WILMINGTON SAVINGS FUND SOCIETY, FSB, ETC. VS. 61 HOLDINGS, LLC (F-024262, BERGEN COUNTY AND STATEWIDE)

NOT FOR PUBLICATION WITHOUT THE
APPROVAL OF THE APPELLATE DIVISION
This opinion shall not "constitute precedent or be binding upon any court." Although it is posted on the
internet, this opinion is binding only on the parties in the case and its use in other cases is limited. R. 1:36-3.

SUPERIOR COURT OF NEW JERSEY
APPELLATE DIVISION
DOCKET NO. A-1971-17T4

WILMINGTON SAVINGS FUND
SOCIETY, FSB, DOING BUSINESS
AS CHRISTIANA TRUST, NOT IN
ITS INDIVIDUAL CAPACITY,
BUT SOLEY AS TRUSTEE FOR
BCAT 2015-14BTT,

Plaintiff-Appellant,

v.

61 HOLDINGS, LLC,

Defendant-Respondent.
_______________________________

Argued January 7, 2019 – Decided July 12, 2019

Before Judges Sumners and Mitterhoff.

On appeal from the Superior Court of New Jersey,
Chancery Division, Bergen County, Docket No. F-
024262-16.

John E. Brigandi argued the cause for appellant
(Knuckles Komosinski & Manfro LLP, attorneys; John
E. Brigandi, on the briefs).
 Stephen McNally argued the cause for respondent
(Chiumento McNally, LLC, attorneys; Stephen
McNally and Paige M. Bellino, on the briefs).

PER CURIAM

Plaintiff Wilmington Savings Fund Society, FSB, doing business as

Christiana Trust, not in its individual capacity, but solely as Trustee for BCAT

2015-14BTT ("Wilmington Savings"), appeals Judge Edward A. Jerejian's

December 7, 2017 and December 12, 2017 orders denying its motion for

summary judgment, granting defendant 61 Holdings, LLC's ("61 Holdings")

cross-motion for summary judgment, and dismissing the complaint with

prejudice. We affirm, substantially for the reasons set forth in Judge Jerejian's

thorough written opinion, adding only the following comments.

This case arises from a dispute between Wilmington Savings, holder of a

$25,000 line of credit note issued to previous owner Robert Polesovsky ("the

borrower") by Fleet National Bank ("Fleet"), and 61 Holdings, third-party

purchaser of the property from Wells Fargo Bank ("Wells Fargo"), holder of a

note and mortgage given by the prior owner to World Savings Bank, FSB

("World Savings"), in the amount of $220,000.

After the borrower's default, Wells Fargo commenced a foreclosure action

and ultimately obtained a judgment against Polesovsky. Wells Fargo was the

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successful bidder at the sheriff's sale, and thereafter sold the property to 61

Holdings. 61 Holdings recorded its deed with the Bergen County Clerk's Office

on August 11, 2016. Wilmington Savings, holder of the other note and mortgage

on the property, instituted the instant foreclosure action against 61 Holdings on

or about September 1, 2016.

Background

On April 12, 2004, Polesovsky executed a promissory note and mortgage

in favor of World Savings Bank, FSB, in the amount of $220,000. The mortgage

was secured by the property located on Overpeck Avenue in Ridgefield Park

("the subject property"). World Savings recorded its mortgage on January 27,

2005. Thereafter, World Savings assigned its note and mortgage to Wells Fargo.

On July 2, 2004, the borrower executed a line of credit note and mortgage

in favor of Fleet in the amount of $25,000. Fleet's mortgage was also secured

by the subject property. Bank of America, N.A., s/b/m 1 Fleet National Bank

subsequently assigned the note and mortgage to Wilmington Savings.

Wilmington Savings' mortgage was recorded on August 3, 2004.

Although Fleet's loan was recorded first, it was granted second in time and

thus Wells Fargo's predecessor had no constructive or actual knowledge of the

1
Successor by merger.
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second loan at the time its loan was originated. In that regard, Wells Fargo

produced its loan origination file in discovery, which showed the borrower did

not disclose that he had taken out a line of credit loan with Wilmington Savings.

