| Elwood v Hoffman |
| 2009 NY Slip Op 02511 [61 AD3d 1073] |
| April 2, 2009 |
| Appellate Division, Third Department |
| William R. Elwood III, Respondent, v Rhonda L. Hoffman,Defendant, and HSBC USA, N.A., Appellant. |
—[*1] Harlem & Jervis, Oneonta (Eric V. Jervis of counsel), for William R. Elwood III,respondent.
Malone Jr., J. Appeals (1) from an order of the Supreme Court (Coccoma, J.), entered July21, 2008 in Otsego County, which, among other things, granted plaintiff's cross motion to strikedefendant Rhonda L. Hoffman's answer, and (2) from an order of said court, entered July 21,2008 in Otsego County, which, among other things, granted plaintiff's cross motion to dismissthe proposed counterclaim and cross claim of defendant HSBC USA, N.A.
Plaintiff and defendant Rhonda L. Hoffman (hereinafter defendant) lived together from 1988until 2006. In 1995, they purchased a vacant piece of property in the Town of Oneonta, OtsegoCounty. Because plaintiff was still legally married at the time of the purchase, title to theproperty was taken in defendant's name alone. Following the finalization of plaintiff's divorce,the property was to be conveyed to the parties jointly. This, however, never occurred. Plaintiffand defendant constructed a home upon the property which was financed with a $45,000 line ofcredit from KeyBank N.A., secured by a mortgage on the subject property. Both plaintiff and[*2]defendant were responsible for repayment of the line of creditunder the loan agreement.
In April 2006, plaintiff and defendant's relationship ended and plaintiff vacated the premises.Thereafter, he commenced this action seeking to impose a constructive trust on the property forthe purpose of selling it and dividing the proceeds. In connection therewith, plaintiff filed anotice of pendency against the property in May 2006. Notwithstanding the notice of pendency,defendant obtained a $85,000 loan from Delta Funding in October 2006, secured by a mortgageon the subject property. A portion of the loan proceeds was used to satisfy the KeyBankmortgage. Defendant HSBC USA, N.A. subsequently acquired the note and mortgage fromDelta.
Thereafter, HSBC moved to intervene in the instant action and included in its proposedanswer a counterclaim and cross claim seeking equitable subrogation with respect to theKeyBank mortgage that it had satisfied. Plaintiff cross-moved to, among other things, dismissHSBC's proposed counterclaim and cross claim and to strike defendant's answer. As defendantdid not contest plaintiff's request for a constructive trust, Supreme Court struck defendant'sanswer, granted judgment in favor of plaintiff and directed that an inquest be conducted todetermine the parties' interests in the subject property (order No. 1). In a separate order enteredthe same day, the court further granted HSBC's motion to intervene, but only to the extent ofallowing it to participate in the inquest, and dismissed its proposed counterclaim and cross claimpremised upon equitable subrogation (order No. 2). HSBC appeals.
HSBC argues that it is entitled to invoke the doctrine of equitable subrogation as acounterclaim to plaintiff's action and that Supreme Court should have permitted it to intervenefor this purpose. Under the circumstances presented, we agree. The Court of Appeals has statedthe doctrine as follows: "Where property of one person is used in discharging an obligation owedby another or a lien upon the property of another, under such circumstances that the other wouldbe unjustly enriched by the retention of the benefit thus conferred, the former is entitled to besubrogated to the position of the obligee or lien-holder" (King v Pelkofski, 20 NY2d326, 333 [1967], quoting Restatement of Restitution § 162). It has been applied insituations, like the case at bar, where "the funds of a mortgagee are used to satisfy the lien of anexisting, known incumbrance when, unbeknown to the mortgagee, another lien on the propertyexists which is senior to his [or hers] but junior to the one satisfied with his [or her] funds"(King v Pelkofski, 20 NY2d at 333-334; see United States v Baran, 996 F2d 25,28 [1993]).
Here, HSBC's predecessor in interest, Delta, provided funds through a second mortgage onthe subject property to pay off a first mortgage securing a loan that both plaintiff and defendantwere obligated to pay. Although plaintiff's notice of pendency had been filed at the time thesecond mortgage was given, it was apparently overlooked by Delta's title agent. Thus, whileDelta had constructive notice of the recorded notice of pendency, it did not have actual notice ofthe same. Based upon the Court of Appeals' decision in King v Pelkofski (20 NY2d at333-334), the presence of constructive notice does not render the doctrine of equitablesubrogation inapplicable where, as here, the notice of pendency, was "unbeknown" to Delta atthe time (see United States v Baran, 996 F2d at 28). We decline to follow those casesholding [*3]otherwise inasmuch as they depart from the Court ofAppeals' decision in King v Pelkofski (supra; see e.g. Bank One v Mon Leang Mui, 38 AD3d 809 [2007];Roth v Porush, 281 AD2d 612 [2001]; R.C.P.S. Assoc. v Karam Devs., 238AD2d 492 [1997]).
Notably, plaintiff would be unjustly enriched if the doctrine of equitable subrogation werenot applied in the case at hand. Plaintiff was personally obligated on the first mortgage loan toKeyBank which was completely satisfied by the subsequent mortgage loan provided by Deltaand assigned to HSBC. Denying HSBC equitable subrogation would provide a windfall toplaintiff by allowing him to have his original mortgage debt extinguished while at the same timemaintain a right to the subject property that is superior to the mortgagee that furnished the fundsthat extinguished the first mortgage. Accordingly, given that HSBC's counterclaim and crossclaim for equitable subrogation have merit, Supreme Court erroneously dismissed them. In viewof this, Supreme Court should not have limited HSBC's intervention to participation in theinquest, but should have permitted it to serve its answer and defend the action (see e.g.Capital Resources Co. v Prewitt, 266 AD2d 176 [1999]).
Mercure, J.P., Peters, Lahtinen and Kane, JJ., concur. Ordered that order No. 1 entered July21, 2008 is affirmed, without costs. Ordered that order No. 2 entered July 21, 2008 is modified,on the law, without costs, by reversing so much thereof as granted that part of plaintiff's crossmotion dismissing the proposed counterclaim and cross claim of defendant HSBC USA, N.A.and as partially denied the motion to intervene; cross motion denied to said extent and motion tointervene granted in its entirety; and, as so modified, affirmed.