Opinion
HHDCV106014396S.
11-01-2012
INTERSTATE ADVISOR, LLC v. Neville McCALLA, et al.
UNPUBLISHED OPINION
ROBERT F. VACCHELLI, Judge.
The plaintiff, Interstate Advisor, LLC (Interstate), has pending a foreclosure action wherein it seeks to foreclose on its mortgage on property owned by the defendants, Neville and Norma McCalla. A foreclosure by sale is anticipated. Interstate's mortgage, securing a home equity credit line revolving loan, was recorded on the East Hartford land records on March 2, 2006, by its predecessor in interest, Household Realty Corporation. Interstate claims a first mortgage position for its lien, and it alleged, in its complaint, that the defendant, Mortgage Electronic Registration Systems, Inc. (MERS), holds second and third mortgages that are subsequent in right. MERS claims that its mortgages, recorded later in time on January 8, 2007, nevertheless should have priority. MERS has filed the instant motion for determination of priorities calling upon the court to exercise its equitable powers to effectuate the true intent of the parties and rectify an injustice. For the following reasons, the court grants the motion and it assigns priority to the MERS mortgages over the Interstate mortgage.
I
" 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." Hudson Valley Bank v. Kissel, 303 Conn. 614, 626, 35 A.3d 260 (2012), citing Brown v. General Laundry Service, Inc., 139 Conn. 363, 372, 94 A.2d 10 (1952), vacated on other grounds, 347 U.S. 81, 74 S.Ct. 367, 98 L.Ed. 520 (1954), and Beers v. Hawley, 2 Conn. 467, 469 (1818); accord Independence One Mortgage Corp. v. Katsaros, 43 Conn.App. 71, 73, 681 A.2d 1005 (1996). Nevertheless, MERS argues that the court should determine that its mortgages should hold priority positions over Interstate's mortgage on the grounds of payment and under the doctrines of equitable estoppel, and equitable subrogation. The gravamen of its arguments is that its loans refinanced the plaintiff's loan with the intent that plaintiff's mortgage would be released giving MERS the priority positions.
All three theories rest on various equitable principles designed to prevent injustice. An action in foreclosure is an equitable action. City Savings Bank v. Lawlor, 163 Conn. 149, 155, 302 A.2d 252 (1972). Therefore, such considerations are appropriate. " Because a mortgage foreclosure is an equitable proceeding, the trial court may consider all relevant circumstances to ensure that complete justice is done ... [T]he determination of what equity requires in a particular case, the balancing of the equities, is a matter for the discretion of the trial court." (Citations omitted; internal quotation marks omitted.) Reynolds v. Ramos, 188 Conn. 316, 320, 449 A.2d 182 (1982).
Priority claims in a foreclosure by sale ordinarily are determined by way of supplemental judgment after the sale. General Statutes § 49-27; Voluntown v. Rytman, 27 Conn.App. 549, 556, 607 A.2d 896, cert. denied, 223 Conn. 913, 614 A.2d 931 (1992). A decision determining priorities prior to sale is interlocutory until a sale is approved and the court renders a supplemental judgment. J & E Investment Co., LLC v. Athan, 131 Conn.App. 472, 484, 27 A.3d 415 (2011); Moran v. Morneau, 129 Conn.App. 349, 357-58, 19 A.3d 268 (2011).
II
The court conducted a hearing on these issues on October 22, 2012. It heard testimony from Attorney Danielle Toce, whose office handled the subject refinance closing in 2006; Norma McCalla, defendant; and Neville McCalla. Numerous notes, deeds, records from the closing and other records documenting the events were admitted as exhibits. The parties also filed briefs in support of their respective positions.
The court finds as follows: Neville and Norma McCalla are the owners of a home located at 275 Brentmoor Road, East Hartford, CT. It is their primary residence. In 2006, the property was encumbered by two mortgages. The first was an open end mortgage deed securing a promissory note in the original amount of $285, 000.00 held by Argent Mortgage Company, LLC (Argent). The second was an open end mortgage deed securing a home equity credit line revolving loan agreement with a credit limit of $45, 000.00 held by Household Realty Corporation (Household Realty). That latter mortgage was dated February 7, 2006. It was recorded on the East Hartford land records on March 2, 2006. That latter mortgage was eventually assigned to the plaintiff by an Assignment of Mortgage recorded on the East Hartford land records dated April 22, 2010. That latter mortgage is the one being foreclosed on by the plaintiff in the instant case, and it is the one in issue in the instant motion.