On December 15, 2009, Wells Fargo initiated a foreclosure action against

the borrower. Neither Wilmington Savings nor Fleet as its predecessor in

interest was named as a defendant. After final judgment was entered against the

borrower, Wells Fargo bought the property at a sheriff's sale for $100. On or

about June 1, 2016, Wells Fargo sold the property to 61 Holdings for $175,000.

On August 11, 2016, 61 Holdings recorded its deed with the Bergen County

Clerk's Office.

Pertinent to the issues on appeal, before purchasing the property from

Wells Fargo, 61 Holdings' title insurance company conducted a title search of

the property, which indicated that Wilmington Savings' mortgage remained an

open lien. The title company then provided an amended title commitment in

connection with the purchase of the property, which omitted Wilmington

Savings' mortgage as an exception to its title policy based on an indemnification

letter dated November 3, 2015, with respect to the Wilmington Savings'

mortgage. Based on the reference to Wilmington Savings' mortgage on both the

initial title search and the indemnification letter, Wilmington Savings argues

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that 61 Holdings had actual notice of an open lien on the property and therefore

should be denied equitable relief. Rejecting that argument, Judge Jerejian found

that 61 Holdings justifiably relied on the amended title commitment in its belief

that the Wilmington Savings loan did not remain as an open lien against the

property.

In contrast, the judge found that Wilmington Savings did know of Wells

Fargo's mortgage. The judge drew a negative inference presuming that

Wilmington Savings' predecessor had knowledge of Wells Fargo's mortgage,

opining that:

[Wilmington Savings]'s argument that Fleet National
had no knowledge of the loan granted by World Savings
Bank is a self-serving assertion unsupported by any
evidence. The loan granted by World Savings Bank
was executed on April 12, 2004, well before
[Wilmington Savings'] [m]ortgage[,] which was not
executed until July 2, 2004 . . . . [Wilmington Savings]
was unable to produce the loan origination file [2] in

2
A loan file, if maintained in the regular course of business, should include an
application completed and signed by the borrower and identifying any existing
debts, including those secured by a mortgage on the property. Therefore, the
court found the borrower would have disclosed Wells Fargo's mortgage given
that it was originated approximately three months before the execution of the
Wilmington Savings' mortgage.
Wilmington Savings produced only the note, mortgage, assignments of
mortgage, notice of intention to foreclose, and screen shots showing the
foreclosure charges and the property preservation fees allegedly incurred since
the supposed default.

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 response to [61 Holdings'] request. In a supplemental
certification in response to a request made by the court,
[Wilmington Savings] certified that it had produced all
of the loan documents in its possession and did not have
the complete loan origination file. Such a loan
origination file would include the application of the
borrower . . . [and] would indicate whether the borrower
disclosed a prior mortgage or encumbrance to the junior
lender, thereby barring the protection of New Jersey's
Recording Act. . . . . Accordingly, because
[Wilmington Savings] failed to produce the loan file,
[61 Holdings] is entitled to a favorable inference that
[Wilmington Savings] had actual knowledge of the
prior loan at the time of the loan's origination. As a
result, equity demands that Wells Fargo's interest be
deemed greater than that of [Wilmington Savings].

The judge noted that as Wilmington Savings' predecessor had actual knowledge

of Wells Fargo's mortgage, Wells Fargo's mortgage would have priority

notwithstanding the fact that Wilmington Savings' mortgage was recorded first.

See N.J.S.A. 46:26A-12(b). Beyond this, the court found that Wilmington

Savings could not prove a lack of prejudice because its predecessor never had

an expectation of having a first lien on the property.

On December 7, 2017, Judge Jerejian entered two orders, one denying

Wilmington Savings' motion for summary judgment and the other granting 61

Holdings' cross-motion for summary judgment. In his accompanying written

opinion, the judge concluded that (1) Wells Fargo was entitled to equitable

subrogation of Wilmington Savings' interest; (2) 61 Holdings was entitled t o

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step into the shoes of Wells Fargo; and (3) 61 Holdings was permitted to

foreclose Wilmington Savings' interest in a strict foreclosure action. On

December 12, 2017, the judge entered an amended order clarifying that

Wilmington Savings' complaint was dismissed with prejudice. This appeal

ensued.

