Bank of America, N.A. v. Citizens Bank
Filing
24
ORDER denying 18 Motion for Summary Judgment; granting 16 Motion for Summary Judgment. So Ordered by Judge Paul J. Barbadoro.(jna)
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW HAMPSHIRE
Bank of America, N.A.
v.
Civil No. 14-cv-455-PB
Opinion No. 2015 DNH 233
Citizens Bank
MEMORANDUM AND ORDER
This case arises from a series of loans issued to nonparty
Linda Burke that were secured by mortgages on Burke’s home (the
“Property”).
Burke defaulted on her loans and her lenders, Bank
of America and Citizens Bank, anticipate they will need to
foreclose on the Property.
Before initiating foreclosure,
however, Bank of America brought this suit to determine which
bank’s lien takes first priority position.
The case is before
me on cross-motions for summary judgment.
I.
BACKGROUND
In May 2005, Countrywide, Bank of America’s predecessor in
interest, loaned Burke $342,000, secured by a mortgage on the
Property.
Doc. No. 16-5 at 1-3.
Countrywide recorded the
mortgage at the Rockingham County Registry of Deeds in first
priority position.
Id. at 1.
Then, in April 2006, Burke
obtained a $150,000 home equity line of credit from Citizens,
also secured by a mortgage on the Property.
4.
Doc. No. 18-5 at 3-
The home equity line was open-ended, meaning that Burke
could “borrow, repay and re-borrow such amounts as desired,
subject to the terms and conditions of the Agreement.”
4.
Id. at
According to its terms, the mortgage securing the equity
line could only be discharged if Burke paid down and terminated
the equity line.
Doc. No. 18-6 at 9.
Citizens recorded its
mortgage in second priority position behind Countrywide’s 2005
mortgage.
Doc. No. 18-5 at 1.
In 2008, Burke negotiated with Countrywide to refinance her
debt on the Property.
During the refinancing process,
Countrywide discovered Citizens’ equity line and requested a
payoff amount in an attempt to close the equity line and
terminate Citizens’ mortgage.
See Doc. No. 16-1 at 2.
On March
21, 2008, Citizens faxed Countrywide a notice requesting
$140,647.18 to close the equity line.
4.
Doc. No. 16-6; 18-1 at 3-
The fax stated that “the payoff” was “valid” through March
28, 2008, and included a notice, which provided:
Any unposted checks or charges that are not included in the
above payoff amount are the responsibility of the customer
upon payoff. The customer is also responsible for the
entire balance on the account regardless of the quoted
payoff amount. If the account is secured by a mortgage,
the mortgage will not be released until the above
conditions are met.
2
Doc. No. 16-6.
The payoff amount included a $250.00 prepayment
penalty and a $17.00 “recording fee” to cover Citizens’ expense
to record the discharge of the mortgage.1
Id.
That same day, Countrywide loaned Burke $417,000, secured
by a mortgage on the Property, in an attempt to discharge and
replace its own 2005 mortgage and pay off Citizens’ equity line.2
Doc. Nos. 16-1 at 1-2; 16-3.
The equity line was not closed
that day, however, and three days later, on March 24, 2008,
Burke borrowed $10,000 more against the equity line.
18-1 at 4.
Doc. No.
Thus, when Citizens finally received Countrywide’s
$140,647.18 check on March 27, 2008, the check was insufficient
to pay off the equity line.
Id.
Citizens nonetheless deposited
The fax also included a place for Burke’s signature, and check
boxes in which Burke could indicate whether she intended to
close the home equity line or keep it open. Burke did not sign
the form at the closing or otherwise indicate that she intended
to close the equity line. Id.
1
There is a discrepancy in the refinancing numbers.
Countrywide’s second loan of $417,000 was insufficient to pay
off both Countrywide’s first loan of $326,986.32 and the home
equity line of $140,647.18. See Doc. No. 16-1 at 1-2; 16-2.
The parties acknowledged at oral argument that another,
unrelated loan was taken out to cover the difference, as
suggested by the HUD statement. See Doc. No. 16-2. Because the
discrepancy does not affect the outcome of this case, I do not
dwell on it here.
2
3
Countrywide’s check, reducing the balance on the equity line to
$8,695.91.
Doc. No. 18-11 at 4.
The equity line remained open
and the mortgage securing it was not discharged.
On April 1, 2008, Citizens notified Burke by letter that it
was unable to close the home equity line.
Doc. No. 16-15.
The
letter requested that Burke pay down the rest of the balance so
that Citizens could “close the account and release the
collateral.”
Id.
Instead of paying off the equity line,
however, Burke continued to borrow against it and later
defaulted on her payment obligations.
8.
See Doc. No. 18-11 at 4-
As of October 2, 2015, Burke owed $154,714.68 on the equity
line.
