Credit Corporation's mortgage recorded in Vol.488 Page 188 of the Montville Land Records.

The Court

Cosgrove, J.

Cosgrove, Emmet L., J.