Bar News - May 21, 2014
Real Property Law: The Death of Equitable Subrogation Without Fraud
By: Cheryl Deshaies
There must be proof of fraud, deception, or other misconduct in the procurement of the funds used to purchase, invest in, or improve a homestead for the transaction to invoke the doctrine of equitable subrogation.
Hypothetical: When a married couple refinanced their home, only the husband was required to sign the note and mortgage. Despite the fact that the mortgage described him as a married man and that the refinance discharged a prior mortgage on which the wife had waived her homestead, the lender did not include the wife on the refinance documents or require her to attend the closing.
Question: If the holder of the refinance mortgage now attempts to foreclose, should it stand in the shoes of the prior mortgagee, defeating the wife’s homestead? Under New Hampshire equitable subrogation law, the answer is a resounding no.
New Hampshire law protects a spouse’s home by establishing a homestead right. “Every person is entitled to $100,000 worth of his or her homestead, or of his or her interest therein, as a homestead,” according to RSA 480:1. The homestead right is exempt from attachment, sale or execution. Real estate cannot be sold at sheriff sale or through foreclosure without paying $100,000 to a spouse who holds a homestead right.
There are some exceptions. One such exception is a mortgage executed by the husband and wife with the formalities required for the conveyances of land. These formalities include a signature acknowledged by the grantor before a justice, notary public or commissioner, with a recitation of the address of the grantee. RSA 480:5-a states: “No deed shall convey or encumber the homestead right, except a mortgage made at the time of purchase to secure payment of the purchase money, unless it is executed by the owner and wife or husband, if any, with the formalities required for the conveyance of land.”
So, what happens if the refinance mortgage was not executed properly and, therefore, is not a charge on the real estate? Will equitable subrogation protect the mortgagee? The answer is no, not without fraud in procurement of the funds.
A New Hampshire statute confers equitable jurisdiction on the superior courts in several types of cases. In the past, to avoid an unfair windfall to the homeowner, courts have invoked the doctrine of equitable subrogation to hold that a mortgagee who satisfied a prior mortgage stands in the shoes of the prior mortgagee.
The leading New Hampshire case applying equitable subrogation was Chase v. Ameriquest Mortgage. The trial court in Chase held that, although the spouse’s signature on the mortgage had been forged, the mortgage nonetheless did constitute a charge on the spouse’s homestead right. The doctrines of equitable subrogation and unjust enrichment obligated the spouse to reimburse the bank in the amount of the prior mortgage payoff – the homestead right did not prime that obligation.
The NH Supreme Court in 2007 partially affirmed the trial court in Chase, explaining that equitable subrogation applies where “one who has discharged the debt of another may, under certain circumstances, succeed to the rights and position of the satisfied creditor.” The Supreme Court in Chase also adopted the following test for equitable subrogation: “(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.”
Although the Chase facts were fraught with fraud (e.g. the husband forged the wife’s signature), and the NH Supreme Court seemed to rely heavily on the existence of fraud in that case, it has been unclear whether Chase made fraud a requirement for equitable subrogation.
In the wake of Chase, mortgagees have argued that equitable subrogation can and should be used to fix mortgage errors of all types to avoid a windfall to a homeowner whose prior, valid mortgage was paid off. Such approach was in danger of expanding the doctrine of equitable subrogation exponentially.
Recently, the NH Supreme Court reigned in the equitable subrogation doctrine in a very meaningful way – by overturning the lower court in Deyeso v. Cavadi.
In Deyeso, an individual had used funds to purchase a home for the mother of their children. A Massachusetts court held that a pursuing creditor had an equitable interest in the funds he used to purchase the home and an equitable lien on the real estate. The pursuing creditor secured an order in Massachusetts allowing an auction of the home.
The mother (now wife of another, who lived with her in the home) argued in NH Superior Court that her homestead right had priority over the creditor’s equitable lien. The trial court disagreed, holding that because the purchaser had acted fraudulently in converting his non-exempt assets to an exempt asset (by purchasing the home), such act entitled the trial court to use its equitable powers to negate the homestead. She appealed.
In Deyeso, the NH Supreme Court held that there must be a showing of “fraud, deception, or other misconduct in the procurement of the funds used to purchase, invest in, or improve a homestead...” for it to invoke the doctrine of equitable subrogation. Deyeso at 5 (emphasis in the original) (citations omitted).
Although the parties agreed in Deyeso that the purchase was made with a fraudulent intent, there was no allegation that the funds themselves were procured through any act of fraud. Thus, the NH Supreme Court held in Deyeso that the homestead right under RSA 480:1 took priority over the creditor’s equitable lien.
The import of Deyeso is wide-reaching. No more does a trial court have carte blanche authority to cure a mortgage defect simply because a prior valid mortgage was satisfied. A mortgagee must take due precaution that its mortgage is done correctly. All signatures and notaries must be secured and done properly, and all spouses must sign the homestead waiver, if the lender truly expects the homestead to be waived.
Homeowners rightfully will invoke the protections provided by New Hampshire statute – including the homestead exemption. The NH Supreme Court made it clear in Deyeso; without fraud in the procurement of the funds, the doctrine of equitable subrogation cannot save a faulty mortgage.
Cheryl C. Deshaies participates in the NH Foreclosure Relief Project practicing foreclosure and collection defense, bankruptcy, and related litigation. She is licensed in New Hampshire and Massachusetts and can be reached at (603) 580-1416 or firstname.lastname@example.org. Read her blog at www.deshaieslaw.com.