Press "Enter" to skip to content

1st Cir. Holds HELOC Lender Not Entitled to Equitable Lien

HELOCThe U.S. Court of Appeals for the First Circuit recently reversed the judgment of a trial court declaring a home equity line of credit invalid, but granting the holder of the HELOC an equitable lien on the HELOC’s secured property.

In so ruling, the First Circuit determined that the trial court abused its discretion by granting the equitable lien because no transactional nexus existed, when the mortgagor did not have authority to mortgage the property and the HELOC proceeds were not used to benefit the property or its owner.

A copy of the opinion in Wilmington Savings Fund Soc’y v. Collart is available at:  Link to Opinion.

In 1999, a husband, wife and their daughter acquired property in Massachusetts.  Two months later, three almost-identical trusts were established for the husband, wife and daughter, with the sole beneficiary of the trust bearing his or her name, and deeding one-third interest in the family property into each trust in order that the family trusts owned the property as tenants-in-common.

The wife was the trustee for the husband’s trust and daughter’s trust.  The husband was the trustee for the wife’s trust.  After the wife died in 2002, a successor trustee was appointed for the daughter’s trust, but the husband did not appoint a successor trustee for the husband’s trust.  The deceased wife had named her husband as the executor of her will and gave him all of her personal property while dividing the remainder of her assets between two estate trusts, naming the husband and daughter as its beneficiaries and the husband as trustee. The husband was entitled to the net income from the estate trusts during his lifetime, with the principal reserved for the daughter to be passed on upon the husband’s death. 

While the husband was trustee of the estate trusts, he ignored the trusts’ terms and never transferred any property into them, instead liquidating the daughter’s assets and keeping the money for himself.

Four years after the wife’s death, the husband began a relationship with a new woman, with whom he divided time between the family property and the new girlfriend’s nearby horse farm. 

In April 2007, the husband purchased a new property, using a combination of his own assets, assets from the wife’s estate and a $500,000 home equity line of credit taken out against the family property, which was still owned by the family trusts — not the husband individually.  The HELOC was dated June 13, 2007 and named the husband, an “unmarried person” as the grantor, and did not mention any of family trusts that held legal title to the family property.

Upon learning of the HELOC, the daughter, through her counsel, sent a letter to the original HELOC lender disputing the HELOC’s validity and advising that the family trusts held title to the family property and did not consent to the HELOC.

As the daughter became concerned about her father’s (the husband’s) capacity and relationship with his new girlfriend, she petitioned the probate court to appoint a guardian for the husband, which was eventually granted.  After the guardian negotiated a sale of the husband’s new property for $1.75 million in April 2009, upon petition, the probate court appointed a guardian ad litem who determined that the sale was in the husband’s best interest. The probate court approved the sale and the guardian used the sale proceeds to replenish the wife’s estate and provide for the husband’s living expenses. The guardian stopped making payments on the HELOC in July 2010 after he was informed by his counsel that the HELOC was invalid.

The husband died in 2013, leaving the daughter to become trustee of the husband’s trust and wife’s trust.  In June 2015, the probate court entered an Order of Final Settlement granting all of the husband’s estate—approximately $1 million— to his daughter.

The original HELOC lender assigned the HELOC to a new entity through transactions in October 2015 and January 2016.  In November 2016, the daughter requested that the lender discharge the HELOC because her father (the husband) did not hold legal title to the family property when it was created.  In June 2017, the daughter conveyed the family property to herself as trustee of the family trusts.

In November 2017, the lender filed suit against the daughter individually and as trustee of the family trusts, seeking: (1) a declaration that the HELOC was a valid encumbrance on the family property, (2) an equitable lien against the property, (3) a constructive trust on the assets of the father’s estate, and; (4) an attachment of the family property due to the daughter’s purported fraudulent conveyance of the family property to herself.

Upon ruling on the parties’ respective motions for summary judgment, the trial court declared the HELOC was invalid because the husband did not have title to the family property (owned by the family trusts) when he obtained it in his individual capacity.  However, the trial court also held that the lender was entitled to an equitable lien against the family property. 

Specifically, the trial court found that after the sale of the father’s property, the proceeds from the $500,000 HELOC were returned to the father, which were inherited by the daughter after his death, and allowing the daughter to retain these funds would result in an unjust enrichment.  As to the lender’s final two claims, the trial court held that a constructive trust would be inappropriate because the daughter and family trusts did not obtain the assets of the husband’s estate or the family property through fraud or mistake and that the lender had no basis to allege fraudulent transfer because the HELOC was not a valid encumbrance.

The daughter appealed on behalf of herself and the family trusts.

The issue on appeal was whether Massachusetts law allowed the trial court to grant the lender an equitable lien on the family property.  The daughter argued that the trial court erred by granting the equitable lien because no owner of the family property agreed to encumber the property and the proceeds of the transaction did not benefit the family property or its true owners.

Because the First Circuit was tasked with interpreting Massachusetts law, and no on-point precedent from the state’s highest court existed, the appellate court reviewed the Restatement (Third) of Restitution and Unjust Enrichment (on which the trial court and parties relied) analogous decisions from the Massachusetts courts, and precedents in other jurisdictions to endeavor to predict how the Massachusetts Supreme Judicial Court would likely decide the question.  Butler v. Balolia, 736 F.3d 609, 613 (1st Cir. 2013); Andrew Robinson Int’l, Inc. v. Hartford Fire Ins. Co., 547 F.3d 48, 51–52 (1st Cir. 2008).