The parties' arguments

On appeal, Wilmington Savings contends that 61 Holdings, as a third-

party purchaser with actual knowledge of the outstanding lien on the property,

cannot resort to the doctrine of equitable estoppel to gain priority. At the outset,

Wilmington Savings contends that 61 Holdings is an ordinary purchaser and not

a mortgagee who paid off a senior lien, and thus is not an entity entitled to

equitable subrogation as a matter of law. Wilmington Savings contends that

because its loan appeared on the initial title commitment obtained by 61

Holdings prior to consummating the sale, 61 Holdings should be found to have

affirmatively taken the risk that there was a cloud on the title. Further, with

respect to Wells Fargo, Wilmington Savings asserts that it is entitled to priority

because its loan was recorded first.

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 Finally, although raised for the first time on Wilmington Savings' reply, it

contends that the trial court abused its discretion in drawing a negative inference

against it for failure to produce its loan origination file.

Standard of review

We review a trial court's grant of summary judgment de novo. Conley v.

Guerrero, 228 N.J. 339, 346 (2017) (citing Templo Fuente De Vida Corp. v.

Nat'l Union Fire Ins. Co. of Pittsburgh, 224 N.J. 189, 199 (2016)).

[W]hen deciding a motion for summary judgment under
Rule 4:46-2, the determination whether there exists a
genuine issue with respect to a material fact challenged
requires the motion judge to consider whether the
competent evidential materials presented, when viewed
in the light most favorable to the non-moving party in
consideration of the applicable evidentiary standard,
are sufficient to permit a rational factfinder to resolve
the alleged disputed issue in favor of the non-moving
party.

[Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520,
523 (1995).]

"[S]ummary judgment will be granted if there is no genuine issue of material

fact and 'the moving party is entitled to a judgment or order as a matter of law.'"

Conley, 228 N.J. at 346 (quoting R. 4:46-2(c)).

"The only material issues in a foreclosure proceeding are the validity of

the mortgage, the amount of the indebtedness, and the right of the mortgagee to

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resort to the mortgaged premises." Great Falls Bank of Pardo, 263 N.J. Super.

388, 394 (Ch. Div. 1993); see also Thorpe v. Floremoore Corp., 20 N.J. Super.

34, 37 (App. Div. 1952). ("Since the execution, recording, and non-payment of

the mortgage were conceded, a prima facie right to foreclosure was made out.").

If a defendant's answer fails to challenge the essential elements of the

foreclosure action, a plaintiff is entitled to strike the defendant's answer. Old

Republic Ins. Co. v. Currie, 284 N.J. Super. 571, 574 (Ch. Div. 1995).

Absent a genuine issue of fact, we must determine whether the trial court's

rulings on legal issues were correct. Walker v. Atl. Chrysler Plymouth, 216 N.J.

Super. 255, 258 (App. Div. 1987). We review evidentiary rulings under an abuse

of discretion standard while we review the legal conclusions that support the

summary judgment ruling de novo. See Estate of Hanges v. Metro. Prop. & Cas.

Ins. Co., 202 N.J. 369, 385 (2010).

The trial court's findings based on an adverse inference

Judge Jerejian determined that Wells Fargo had a basis to assert priority

over Wilmington Savings' mortgage based on equitable subrogation. The judge

determined subrogation was appropriate in light of the fact that Wilmington

Savings' predecessor, Fleet, had actual knowledge of Wells Fargo's mortgage.

Thus, Fleet understood that its lien would be subject to the Wells Fargo

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mortgage, and could not show prejudice because it never had an expectation of

having a first priority position.

The judge reached this conclusion after drawing a negative inference as

to Wilmington Savings' knowledge of the Wells Fargo mortgage: "[Wilmington

Savings'] inability to produce the loan origination file thus raises the inference

that exposure of the facts that would be contained therein would be unfavorable

to its position." Central to that conclusion was Wilmington Savings' failure to

produce its loan origination file, which would have revealed whether the

borrower disclosed Wells Fargo's predecessor's loan which had been executed

almost three months earlier. That issue in turn was critical to resolution of the

priority dispute because, had the application shown the borrower did disclose

the Wells Fargo loan, Wells Fargo would enjoy first-place priority

notwithstanding the fact that Wilmington Savings' predecessor recorded its

mortgage first. See N.J.S.A. 46:26A-12(b).

