Opinion ID: 196637
Heading Depth: 2
Heading Rank: 1

Heading: Massachusetts Common Law Doctrine of Unjust Enrichment

Text: 35 Under Massachusetts law, the doctrine of unjust enrichment provides that where a mortgage has been discharged by mistake, equity will set the discharge aside and reinstate the mortgage to the position which the parties intended it to occupy, if the rights of the intervening lienholders have not been affected. North Easton Co-op Bank v. MacLean, 300 Mass. 285, 15 N.E.2d 241, 245 (1938) (second mortgagee not prejudiced by reinstatement of first mortgage where first mortgage had been discharged by mistake upon first mortgagee's acceptance of new note without knowledge of intervening lien) (citations omitted); see also Provident Co-Operative Bank v. Talcott, Inc., 358 Mass. 180, 260 N.E.2d 903, 909 (1970) (assignee of first mortgagee declared holder of first mortgage to prevent unjust enrichment of second mortgagee where first mortgagee discharged mortgage through inadvertence and second mortgagee's position not adversely affected by acts of first mortgagee); Piea Realty v. Papuzynski, 342 Mass. 240, 172 N.E.2d 841, 846 (1961) (exchange of new mortgage notes for old ones did not constitute discharge of old mortgage where parties had no intent to alter substance or priority of old notes and mortgagor's grantees did not show adverse change of position in reliance upon transaction). 36 The government maintains that no mistake was made because MSFCU intended to refinance the Folkards' first mortgage, and so by law must have intended the consequences of its actions--i.e. the extinguishment of its original security interests. Massachusetts law, however, clearly contemplates situations where the intention to renew is not tantamount to the intention to extinguish existing security interests upon refinancing a mortgage. See North Easton Co-op Bank, 15 N.E.2d at 245; Provident, 260 N.E.2d at 909; Piea Realty, 172 N.E.2d at 846; see also Financial Acceptance Corp. v. Garvey, 6 Mass.App.Ct. 610, 380 N.E.2d 1332, 1335 (1978) (Under Massachusetts law the renewal of a note in a different form does not operate to discharge a mortgage where the debt itself has not been paid.... even where the new note includes a new debt); Worcester N. Sav. Inst. v. Farwell, 292 Mass. 568, 198 N.E. 897, 899 (1935) (where bank, due to negligence of its counsel, failed to discover later mortgage on property and discharged first mortgage upon refinancing, first priority restored to bank because bank did not intend for discharge of interest); compare ICM Mortg. Corp., 758 F.Supp. at 1427 (where refinancing of deed of trust not intended to extinguish security interest, second deed of trust renewed prior obligation, resulting in priority of state created lien over federal tax lien); see generally 33 A.L.R. 149 (It is a general rule that the cancellation of a mortgage on the record is not conclusive as to its discharge.... [a]nd where the holder of a senior mortgage discharges it of record, and contemporaneously therewith takes a new mortgage, he will not, in the absence of paramount equities, be held to have subordinated his security to intervening lien unless the circumstances of the transaction indicate this to have been his intention....). We are thus convinced that an action based on the failure to discover a properly recorded lien is precisely the type of inadvertence the Massachusetts doctrine of unjust enrichment aims to rectify. Furthermore, we are persuaded, in accord with Progressive's view, that no reasonable lender in MSFCU's position would have intended, upon refinancing, to replace a first mortgage bearing the attachment of junior tax liens with a second mortgage bearing the attachment of senior tax liens, thereby relinquishing its senior interest on the property. 37 The district court held that reliance on the Massachusetts line of unjust enrichment cases was misplaced because such cases do not concern federal tax liens. Although it is true that Massachusetts case law does not address reinstatement of a state created lien to a position of priority over a federal government lien, we are not persuaded by the district court's reasoning. We think that cases involving the reinstatement of mortgages which have been inadvertently discharged to the advantage of unintended and unexpected beneficiaries are sufficiently analogous to Progressive's claim to warrant applicability. Whether or not federal tax liens are involved in such cases, to us, seems immaterial. This is mainly because the unjust enrichment doctrine operates only to restore a state created lien to the position it occupied prior to the inadvertent discharge. Reestablishing the party's position, of itself, does not disturb the status of competing liens--whether those of a private lienor or the federal government--in terms of their effective dates of attachment for the determination of priority. It equitably determines the effective date of the state created lien independent of other existing liens. Federal law remains intact to determine both the choateness of the state created lien and its order of priority in relation to any competing federal liens. 38 Moreover, while Massachusetts courts have not had occasion to apply the doctrine of unjust enrichment to the federal government under this set of circumstances, federal courts have held that the doctrine is applicable where the federal government is concerned; and in several instances, have restored state created liens to their intended positions without regard for the United States' potential loss of priority under federal law. See United States v. McCombs, 30 F.3d 310, 333 (2d Cir.1994) (holding that where government ran afoul of notice requirements of federal statute governing priority between federal tax liens and interests of subsequent purchasers, to deny subsequent holder of security interest priority over tax lien would allow government to leap frog the interests vested in two prior mortgage liens and would represent a classic example of unjust enrichment); Dietrich Indus., Inc. v. United States, 988 F.2d 568, 573 (5th Cir.1993) (holding that where purchaser who paid vendor's senior mortgage debt as part of purchase transaction with expectation that property was free of additional encumbrances, to deny equitable subrogation remedy would give the government an unearned windfall in that it would elevate the government's liens for no good reason); Han v. United States, 944 F.2d 526, 530 n. 3 (9th Cir.1991) (holding that where purchasers of residential property paid off and discharged priority position lender unaware that additional federal tax lien attached to property, to require the purchasers to pay a portion of the taxpayer's delinquent taxes would unjustly enrich and produce a windfall in favor of the United States). 39 Finally, we note that no rights of the government are impaired by MSFCU's mortgage reinstatement. The government argues that the IRS is unlike a private creditor in that it does not bargain for interest rates and thus can never be unjustly enriched where valid liens have attached for unpaid taxes. But Progressive does not argue, nor do we suggest, that the government would be unjustly enriched by the ultimate satisfaction of its legitimate tax liens. The point is that the government could not have anticipated its current priority status because from the outset its 1988-1990 liens were clearly junior to MSFCU's 1987 mortgage lien. Absent the inadvertent discharge of MSFCU's mortgage in 1990, the government would not have gained serendipitous priority over MSFCU's second mortgage lien in 1990. This resulted in the government's unjust enrichment at the expense of MSFCU in 1990, and ultimately of Progressive in 1992. We hold that because MSFCU extinguished its initial 1987 mortgage interest by mistake upon refinancing the Folkards' second mortgage in 1990, it should be equitably restored to its original 1987 lien position. 40 The government argues that the equities in favor of MSFCU may not apply to Progressive because there is no evidence that Progressive was unaware of the earlier government lien when it took the assignment of the mortgage from MSFCU. But it is hornbook law that the assignee of a mortgage succeeds to all of the assignor's rights power and equities; and Massachusetts has applied this rule in a situation very like this case. Provident Co-operative Bank, 260 N.E.2d at 908 (By virtue of her purchase from Provident, Mrs. Hutchinson succeeded to all of Provident's rights in relation to the mortgage assigned, including the right to a judicial determination whether it was a first mortgage or a second mortgage.). Thus Progressive may assert any equitable rights and defenses that MSFCU could have asserted before it assigned the mortgage.