| Arbor Commercial Mtge., LLC v Associates at the Palm, LLC |
| 2012 NY Slip Op 03968 [95 AD3d 1147] |
| May 23, 2012 |
| Appellate Division, Second Department |
| Arbor Commercial Mortgage, LLC,Respondent, v Associates at the Palm, LLC, et al., Defendants, and Bank of Smithtown,Appellant. |
—[*1] Cullen and Dykman LLP, Garden City, N.Y. (Thomas S. Baylis of counsel), forrespondent.
In an action to foreclose a mortgage, the defendant Bank of Smithtown appeals, as limited byits brief, from so much of an order of the Supreme Court, Rockland County (Berliner, J.), enteredApril 21, 2010, as, upon a decision of the same court dated March 10, 2010, granted that branchof the plaintiff's motion which was for summary judgment on the complaint insofar as assertedagainst it, and denied its cross motion for leave to serve an amended answer asserting acounterclaim seeking lien priority pursuant to the doctrine of equitable subrogation or,alternatively, to direct the marshaling of assets.
Ordered that the order is reversed insofar as appealed from, on the law, with costs, thatbranch of the plaintiff's motion which was for summary judgment on the complaint insofar asasserted against the defendant Bank of Smithtown is denied, that branch of the cross motion ofthe defendant Bank of Smithtown which was for leave to serve an amended answer asserting acounterclaim seeking lien priority pursuant to the doctrine of equitable subrogation is granted,and the cross motion is otherwise denied as academic.
On December 13, 2007, the Bank of Smithtown (hereinafter the Bank) loaned the defendantST NY LLC the sum of $8,000,000 to purchase a large parcel of real property in Orange County(hereinafter the Orange County property). Prior to closing, the Bank obtained a title report whichdisclosed that the Orange County property was encumbered by three mortgages. The threemortgages disclosed by the title report secured loans totaling $2,350,000. According to the titlereport, the most senior of the three mortgages was recorded on February 20, 2004, the secondwas recorded on December 6, 2004, and the third was recorded on June 2, 2006. The Bankalleges that all three disclosed mortgages were satisfied with $2,350,000 of the proceeds from itsloan. However, the Bank asserts that its title report failed to reveal the existence of an additionalmortgage which encumbers a portion of the Orange County property, as well as a second parcelof real property situated in Rockland County (hereinafter the Rockland County property). Thisallegedly undisclosed mortgage, which is now held by the plaintiff Arbor Commercial Mortgage,LLC, was given to secure a $1,000,000 loan to the defendants Associates at the Palm, LLC,Beattie R. Associates, LLC, and [*2]Sloatsburg PostDevelopment, LLC (hereinafter collectively the mortgagor defendants). The plaintiff's mortgagewas recorded in the office of the Clerk of the County of Orange on March 6, 2006, approximately19 months prior to the closing on the Bank's loan.
When the mortgagor defendants defaulted on their payment obligations, the plaintiffcommenced this action, seeking to foreclose on the portion of the Orange County property whichsecured its loan, as well as on the Rockland County property, alleging, inter alia, that its lien onthe Orange County property was senior to the Bank's lien. In its answer, the Bank denied that itsmortgage was subordinate to the plaintiff's mortgage, and claimed that it held the first mortgageon the portion of the Orange County property encumbered by the plaintiff's mortgage. Theplaintiff subsequently moved, inter alia, for summary judgment on the complaint insofar asasserted against the Bank, alleging that its mortgage was senior to the Bank's mortgage because itwas recorded first. The Bank cross-moved for leave to serve an amended answer asserting acounterclaim seeking lien priority pursuant to the doctrine of equitable subrogation or,alternatively, to direct the marshaling of assets so as to require the plaintiff to satisfy its lien byfirst foreclosing upon the Rockland County property. The Supreme Court granted the plaintiff'smotion and denied the Bank's cross motion, concluding that the Bank could not invoke thedoctrine of equitable subrogation because it had constructive knowledge of the plaintiff'srecorded lien, and that the Bank's proposed amendment of its answer was, therefore, palpablywithout merit. We reverse.
The doctrine of equitable subrogation applies in New York "where the funds of a mortgageeare used to satisfy the lien of an existing, known incumbrance when, unbeknown to themortgagee, another lien on the property exists which is senior to his but junior to the one satisfiedwith his funds. In order to avoid the unjust enrichment of the intervening, unknown lienor, themortgagee is entitled to be subrogated to the rights of the senior incumbrance" (King vPelkofski, 20 NY2d 326, 333-334 [1967]). The doctrine operates to "erase[ ] the lender'smistake in failing to discover intervening liens, and grants him the benefit of having obtained anassignment of the senior lien that he caused to be discharged" (United States v Baran,996 F2d 25, 29 [1993]). In this manner, equitable subrogation "preserves the proper priorities bykeeping the first mortgage first and the second mortgage second" (Bank of Am., N.A. vPrestance Corp., 160 Wash 2d 560, 565, 160 P3d 17, 20 [2007]), and prevents "a juniorlienor from converting the mistake of the lender 'into a magical gift for himself' " (UnitedStates v Baran, 996 F2d at 29, quoting Long Is. City Sav. & Loan Assn. v Skow, 25AD2d 880, 881 [1966]).
Although the Supreme Court concluded that equitable subrogation was unavailable to theBank because of its constructive knowledge of the plaintiff's prior recorded mortgage, in Kingv Pelkofski (20 NY2d 326 [1967]), the Court of Appeals extended the benefit of the doctrineto the plaintiff mortgagee despite her constructive knowledge of a prior recorded inter vivos trustagreement. The rule that actual notice of an intervening interest bars application of the doctrineof equitable subrogation, but that constructive notice does not, has also been adopted by themajority of States which have considered this issue (see e.g. Hicks v Londre, 107 P3d1009, 1013 [Colo App 2004], affd 125 P3d 452 [Colo 2005]; Bank of New York vNally, 820 NE2d 644, 655 [Ind 2005]; Lamb Excavation, Inc. v Chase Manhattan Mtge.Corp., 208 Ariz 478, 484, 95 P3d 542, 548 [2004]; Eastern Sav. Bank, FSB vPappas, 829 A2d 953, 957-958 [DC 2003]; United Carolina Bank v Beesley, 663A2d 574, 576 [Me 1995]; Dodge City of Spartanburg, Inc. v Jones, 317 SC 491, 495, 454SE2d 918, 920-921 [1995]). Accordingly, the Bank's constructive knowledge of the plaintiff'smortgage is not an absolute bar to application of the doctrine of equitable subrogation (seeKing v Pelkofski, 20 NY2d 326 [1967]; Elwood v Hoffman, 61 AD3d 1073 [2009]). Under thecircumstances of this case, the Supreme Court should have denied that branch of the plaintiff'smotion which was for summary judgment on the complaint insofar as asserted against the Bank,and granted that branch of the Bank's cross motion which was for leave to serve an amendedanswer asserting a counterclaim so as to seek lien priority pursuant to the doctrine of equitablesubrogation. To the extent that our decisions in Bank One v Mon Leang Mui (38 AD3d 809 [2007]), Roth vPorush (281 AD2d 612 [2001]), and R.C.P.S. Assoc. v Karam Devs. (238 AD2d 492[1997]) provide contrary authority, they should not be followed.
In light of our determination, the Bank's alternative contention has been rendered academic.Skelos, J.P., Eng, Belen and Lott, JJ., concur.