It is well-settled that "failure of a party to produce before a trial tribunal

proof which, it appears, would serve to elucidate the facts in issue, raises a

natural inference that the party so failing fears exposure of those facts would be

unfavorable to him." State v. Clawans, 38 N.J. 162, 170 (1962) (citing 2

Wigmore on Evidence, § 285 (3d ed. 1940)). This principle applies to civil as

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well as criminal trials. Id. at 171(citing 2 Wigmore on Evidence §§285, 290 (3d

ed. 1940) (other citations omitted). In this case, whether the borrower disclosed

to Fleet as Wilmington Savings' predecessor the existence of the prior loan was

a fact uniquely within Wilmington Savings' control. Moreover, no reasonable

explanation was provided to explain the non-production of the loan application,

a document that is kept in the normal course of business as part of a loan

application file, signed by the borrower and identifying any outstanding liens on

the property. Under these facts, we find the judge did not abuse his discretion

in drawing the inference that Wilmington Savings knew of the prior loan.

Whether Wells Fargo was entitled to equitable subrogation

Relatedly, Wilmington Savings asserts that the trial court erred in finding

Wells Fargo's lien had priority, noting that its mortgage was recorded months

before that of Wells Fargo's predecessor.

Our scope of review of a trial court's decision to apply an equitable

doctrine is limited. Ocwen Loan Services, LLC v. Quinn, 450 N.J. Super. 393,

397 (App. Div. 2016). A decision to apply equitable subrogation is left to the

sound discretion of the trial judge, and we will not substitute our judgment for

that of the trial judge in the absence of a clear abuse of discretion. Ibid.

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 New Jersey is a race-notice state with respect to mortgaged properties.

See Palamarg Realty Co. v. Rehac, 80 N.J. 446, 454 (1979). In that regard,

N.J.S.A. 46:26A-12(b) provides that "[a] claim under a recorded document

affecting the title to real property shall not be subject to the effect of a document

that was later recorded or was not recorded unless the claimant was on notice of

the later recorded or unrecorded document." As a corollary to the rule, parties

are generally charged with constructive notice of instruments that are properly

recorded. Friendship Manor, Inc. v. Greiman, 244 N.J. Super. 104, 108 (1990).

Despite the general rule prioritizing first-recorded mortgages, New Jersey

courts have applied the doctrine of equitable subrogation to ameliorate the harsh

consequences of the recording act. See Sovereign Bank v. Gillis, 432 N.J.

Super. 36, 44-45 (App. Div. 2013). The doctrine of equitable subrogation is

"highly favored in the law." Culver v. Ins. Co. of N. Am., 115 N.J. 451, 456

(1989). It is rooted in principles of equity, compelling "the ultimate discharge

of an obligation by the one who in good conscience ought to pay it." US Bank,

NA v. Hylton, 403 N.J. Super. 630, 637 (Ch. Div. 2008) (quoting First Union

Nat'l Bank v. Nelkin, 354 N.J. Super. 557, 565 (App. Div. 2002)).

"[A] mortgagee who negligently accepts a mortgage without knowledge

of intervening encumbrances will subrogate to a first mortgage with priority

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over the intervening encumbrances to the extent that the proceeds of the new

mortgage are used to satisfy the old mortgage." Inv'rs Sav. Bank v. Keybank,

424 N.J. Super. 439, 443 (App. Div. 2012) (quoting Trus Joist Corp. v. Nat'l

Union Fire Ins. Co., 190 N.J. Super. 168, 179 (App. Div. 1983)). Equitable

subrogation ensures "that the holders of the intervening encumbrances not be

unjustly enriched at the expense of the new mortgagee." Id. at 444 (quoting

Trust Joist, 190 N.J. Super. at 179) .