Later in 2006, the McCallas decided to refinance. Due to financial problems, Mr. McCalla did not qualify for a loan, so his wife applied. She qualified for an adjustable rate loan in the amount of $276, 800.00 and a fixed rate loan in the amount of $69, 200 .00 originated by Decision One Mortgage Company, LLC (Decision One). Those loans were intended to refinance the two existing mortgages. In advance of the closing, scheduled for December 29, 2006, Attorney Toce's Office, which was handling the refinance for Decision One, communicated with HFC, agent for Household Realty, to obtain the payoff amount necessary to obtain a release of its mortgage. A release of the mortgage obviously was important in this context because a simple pay-off would not extinguish the debtor's ability to borrow more money on the line of credit. Prudential Home Mortgage Co. v. Johnson, Superior Court, judicial district of New Haven, Doc. No. CV 91-0316455 (April 6, 1993, Vertefeuille, J.). HFC responded that the payoff amount was $31, 861.09, good until January 12, 2007. It further advised that " [W]e will not release any security interest until the account is paid in full ... Please issue a check referencing our account number for $31, 861.09 to HFC for the payoff."
At the closing, a check for payment in full was drawn, dated January 5, 2007, and it was sent to HFC, with a cover letter stating:
With regard to the above-captioned matter enclosed please find a check in the amount of $31, 861.09 [which] represents payment in full of the mortgage account above noted. Please consider this letter written request for the Release of Mortgage, and forward said " RELEASE" to: FirsTrac, LLC, 56 Arbor Street, Suite 220, Hartford, CT 06106. For preparation of the Release, the following is pertinent information obtained from the Land Records: Original Lien to Househole [sic] Realty Corp., recorded in Volume 2709 at page 337 of the East Hartford Land Records.
Cover letter (emphasis in original).
The cover letter also mentioned the fact that General Statutes § 49-8 requires a mortgagee to execute and deliver a Release of Mortgage within sixty days from the date of the request at the risk of liability at the rate of $200.00 per week or the actual loss sustained by the mortgagee, whichever is greater. HFC negotiated the check on January 10, 2007, but did not supply a release.
In the meantime, and unbeknownst to Decision One or its agents, the McCallas asked HFC to keep their line of credit open. They completed a preprinted Home Equity Line of Credit Borrower Instruction Form, dated January 12, 2007, stating: " We ... would like to keep our approved line of credit on the above listed account open and active. Please do not close this account nor release the lien until instructed." HFC accepted the request, and continued to permit the McCallas to borrow against the line of credit. The court does not find any deceit substantiated on the part of the McCallas in submitting the form. They simply needed the money and left it to the financial institutions to make the appropriate arrangements.
The refinance paid off the Argent mortgage, as intended, and, on request, Argent's successor in interest supplied a release dated February 21, 2007, which was recorded in the land records on March 5, 2007. To date, the Household Realty mortgage has not been released. According to Attorney Toce, the service that was engaged to obtain that release repeatedly requested it from HFC, but received no response. She also testified that it is not the practice, in local refinance closings, to obtain a release in advance of closing and hold it in escrow pending disbursement of funds, or to hold funds in escrow pending receipt of the release. The practice is to draw and issue the checks and rely on the parties to comply with the requirements of General Statutes § 49-8 in a timely fashion.
The Household Realty mortgage securing the line of credit was assigned to Interstate on April 22, 2010, and Interstate alleges in its complaint that it holds the note. Hence, Interstate is the plaintiff party in interest in this case. Decision One obtained and recorded its mortgage deeds to secure its notes and recorded them on the land records on January 8, 2007. The mortgage securing the $276, 800.00 loan was recorded first. The mortgage securing the $69, 200.00 loan was recorded second. Those mortgages named MERS as nominee for the lender and the lender's successors and assigns, and made MERS the mortgagee on the mortgage deeds. Hence, MERS is the defendant party in interest in this case.
The foreclosure action was commenced by service on September 7, 2010. A judgment of foreclosure by sale was entered in the case on March 14, 2011, but that judgment was automatically stayed when the McCallas filed for bankruptcy. The Bankruptcy Court granted the plaintiff's motion for relief from the stay, and it has filed a motion to open the judgment to advance the case. In response, MERS filed an Answer with Special Defenses of Payment, Equitable Estoppel and Equitable Subrogation and the instant motion.
III
All of the defenses raised by MERS, and its arguments in the instant motion, are aimed at putting its mortgages ahead of the plaintiff's mortgage in priority. MERS calls upon the court to exercise its equitable powers to rectify the perceived injustice in this case and accomplish that result.