Doc. No. 18-2 at 1.
Although Citizens accepted Countrywide’s payoff check and
later notified Burke that it could not close the home equity
line, it did not inform Countrywide that the equity line
remained open.
II.
STANDARD OF REVIEW
Summary judgment is appropriate when there is “no genuine
dispute as to any material fact and the movant is entitled to
judgment as a matter of law.”
Fed. R. Civ. P. 56(a).
The
evidence submitted in support of the motion must be considered
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in the light most favorable to the nonmoving party, drawing all
reasonable inferences in its favor.
See Navarro v. Pfizer
Corp., 261 F.3d 90, 94 (1st Cir. 2001).
A party seeking summary judgment must first identify the
absence of any genuine dispute of material fact.
v. Catrett, 477 U.S. 317, 323 (1986).
Celotex Corp.
A material fact “is one
‘that might affect the outcome of the suit under the governing
law.’”
United States v. One Parcel of Real Prop. with Bldgs.,
960 F.2d 200, 204 (1st Cir. 1992) (quoting Anderson v. Liberty
Lobby, Inc., 477 U.S. 242, 248 (1986)).
If the moving party
satisfies this burden, the nonmoving party must then “produce
evidence on which a reasonable finder of fact, under the
appropriate proof burden, could base a verdict for it; if that
party cannot produce such evidence, the motion must be granted.”
Ayala–Gerena v. Bristol Myers–Squibb Co., 95 F.3d 86, 94 (1st
Cir. 1996); see Celotex, 477 U.S. at 323.
On cross motions for summary judgment, the standard of
review is applied to each motion separately.
See Am. Home
Assurance Co. v. AGM Marine Contractors, Inc., 467 F.3d 810, 812
(1st Cir. 2006) (applying the standard to each motion where
cross motions were filed); see also Mandel v. Bos. Phoenix,
Inc., 456 F.3d 198, 205 (1st Cir. 2006) (“The presence of cross5
motions for summary judgment neither dilutes nor distorts this
standard of review.”).
Hence, I must determine “whether either
of the parties deserves judgment as a matter of law on facts
that are not disputed.”
Adria Int'l Group, Inc. v. Ferré Dev.,
Inc., 241 F.3d 103, 107 (1st Cir. 2001).
III.
ANALYSIS
When a lien is discharged, priority rights associated with
the lien ordinarily are lost and the next most senior lienholder
succeeds to the priority position of the lienholder whose lien
was discharged.
(1997).
See Hilco, Inc. v. Lenentine, 142 N.H. 265, 265
If, however, a junior lienholder pays off the senior
lien, the junior lienholder may sometimes invoke the doctrine of
equitable subrogation to skip over intermediate lienholders and
claim the priority rights associated with the discharged lien.
Restatement (Third) of Prop.: Mortgs. § 7.6 (Am. Law Inst. 1997)
(“Restatement of Property”).
The doctrine exists to prevent an
intermediate lienholder from obtaining “an unwarranted and
unjust windfall” that would result if the intermediate
lienholder were to acquire priority rights as a result of a debt
payment made by a junior lienholder.
7.6 cmt. a.
6
Restatement of Property §
In New Hampshire, equitable subrogation applies only when
the following four conditions are satisfied:
(1) [T]he subrogee cannot have acted as a volunteer; (2)
the subrogee must have paid a debt upon which it was not
primarily liable; (3) the subrogee must have paid the
entire debt; and (4) subrogation may not work any injustice
to the rights of others.
Chase v. Ameriquest Mortg. Co., 155 N.H. 19, 27 (2007).
Equitable subrogation is a “broad doctrine” to be given “liberal
application.”
Id.
The subrogee – here, Bank of America – bears
the burden of showing it is entitled to equitable subrogation.3
Id. at 26.
Citizens presents three arguments to support its contention
that Bank of America is not entitled to equitable subrogation.
First, it argues that Bank of America cannot satisfy the
As the Restatement of Property notes, this type of case is
better viewed as a claim for modification and replacement than a
claim for equitable subrogation because a lienholder cannot
technically be subrogated to its own lien. Restatement of
Property § 7.6 cmt. e (“Obviously subrogation cannot be involved
unless the second loan is made by a different lender than the
holder of the first mortgage; one cannot be subrogated to one's
own previous mortgage. Where a mortgage loan is refinanced by
the same lender, a mortgage securing the new loan may be given
the priority of the original mortgage under the principles of
replacement and modification of mortgages.”). This distinction
does not affect my analysis, however, because the result would
be the same regardless of the nomenclature that is used to
describe the claim.
3
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doctrine’s third requirement because it failed to completely
payoff the home equity line.
Next, it argues that Bank of
America cannot satisfy the fourth requirement because Citizens
would be unfairly prejudiced if it lost its priority position.
