>Daily Development for Friday, August 1, 2008
>by: Patrick A. Randolph, Jr.
>Elmer F. Pierson Professor of Law
>UMKC School of Law
>Of Counsel: Husch Blackwell Sanders
>Kansas City, Missouri
>dirt@umkc.edu
>
>MORTGAGES; SUBROGATION: Assignee of a mortgage obtained pursuant to refinancing was entitled to equitable subrogation such that its mortgage took priority over a mortgage held by second mortgagee.

>
>JPMorgan Chase Bank, as Trustee for Equity One ABS, Inc. v. Howell, 883 N.E.2d 106 (Ind. App. 2007).
>
>Howell owned property upon which Irwin held a first conventional mortgage, Bank One held a second mortgage securing a line of credit, and Accredited Home Lenders, Inc. held a third mortgage. The dates of execution and recording for Irwin's mortgage were unknown, but all parties agreed that it was the first mortgage. Bank One's second mortgage was executed on October 5, 1999 and recorded on October 15, 1999. Accredited's third mortgage was executed on May 24, 2002 and eventually assigned to Equity One on February 28, 2003. Equity One paid off the first mortgage in Irwin's favor and that mortgage was released.

>
>Equity One then attempted to pay off the second mortgage in Bank One's favor. Equity One's closing agent, Nations Title Agency of Indiana sent Bank One a payoff check as well as a letter signed by Howell instructing Bank One to close the line of credit and notify Nations Title of any shortage in the payoff amount. The payoff check, however, was short by approximately $300.00. Bank One deposited the check, but neither informed Nations Title of the shortage, nor closed Howell's line of credit, which Howell continued to draw upon after the payoff, resulting in a final balance of $42,235.

>
>Howell then defaulted on the notes and mortgages held by Equity One and Bank One. Equity One filed against Howell and Bank One seeking to foreclose its mortgage and for a judgment that it held the first priority lien against the property. Bank One answered with a claim asserting first priority and the trial court granted summary judgment. Equity One appealed, claiming that its mortgage should have priority based on the doctrine of equitable subrogation.

>
>The Court of Appeals (the "Court") discussed Indiana Code sections pertaining to filing, priority, and equitable subrogation. The Court quoted the Indiana Supreme Court's decision in Bank of New York v. Nally, 820 N.E.2d 644 (Ind.2005): " 'a mortgagee who refinances an existing mortgage is entitled to equitable subrogation even if it had actual or constructive knowledge of an existing lien on the property unless the junior lienholder is disadvantaged or the mortgagee is 'culpably negligent' [.]' " Equity One contended that it was entitled to equitable subrogation because: 1) Equity One refinanced Irwin's senior mortgage; 2) Bank One would not be disadvantaged because it remained the second lienholder; and, 3) Equity One was not culpably negligent. The Court agreed, finding: 1) Bank One was bound by the acknowledgment in its request for summary judgment that Equity One had refinanced and paid off the first mortgage; 2) Bank One did not argue that it would be disadvantaged by equit

able subrogation; and, 3) Bank One was not prejudiced by Equity One's failure to verify whether it had fully paid off Bank One's mortgage. Finally, the Court found that allowing Bank One priority would result in unearned windfall. As a result, the Court held that Equity One was entitled to equitable subrogation, reversed the trial court's grant of summary judgment to Bank One, and remanded with instructions to enter summary judgment for Equity One.

>
>Comment 1: Although the law around the country is unsettled as to the availability of equitable subrogation “sandwiched” prior lienholder whose existence was known  known to the subrogation candidate at the time it paid a more senior loan, the law in Indiana is quite generous.  Even in those states that require some “equitable argument” to support subrogation, Equity One has a very strong argument here, as the court notes.  Bank One received a clear  instruction that the line of credit was to be closed, and knew that Equity One believed that it had fully paid the Bank One mortgage, but said nothing, and in fact continued to make advances to the borrower. 

>
>Under the Restatement and under a number of state statutes, a communication from the mortgagor terminating a line of credit secured loan is viewed as a final termination.  It is likely that the sent by the borrower here was such a communication.  Bank One may be lucky to have a secured claim at all (at least beyond the $300 shortfall), much less a prior one. 

>
>Comment 2: It appears, however, that after the payoff the Equity One mortgage was further assigned into securitization.  Should this matter?   The court assumes, likely correctly, that subrogation rights go with any assignment of a secured claim. 

>
>An interesting question, not raised here, is whether such rights ought to exist  if, at the time the assignment occurred, everyone was already aware of the fuss with Bank One and that Bank One was claiming a prior claim.  Should one be able to “buy in” to such an equitable position?  The editor believes that the Indiana court would say “yes” to this, since it would have permitted the original refinancing lender to claim subrogation even if it had knowledge of the intervening lien at the time.  Its view (and that of the Restatement) is that failure to grant subrogation virtually always results in an inequitable windfall to the intervening lienholder, and no special equities need exist on behalf of the candidate for subrogation.

>
>Comment 3: Note that the subrogation is only to the amount of the Irwin first lien, which was about $77,000.  That’s standard.  You only get the amount of the original priority (and you must have paid off the whole amount of the lien occupying that priority).  According to Dale Whitman, who is certainly the “source” an matters of this nature, Equity One should otherwise get all the original terms and conditions of its own mortgage, limited only as to the amount of the lien. 

>
>The editor had believed that subrogation was only as to priority, and that otherwise the subrogated party lives with the terms of the loan into which it subrogates.  But he’ll concede Dale has read a lot more cases on this point a lot more carefully.  The difference really is less than it seems, as most often the lender and borrower could agree to change the terms of their mortgage without loss of priority unless there is significant negative impact on a junior lienholder.  Although the borrower in these cases may desire to have the terms of the original senior lien, it has already agreed to the terms of the subrogated party’s lien, so it has a weak position. 

>
>Dale admits that there would be no substitution of priority for any terms that would have a significant negative effect on the junior  without the junior’s consent. 

>
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