Equity always looks to the substance of a transaction and not to mere form. The court should not in equity permit a lienor, who has not been prejudiced thereby, to acquire priority when that was not the intent of the parties. That equity will act to prevent such a result is clearly established by the great weight of authority. Connecticut National Bank v. Chapman, 153 Conn. 393, 397, 216 A.2d 814 (1966). Errors in obtaining releases during refinancing of debt are classic examples of situations where this problem arises, and where the courts are called upon to restore the intended positions of the parties:
One of the most common mistakes connected with releases of mortgages occurs when the mortgage is renewed and the prior lien is released in ignorance of intervening rights. Ignorance in such a case is regarded in equity as equivalent to a mistake, and relief will be granted when there is no element of estoppel involved. Lomas & Nettleton Co. v. Isacs, supra, at 620. The presumption that one taking a mortgage upon land knows of all prior encumbrances of record affecting it certainly is no stronger than the presumption that one knows the law which determines his rights, yet relief may be given in equity against mistakes of law. Home Owners' Loan Corporation v. Sears, Roebuck & Co., 123 Conn. 232, 242, 193 A. 769; Tiernan v. Savin Rock Realty Co., 115 Conn. 473, 482, 162 A. 11; Bronson v. Leibold, 87 Conn. 293, 298, 87 A. 979; Park Bros. & Co. v. Blodgett & Clapp Co., 64 Conn. 28, 34, 29A. 133.
We have upheld the power of a court of equity to grant relief from the consequences of an innocent mistake, although the mistake was not unmixed with negligence, when the failure to do so would allow one to enrich himself unjustly at the expense of another. Lomas & Nettleton Co. v. Isacs, supra. Whether or not a plaintiff will be barred of remedy in equity against the effect of mistake because of his negligence depends to a large extent upon the circumstances of the particular case. 2 Pomeroy, Equity Jurisprudence (5th Ed.), p. 1045.Connecticut National Bank v. Chapman, supra, 153 Conn. at 397-98
Similarly, under the doctrine of equitable estoppel, " 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." (Citations omitted; internal quotation marks omitted.) Equicredit Corp of Connecticut v. Kasper, 122 Conn.App. 94, 98, 996 A.2d 1243, cert. denied, 298 Conn. 916 (2010). However, equitable subrogation is not available where it would work an inequality. Id.
In the instant case, MERS does not claim that it was ignorant of the plaintiff's mortgage when it refinanced. It was aware of it, paid it off, and requested a release. The failure to obtain the release was caused by plaintiff's predecessor who clearly reneged on the agreement to provide the release after its account was paid in full, it argues. After that account was paid in full, plaintiff's predecessor refused or neglected to comply and, instead, made arrangements with the McCallas to continue the account with priority over MERS without notice to MERS. Equitable subrogation is available to put the refinancer in the position it bargained for in such a case. " It is broad enough to include every instance in which one party pays a debt for which another is primarily answerable, and which, in equity and good conscience, should have been discharged by the latter." (Citation omitted; internal quotation marks omitted.) Home Owner's Loan Corp. v. Sears, Roebuck & Co., 123 Conn. 232, 238 193 A. 769 (1937). " Equitable subrogation allows a person who pays a lien holder to assume the same priority position as the lien holder held. The party paying the lien can step into the place of the paid-off encumbrancer." Prudential Home Mortgage Co. v. Johnson, supra.
Plaintiff argues that equitable subrogation is not applicable in this case because the doctrine is not intended as a means of circumventing the rights of existing lien holders who have properly recorded their mortgage instruments, citing Independence One Mortgage Corporation v. Katsaros, supra. In that case, however, the plaintiff inexcusably failed to detect a mortgage of record, and failed to ask for a release. The prior mortgage holder had done nothing improper. So, equitable subrogation did not apply. Accord, Deutsche Bank Nat'l Trust Co. v. DelMastro, 133 Conn.App. 669, 38 A.3d 166, cert. denied, 304 Conn. 917, 40 A.3d 783 (2012). This case is not similar. This is not a case where MERS inexcusably missed a prior lien plainly and fairly recorded on the land records. This is a case where the plaintiff's predecessor in interest unfairly failed to release a lien required by agreement and law to be released.
Also, plaintiff argues that it should not be held responsible under the payment and equitable estoppel arguments advanced by MERS because, " Other than providing a letter to the [McCallas] of the amount necessary to pay off [their] account, the actions that the defendant MERS is relying upon to establish these two legal concepts were performed by the [McCallas], not the plaintiff." Plaintiff's Brief, p. 4. The argument is not persuasive. Only the plaintiff can release its mortgage, it agreed to do so, and its refusal to comply caused the inequities that the defendant seeks to have the court rectify. The court agrees to do so, and it further finds no mitigating circumstances in favor of the plaintiff that would tip the scales of justice in its favor.
IV
For the foregoing reasons, the court grants the defendant's motion to determine priorities and it assigns priority to the MERS mortgages over the Interstate mortgage in this case accordingly.