Upon the foregoing cited papers, the Decision on this motion is as follows:

Plaintiff Ohio Savings Bank moves for an order striking the answer of defendants First Island Realty Corp. (hereinafter "First Island") and Kirk A. McLeod, granting plaintiff summary judgment on its complaint, appointing a referee to compute, subrogating plaintiff to the rights of the senior encumbrance and to priority over First Island's interest in the subject property, imposing an equitable mortgage and awarding costs of this motion.

Plaintiff commenced this action seeking, inter alia, a judgment declaring it to be equitably subrogated to a prior mortgagee on the property whose mortgage was satisfied by funds issued by plaintiff and for a judgment declaring that plaintiff has an equitable mortgage on the property as a result. On September 17, 2002, Aatif Barakaat, the former owner of the subject property at 183 Irving Avenue in Brooklyn, delivered a deed to the property to Ronald Lewis. This deed was recorded on October 30, 2002. In conjunction with this transaction, Lewis executed a purchase money mortgage in favor of plaintiff in the amount of $422,100.00 (hereinafter "Lewis mortgage"), which was also recorded on October 30, 2002. The funds from this loan were used in part to pay off an existing mortgage on the property held by Indymac Bank, FSB (hereinafter "Indymac mortgage"), which had been given by Barakaat to secure a loan in the amount of $322,100.00. As the result of a default in payment by Lewis, plaintiff commenced an action to foreclose the Lewis mortgage. This prior foreclosure action resulted in a judgment of foreclosure and a sale was conducted at which plaintiff submitted the successful bid of $474,000.00 and received a referee's deed to the property. [*2]

At some point after receiving the referee's deed, plaintiff reviewed the title search performed with respect to the property and discovered that Barakaat had delivered a deed to the property to First Island which was recorded on July 3, 2002, more than two months prior to Barakaat's delivery of the deed to Lewis and the execution of the Lewis mortgage in favor of plaintiff. It is not clear if First Island paid any consideration for its deed, though it is not in dispute that the Indymac mortgage was on record and still encumbered the property when First Island took title. As a result of its discovery of the First Island deed, plaintiff discontinued the foreclosure action and commenced the instant action seeking equitable subrogation to the Indymac mortgage and to recover from First Island the funds expended by plaintiff to satisfy this mortgage. The answer of First Island and McLeod (First Island's Chief Executive Officer), sets forth a series of general denials and two affirmative defenses that plaintiff failed to minimize its damages and that the complaint fails to state a claim upon which relief could be granted.

The equitable subrogation doctrine applies "where the funds of a mortgagee are used to satisfy the lien of an existing, known encumbrance when, unbeknown to the mortgagee, another lien on the property exists which is senior to his but junior to the one satisfied with his funds. In order to avoid the unjust enrichment of the intervening, unknown lienor, the mortgagee is entitled to be subrogated to the rights of the senior incumbrance (citations omitted)." King v Pelkofski, 20 NY2d 326, 333-334 (1967). See R.C.P.S. Assocs. v Karam Developers, 238 AD2d 492 (1997); Pawling Sav. Bank v Hunt Props., 225 AD2d 678 (1996); Zeidel v Dunne, 215 AD2d 472 (1995). While First Island argues that its deed was recorded prior to the execution of the Lewis mortgage, thus giving plaintiff constructive notice thereof, the court notes that the Court of Appeals allowed equitable subrogation to the plaintiff in King v Pelkofski despite the fact that the intervening encumbrance was recorded in said case. Subrogation "is a highly favored remedy" and the "courts are inclined to extend rather than restrict its principle." Bonham v. Coe, 249 App Div 428, 439 affd 276 NY 540 (1937). Further, as stated by the Second Circuit Court of Appeals in U.S. v Baran (996 F 2d 25, 29 (1993):

The purpose of subrogation is to prevent a junior lienor from converting the mistake of the lender into a magical gift for himself.' (citations omitted). In effect, subrogation erases the lender's mistake in failing to discover intervening liens, and grants him the benefit of having obtained an assignment of the senior lien that he caused to be discharged. (citation omitted)

Although other states may take a different view, New York does not require the lender to offer an excuse for his failure to discover the intervening lien (citations omitted).

Therefore this court finds sufficient for equitable subrogation purposes plaintiff's assertion that it was without actual knowledge of First Island's recorded deed even though plaintiff had constructive knowledge. Equity dictates that plaintiff be entitled to an equitable mortgage on the subject property to the extent of the funds expended by plaintiff to satisfy the Indymac mortgage. See Mailloux v Spuck, 87 AD2d 736, 737 lv denied 56 NY2d 507 (1982) ["An equitable mortgage has been defined as a transaction which has the intent but not the form of a mortgage, and which a court will enforce in equity to the same extent as a mortgage (citation omitted)."] This court further finds the affirmative defenses of First Island and McLeod to be [*3]without merit. Defendants have not set forth how or why plaintiff has a duty to minimize damages under the facts of this case and the complaint clearly states a cause of action for equitable subrogation.

As a result, plaintiff's motion is granted to the following extent: plaintiff is granted summary judgment on its cause of action for equitable subrogation, the answer of First Island and McLeod is stricken, an equitable mortgage on the property in favor of plaintiff is imposed on the property to the extent of the funds expended to satisfy the Indymac mortgage, and a referee to compute the amount due plaintiff shall be appointed forthwith. That part of plaintiff's motion seeking costs is denied.

Settle order.

Dated: March 2, 2007



DONALD SCOTT KURTZ

Justice, Supreme Court