Finally, it asserts that the doctrine is inapplicable to cases
such as this one because Bank of America’s predecessor had
actual knowledge of the home equity line when it refinanced the
first mortgage.
A.
I address each argument in turn.
Paying Off Citizens’ Entire Debt
It is undisputed that Countrywide paid the entirety of its
2005 mortgage during the refinancing process.
4.
Doc. No. 18-1 at
Nonetheless, Citizens argues that Bank of America is not
entitled to equitable subrogation because it failed to pay off
Citizens’ entire debt.
This argument is unpersuasive because it
focuses on the wrong loan.
The doctrine of equitable subrogation holds that a subrogee
must pay the “entire debt” of the party whose rights it seeks to
succeed.
See Chase, 155 N.H. at 27; Restatement of Property §
7.6 cmt. a (“Where subrogation to a mortgage is sought, the
entire obligation secured by the mortgage must be discharged.”).
This requirement exists to prevent partial subrogation, where a
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subrogee pays only part of the senior lienholder’s debt.4
See
Rabo Agrifinance, Inc. v. Terra XXI, Ltd., 583 F.3d 348, 354
(5th Cir. 2009) (“Where a surety pays only part of a single
debt, he cannot receive rights of subrogation.”).
It does not
follow, however, that a subrogee must also pay the debts of
other lienholders – particularly intervening interests over
which it seeks to gain priority.
See Bilden Props., LLC v.
Birin, 165 N.H. 253, 259 (2013) (granting equitable subrogation
even though the subrogee did not pay any of the debt owed to the
intermediate lienholder).
Here, it is undisputed that Countrywide paid off the first
mortgage during the refinancing process.
Doc. No. 18-1 at 4.
During that same process, Countrywide attempted to pay off
Citizens’ home equity line, but failed, and Citizens’ lien
remained on the Property.
Because Citizens’ lien remains today,
Bank of America now invokes equitable subrogation to essentially
“jump over” Citizens’ lien.
If I were to adopt Citizens’
As the Restatement of Property notes, partial subrogation is
not permitted because it “would have the effect of dividing the
security between the original obligee and the subrogee, imposing
unexpected burdens and potential complexities of division of the
security and marshaling upon the original mortgagee.”
Restatement of Property § 7.6 cmt. a.
4
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argument requiring Bank of America to pay Citizens’ lien off,
there would be no need for equitable subrogation, since there
would be no other lienholders to jump over.
This result makes
no sense, and I accordingly reject Citizens’ argument.
B.
Prejudice to Citizens
Citizens next argues that applying equitable subrogation
would “work an injustice” on its rights.
27.
See Chase, 155 N.H. at
It claims that subrogation would prejudice Citizens by
demoting the priority of its lien, thereby reducing its ability
to recover from Burke.
See Doc. No. 18-1 at 8.
The facts here undermine Citizens’ claim of prejudice.
First, Bank of America is only seeking $326,986.32, the amount
it used to pay off the original Countrywide mortgage, and not
more.5
Doc. No. 16-1 at 3.
Second, Citizens’ priority position
The Restatement of Property recognizes that “there is no right
of subrogation with respect to any excess funds:”
5
Subrogation will be recognized only if it will not
materially prejudice the holders of intervening interests.
The most obvious illustration is that of a payor who lends
the mortgagor more money than is necessary to discharge the
preexisting mortgage. The payor is subrogated only to the
extent that the funds disbursed are actually applied toward
payment of the prior lien. There is no right of subrogation
with respect to any excess funds.
Restatement of Property § 7.6 cmt. e.
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remains the same as it was before the refinancing – no better
and no worse.
Third, Citizens received a $140,647.18 payoff
from Countrywide in 2008 to which it was not otherwise entitled.
It deposited that payoff, yet maintained both its home equity
line and its priority position, giving Citizens a double
benefit.
And fourth, without subrogation, Citizens would
succeed to Countrywide’s 2005 priority position without having
paid Countrywide’s debts, giving it an “unjust and unwarranted
windfall.”
See Restatement of Property § 7.6 cmt. a.
Rather
than prejudice Citizens, this priority windfall would unjustly
enrich Citizens at Bank of America’s expense – an outcome the
doctrine of equitable subrogation was designed to prevent.
See
id.
Citizens does not attempt to refute any of these
contentions.6
Instead, it argues that Bank of America should be
At oral argument, Citizens argued that Countrywide’s
refinancing of Burke’s original mortgage prejudiced it by
increasing Burke’s total indebtedness, making her more likely to
default. This theory of prejudice is too speculative to warrant
relief. It would require me to engage in a series of
assumptions about Burke’s financial status – for example, that
the refinancing increased, rather than decreased, her likelihood
of default – that the parties have not adequately briefed here.