According to § 56(1) of the Restatement (Third) of Restitution and Unjust Enrichment, “If a defendant is unjustly enriched by a transaction in which (a) the claimant’s assets or services are applied to enhance or preserve the value of particular property to which the defendant has legal title, or more generally (b) the connection between unjust enrichment and the defendant’s ownership of particular property makes it equitable that the claimant have recourse to that property for the satisfaction of the defendant’s liability in restitution, the claimant may be granted an equitable lien on the property in question.” Restatement (Third) of Restitution and Unjust Enrichment § 56(1) (Am. Law Inst. 2011).

The First Circuit noted that the restatement makes clear that a transactional nexus must exist between the property and the events giving rise to the equitable lien, and this requirement is usually, but not necessarily, satisfied as described in § 56(1)(a). See id. at § 56 cmt. d

Here, while the lender acknowledged that the HELOC proceeds were not used to enhance or maintain the family property, but instead for the husband to purchase the husband’s new property, it argued that the husband’s agreement to repay the HELOC from the family property meets the requisite transactional nexus, citing the First Circuit’s decision in United States v. Friedman, 143 F.3d 18, 23 (1st Cir. 1998) and the Supreme Judicial Court in Delval v. Gagnon, 99 N.E. 1095, 1096 (Mass. 1912), to support its theory.

The First Circuit found this argument unavailing.  Although both Friedman and Delval involved express agreements to pay creditors out of specific funds, in both cases it was undisputed that the debtors owned and controlled the assets from which they agreed to pay the creditors, unlike here, where the husband did not have the authority to pledge the family property.  Thus, the husband’s express agreement to pay off the HELOC from the family property cannot support the equitable lien.

Next, the lender argued that the husband’s possession of the family property and intent to encumber it provided sufficient transactional nexus, and that Pinch v. Anthony, 90 Mass. 536 (1864), controls this case.  In Pinch, the Supreme Judicial Court says that “a party may by express agreement create a charge or claim in the nature of a lien on real as well as personal estate of which he is the owner or possessor, and that equity will establish and enforce such charge or claim.” Id. at 539.  Thus, the lender contended that because the husband possessed the family property and intended to encumber it at the time the HELOC was originated, the Pinch court’s “or possessor” language is dispositive, and ownership status of the family property was irrelevant.

This, too, was rejected by the First Circuit as an overly-broad reading of Pinch, finding that the “or possessor” language was merely nonbinding dicta, and that the lender’s interpretation was undermined by cases decided around the same time and holding that when a mortgagor purports to mortgage a property he does not own, as was the case here, equity cannot grant relief to the mortgagee.  See Pennock v. Coe, 64 U.S. 117, 127–28 (1859); Moody v. Wright, 54 Mass. 17, 32 (1847).

Lastly, the First Circuit’s review of more recent rulings in other jurisdictions supported the daughter’s position and held that an equitable lien is an improper remedy when the mortgagor could not convey title to the property and the mortgage proceeds were not used to improve the property or benefit the true owner. See Wachovia Bank, N.A. v. Coffey, 746 S.E.2d 35, 36-38 (S.C. 2013) (upholding dismissal of bank’s claim for an equitable lien when a husband took out a HELOC on a property “titled in [his] [w]ife’s name only,” the bank never verified if the husband owned the property, and the husband used the proceeds to buy a sailboat); DFA Dairy Fin. Servs., L.P. v. Lawson Special Tr., 781 N.W.2d 664, 672 (S.D. 2010) (affirming a trial court’s denial of an equitable lien when the proceeds of a mortgage were not used to preserve or improve the property and the mortgagor did not have authority to convey the property); Sorenson v. Pyeatt, 146 P.3d 1172, 1175, 1178 (Wash. 2006) (en banc) (holding that lenders had “failed to establish . . . that they are entitled to an equitable lien” when the mortgagor “forged the deeds that purported to convey title,” “had no power to grant a valid security interest in the property,” and “used the fraudulently obtained loan money primarily as disposable income”).

Because the lender could not establish any transactional nexus to support the equitable lien and did not take steps to assure the validity of any HELOC it (or its predecessor) wished to grant, the First Circuit determined that the trial court committed an error of law by granting the lender an equitable lien against the family property because any benefit the daughter derived from the HELOC proceeds inherited through the husband’s (her father’s) estate had no relation to her interest in the family property.

Accordingly, because the grant of the lien to the lender was an abuse of discretion, the appellate court reversed and remanded the trial court’s judgment with instructions to enter judgment for the daughter, individually, and as trustee for the family trusts.

Print Friendly, PDF & Email

Christopher P. Hahn practices in Maurice Wutscher’s Commercial Litigation, Consumer Credit Litigation and Insurance Recovery and Advisory groups. Prior to joining Maurice Wutscher LLP, he served under the General Counsel at the Florida Office of Financial Regulation. He also obtained extensive experience litigating property insurance claims through all phases of discovery, motion practice and other pre-trial activities. Christopher obtained his Bachelor of Science degree in Business Administration from the University of Southern California, followed by his Juris Doctorate degree from the University of Miami School of Law. He is also a graduate of the University of Miami’s Masters of Business Administration program, completing his degree with an emphasis on finance and mergers and acquisitions. For more information, see https://mauricewutscher.com/attorneys/christopher-p-hahn/

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.