The Massachusetts Appeals Court recently denied a mortgagee’s attempt to invoke the doctrine of equitable subrogation to hold the surviving spouse of a mortgagor liable for a second mortgage on their residence–owned by the married couple as tenants in the entirety–that had been procured and signed only by the deceased spouse.
In Wells Fargo Bank, N.A. v. Comeau, 92 Mass. App. Ct. 462 (2017), Nancy and William Comeau owned their residence in Groveland, Massachusetts as tenants by the entirety, which they took out a first mortgage on in the amount of $150,000 to Haverhill Co-Operative Bank (“Haverhill”) in 2003. Nancy and William were both mortgagor-grantors on the first mortgage, though Nancy was not a signatory to the note to Haverhill. In 2005, “William refinanced the 2003 loan by executing a note in his name only to Washington Mutual Bank, F.A. (Washington Mutual), in the amount of $300,000 secured by a mortgage deed to Washington Mutual in which he (William) was the sole mortgagor-grantor. There is no reference to Nancy in the mortgage deed to Washington Mutual, and no evidence in the record of any representations made by Nancy to Washington Mutual concerning the transaction.” Id. William used the proceeds of the Washington Mutual loan to pay off the Haverhill note, and then died three years later, with a balance outstanding on his Washington Mutual note, and with his undivided interest in the residence passing to Nancy.
Wells Fargo, N.A. (“Wells Fargo”) is Washington Mutual’s successor-in-interest. Wells Fargo held a claim against William’s estate, but failed to make a claim against the estate prior to the expiration of the statute of limitations. Wells Fargo later filed a complaint against Nancy in 2013, seeking a declaratory judgment that its 2005 mortgage must be equitably subrogated to the record position of the 2003 mortgage, such that Wells Fargo’s mortgage would thus encumber the residence.
The Appeals Court affirmed the Superior Court’s rejection of Wells Fargo’s argument that equitable subrogation should be invoked to encumber the residence with the 2005 mortgage. The Court stated that in Massachusetts, whether equitable subrogation–in which one entity can be substituted for the position of another entity because the first entity is entitled to recover from the person or entity that had an obligation to the second entity–should be applied is determined according to principles of equity. See East Boston Sav. Bank v. Ogan, 428 Mass. 327, 330-333 (1998).
The Appeals Court explained that Wells Fargo’s position that Washington Mutual intended to hold a mortgage on the entire property, not subject to Nancy’s right of survivorship, was not consistent with the documentation of the 2005 mortgage. In the 2005 mortgage, William covenanted that “the Property is unencumbered, except for encumbrances of record.” The Court noted: “Nancy’s right of survivorship as a cotenant by the entirety was such an encumbrance on the property, and the 2005 mortgage was subject to that encumbrance. The law did not forbid William from mortgaging only his interest in the property, and the law did not forbid Washington Mutual from taking such an interest as security.” Id.
Further, the Court explained, “Equitable subrogation should be granted only when the rights of other parties will not be materially affected. . . . Here, Nancy would be materially prejudiced if Wells Fargo were to be placed in the record position of the [original] mortgage, because that would expose her to the risk of a foreclosure if she did not pay a debt that only her deceased husband was obligated to pay.” Id.
The Appeals Court’s decision in Wells Fargo Bank, N.A. v. Comeau reiterates the need for mortgagee banks to carefully investigate the encumbrances of record, and require all title holders to be parties to a mortgage and note. Further, the decision emphasizes the need for mortgagee banks and other creditors to pursue all meritorious claims against an estate in Massachusetts within the relevant statute of limitations period.
Fitch Law Partners will continue to monitor developments in this area of the law.