Moreover, if anything, the facts show that Citizens was helped
more than hurt by Countrywide’s refinancing, because Citizens
received a $140,647.18 check from Countrywide to which it was
not otherwise entitled.
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barred from claiming equitable subrogation because its
predecessor was negligent in failing to ensure that the equity
line had been discharged before it proceeded with the
refinancing.
Doc. No. 18-1 at 8-12 (noting Countrywide’s
“sloppy” refinancing).
Our cases make clear, however, that
“negligence on the part of a surety does not invalidate the
right to subrogate.”
Chase, 155 N.H. at 28 (citing Fifield v.
Mayer, 79 N.H. 82, 85 (1918)).
Indeed, the “principle [of
equitable subrogation] is that the lien-holder’s equitable
rights are not infringed, impaired, or in any respect changed by
the mere fact that the other party was negligent....”
79 N.H. at 85.
Fifield,
In other words, Countrywide’s failure to
discharge Citizens’ loan does not by itself prevent subrogation.
C.
Actual Knowledge of the Intermediate Lien
Citizens further argues that Bank of America may not claim
equitable subrogation because Countrywide knew of Citizens’ home
equity line during the refinancing process.
The New Hampshire
Supreme Court has held that constructive notice of another lien
does not bar subrogation, but has not considered a case
involving actual knowledge.
See, e.g., Bilden Props., 165 N.H.
253 (lender had constructive, not actual notice); Chase, 155
N.H. 19 (lender had no notice because of fraudulent deception);
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Fifield, 79 N.H. 82 (constructive notice).
Faced with what it
sees as a gap in controlling law, Citizens urges me to adopt the
majority view among other states that actual knowledge should
bar subrogation.
Bank of America counters that a lender’s
actual knowledge of another lien should be irrelevant, citing
the Restatement of Property.
See Restatement of Property § 7.6.
When a case turns on an unresolved issue of state law, a
federal court must consider whether to certify the issue to the
state court for authoritative resolution.
See VanHaaren v.
State Farm Mut. Auto. Ins. Co., 989 F.2d 1, 3 (1st Cir. 1993)
(“Absent controlling state court precedent, a federal court
sitting in diversity may certify a state law issue to the
state's highest court, or undertake its prediction when the
course the state courts would take is reasonably clear.”)
(internal quotations omitted); N.H. Sup. Ct. R. 34.
Here,
however, neither party has asked the court to certify the
question; expeditious action is required to permit the parties
to proceed with an anticipated foreclosure proceeding; the
amount in dispute is small; and the issue is not one that recurs
often in federal court.
Under these circumstances, the more
reasonable course is to attempt to predict how the New Hampshire
Supreme Court would rule rather than to delay resolution of the
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case by certifying the question.
See Porter v. Nutter, 913 F.2d
37, 40-41 (1st Cir. 1990) (“In diversity jurisdiction, our
function is not to formulate a tenet which we, as free agents,
might think wise, but to ascertain, as best we can, the rule
that the state's highest tribunal would likely follow.”)
(internal quotations omitted).
In my view, the New Hampshire Supreme Court would follow
the approach advocated by the Restatement of Property even
though it represents a minority position among those courts that
have squarely addressed the issue.
The majority rule permits
junior lienholders to invoke equitable subrogation if they
negligently fail to learn of an intermediate lien, but denies
similar protection to lienholders, like Bank of America, who
were aware of an intermediate lien but were arguably negligent
in failing to pay it off.
In both cases, the intermediate
lienholder will receive a windfall unless the junior lienholder
is subrogated to the position of the senior lienholder.
I
cannot conceive of a reason why equity would allow such a
windfall in one case but not the other.
Accordingly, I decline
to adopt a rule that would deny equitable subrogation to junior
lienholders who have actual knowledge of an intermediate lien.
When Bank of America refinanced Burke’s loan in 2008,
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Countrywide “reasonably expected to get security with priority
equal to the mortgage being paid.”
Restatement of Property §
7.6 cmt. e; Doc. No. 16-1, at 9-10.
The fact that it knew of
Citizens’ lien and failed to discharge it is irrelevant.
See
Restatement of Property § 7.6 cmt. e (“[T]he payor's notice,
actual or constructive, is not necessarily relevant”).
As such,
Bank of America is entitled to equitable subrogation, and its
lien retains first priority.
IV.
CONCLUSION
For the reasons stated above, I grant Bank of America’s
motion for summary judgment (Doc. No. 16), and deny Citizens’
motion for summary judgment (Doc. No. 18).
SO ORDERED.
/s/Paul Barbadoro
Paul Barbadoro
United States District Judge
December 21, 2015 2015
cc:
Kenneth D. Murphy, Esq.
Brenna A. Force, Esq.
Geoffrey Williams Millsom, Esq.
Kelly Martin Malone, Esq.
Michael Kily, Esq.
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