Historically, equitable subrogation has been unavailable to a new lender

who has actual knowledge of an intervening second mortgage. Gillis, 432 N.J.

Super. at 45. More recently, however, courts have rejected the historical

approach, finding that "the lender's actual knowledge of an intervening loan is

not a bar to its reliance upon equitable principles of priority." Id. at 49-50. As

we noted in Gillis, "[a]s we recently highlighted in [Inv'rs Sav. Bank,] the Third

Restatement has repudiated the traditional majority approach and recommends

that subject to certain other factors, 'subrogation can be granted even if the payor

had actual knowledge of the intervening interest.'" Id. at 46 (quoting

Restatement (Third) of Property: Mortgages, § 7.6 cmt. e, illus. 26 (Am. Law

Inst. 1997)).

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 Under the facts of this case, however, there is no need to directly address

the issue of the actual-knowledge bar. That is so because, as the trial judge

found, Fleet's mortgage was not an "intervening" mortgage as is the typical

scenario in cases involving equitable subrogation. Rather, there is no dispute

that although it was first-recorded, Wells Fargo's predecessor World Savings'

loan was executed months before. Thus, Judge Jerejian determined:

[W]hile [Wilmington Savings' mortgage] was recorded
first, it was granted second in time and thus Wells
Fargo's predecessor in interest had no constructive or
actual knowledge of this second loan at the time its loan
was originated. In fact, [61 Holdings] has produced
evidence, . . . demonstrating that [borrower] did not
disclose the [Wilmington Savings'] [m]ortgage.
Further, even if Wells Fargo’s predecessor in interest
had knowledge of the Fleet National loan, in the context
of replacement, "the lender’s actual knowledge of an
intervening loan is not a bar to its reliance upon
equitable principles of priority." [Gillis], 432 N.J.
Super. at 49-50. As the World Savings Bank loan was
utilized to pay off the satisfied mortgage, it was
reasonable for World Savings Bank to rely upon
traditional, equitable principles of priority and expect
that its interest would be in "first place." Unjust
enrichment would thus result if the interest held by
[Wilmington Savings] were to be vaulted past the
interest held by [61 Holdings] solely by virtue of it
being first to record. Such a result would contradict the
very purpose behind the doctrine of equitable
subrogation.

[(Emphasis added).]

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 We conclude that the judge's factual findings are amply supported by the

record and his legal conclusions are unassailable. We therefore find that the

judge did not abuse his discretion in applying the doctrine of equitable

subrogation to accord Wells Fargo a first-priority position.

61 Holdings status as an innocent third-party purchaser

We are similarly unpersuaded by Wilmington Savings' argument that, for

the purposes of equitable subrogation, 61 Holdings is not entitled to step into

the shoes of Wells Fargo. Wilmington Savings contends that 61 Holdings lost

its status as an innocent purchaser by virtue of its actual knowledge that

Wilmington Savings' mortgage remained as an open lien when it purchased the

property. In that regard, Wilmington Savings notes that 61 Holdings attached a

title commitment and indemnification letter from a title guaranty company in

support of its cross-motion, both of which reference the open mortgage.

Wilmington Savings argues that these documents "clearly demonstrate that 61

Holdings took the calculated risk to purchase the property, despite having actual

knowledge of Wilmington Savings' mortgage, by relying upon the

indemnification letter of its title insurer." Wilmington Savings reasons that

"such deliberate actions are not worthy of equitable relief, nor should

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[d]efendant be rewarded under . . . equitable subrogation for willfully ign oring

[p]laintiff's mortgage."

As did the trial judge, we reject this argument. In support of the cross-

motion, Michael S. Ryan, President of 61 Holdings, certified that:

In conjunction with the closing of the Property, Elite
Title Group, LLC issued an amended title commitment
to 61 Holdings dated June 7, 2016, that referenced
[p]laintiff's [m]ortgage but indicated that same was
being "omitted based upon the receipt of [an]
indemnification letter."

61 Holdings relied on the Amended Title Commitment
and accompanying indemnification letter at the time of
closing.

It was 61 Holdings' understanding that based upon the
Amended Title Commitment, there were no title issues
affecting its priority or interest in the property.

