By: Gregg P. Tabakin, Esq. & Lisa M. McQuade, Esq.
An equitable mortgage may seem like an academic legal principle, perhaps only useful for studying for a bar examination or writing a law review article but it actually has practical applications today. New York mortgagees should seek the imposition of an equitable mortgage where the parties intended the property to be secured by a mortgage but a defect in the mortgage renders the mortgage unenforceable.
An equitable lien arises where there is an express or implied agreement that there shall be a lien on specific property. Teichman by Teichman v. Community Hosp., 87 NY2d 514, 520 (1996). A clear intent that the property is to be held, given or transferred as security for the obligation must be established in order to impose an equitable mortgage. M & B Joint Venture, Inc. v. Laurus Master Fund, Ltd, 12 N.Y. 3d 798, 800 (2009). A “mere expectation, however sincere, is insufficient to establish an equitable lien”. Scivoletti v. Marsala, 61 NY2d 806 at 809 (1984). An equitable lien “is dependent upon some agreement express or implied that there shall be a lien on specific property. James v. Alderton Dock Yards, 256 N.Y. 298 at 303 (1931). It is necessary that an intention to create such a charge clearly appear from the language and the attendant circumstances. Pennsylvania Oil Products Refining Co. v. Willrock Producing Co., 267 N.Y. 427, 435-6 ( 1935).
An equitable mortgage may be imposed in circumstances other than where a legal mortgage “fails for the want of some solemnity.” Payne v. Wilson, 74 N.Y. 348 at 351 (1878). For example, where money is advanced upon a verbal agreement to secure a debt by a mortgage on real property, but the agreement, for one reason or another, never culminates in a signed writing. Sprague v. Cochran, 144 N.Y. 104 (1894). Or where borrowers applied for a loan and received its full benefit but the signature page of the mortgage suspiciously cannot be located. Allen v. Union Fed. Mortg. Corp., 204 F. Supp.2d 543 (E.D.N.Y. 2002). An equitable mortgage was also imposed to enforce the seniority of a lien where a bank erroneously satisfies a mortgage that formed the basis of that lien. Citibank, N.A. v. Kenney, 17 A.D.3d 305 (2d Dep’t 2005).
In a recent case I litigated in Kings County, New York, a father and three sons owned a parcel of property. All four owners agreed to mortgage the property, but only two of the four owners signed the note and mortgage. The deposition testimony of the three brothers established that all the owners had discussed mortgaging the property and agreed to the transaction. A portion of the loan proceeds were also used for renovations to the property. The Court found that the non-signatory owners were deemed to have agreed to pledge their interests as security for the loan as a matter of equity and the plaintiff was entitled to a lien upon all ownership interests in the subject property.
In sum, where the facts and circumstances indicate that the parties intended to encumber the property to secure an obligation; even though a defect renders the mortgage unenforceable, the mortgagee should seek imposition of an equitable mortgage.
For more information please contact via email Gregg Tabakin, Esq.or by phone at 973-538-4700 ext. 112.
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