The judge found that 61 Holdings justifiably relied on the title company's

assessment that Wilmington Savings did not have a valid claim to title, and

therefore remained an innocent purchaser. We agree.

Notably, although the actual knowledge of a purchaser might in another

factual scenario bear on its status as an innocent purchaser, that knowledge is

different than the actual knowledge of the mortgagees at the time they accepted

the underlying mortgages. In that regard, 61 Holdings' entitlement to

subrogation is wholly derivative of Wells Fargo's entitlement to subrogation.

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That is so because the issue whether equitable subrogation is appropriate must

be evaluated from the standpoint of the entities that made the loans at the time

they made the loans. Thus, the priority rights vis-à-vis Wilmington Savings and

Wells Fargo, albeit not yet judicially determined, were fixed as of the date Wells

Fargo foreclosed the property.

As Judge Jerejian correctly opined:

61 Holdings' ability to step into the shoes of Wells
Fargo Bank is unaffected by its knowledge of
[Wilmington Savings'] loan. While the court is
unpersuaded that in all instances the focus must be on
the knowledge of a party's predecessor in interest and
that no intervening knowledge could prevent a party
from stepping into the shoes of its predecessor, in the
instant case 61 Holdings remains an innocent
purchaser.

As the judge found, Wells Fargo's predecessor held a first-priority lien at

the time its loan originated. Therefore, although 61 Holdings may have been

aware of the Wilmington Savings loan, that awareness does not serve to

eradicate Wells Fargo's entitlement to its priority position. We also agree that

61 Holdings justifiably relied on the assessment of its title company to remove

Wilmington Savings mortgage as an open lien on the property. Thus, as the

judge concluded, 61 Holdings, as an innocent purchaser of the property, is

granted the same rights as those held by its predecessor in interest Wells Fargo.

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 Strict foreclosure

Finally, we reject Wilmington Savings' challenge to Judge Jerejian's

holding that as an innocent purchaser, 61 Holdings retains the right to prosecute

a strict foreclosure action to extinguish Wilmington Savings' interest. A strict

foreclosure action is "a procedure designed to extinguish the equitable right of

redemption." Sears v. Camp, 124 N.J. Eq. 403, 407 (1938). The process is used

when by an oversight, a party is not joined in a prior foreclosure action and it

would be unduly onerous to require the foreclosing lender to re-prosecute the

entire foreclosure action. See id. at 412-413. Strict foreclosure allows the lender

to prosecute against the missed parties only.

[I]t is an ancient field of equity jurisprudence to relieve
against the consequences of accident and mistake of
fact – not to mention its jurisdiction over equitable
titles and interests created by mortgage – where, in the
furtherance of justice, that course may be taken without
disregard of an equal or superior equity, particularly
where one has thereby acquired, at the expense of the
complaining party, a legal right which in good
conscience he should not retain. It is the general rule
that a deed from the purchaser at a foreclosure sale to a
third person transfers to the grantee all the title and
rights of the original purchaser, subject to any
outstanding equity of redemption.

[Id. at 412.]

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See also Citicorp Mortgage, Inc. v. Pessin, 238 N.J. Super. 606, 607 (App. Div.

1990) (holding that a complainant in a foreclosure action who purchases in good

faith at the foreclosure sale is entitled to file a complaint to force an outstanding

junior lienor to redeem its mortgage or be foreclosed of the equity of

redemption).

As Judge Jerejian correctly concluded, as in Pessin, 61 Holdings is an

innocent purchaser of the property, having purchased it from Wells Fargo, the

foreclosing mortgagee. It is irrefutable that just as Wells Fargo as the priority

lienholder would have the ability to bring a strict foreclosure action against

Wilmington Savings if it still held title, 61 Holdings as an innocent purchaser

enjoys that same right.3

To the extent we have not specifically addressed any arguments raised by

the parties, we conclude they are without sufficient merit to warrant discussion

in a written opinion. R. 2:11-3(e)(1)(E).

Affirmed.

3
The issue of the mortgage's discharge is not before us because, as the judge
noted, a strict foreclosure action must be initiated by a separate complaint.
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