Daily Development for Wednesday, November 8,
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
MORTGAGES; SUBROGATION: Wyoming holds that institutional lender is not entitled to benefit of equitable mortgage doctrine where State has explicit "filing date priority" or "first in time" statute and lender has actual and constructive notice of intervening mortgage.
Countrywide Home Loans, Inc. v. First Nat'l Bank of Steamboat Springs, N.A., 2006 Wyo. 132, 2006 Westlaw 2946869 (Wyo., Oct. 17, 2006).
Ketcham obtained a mortgage loan from AWL in 1997 in the amount of $100,000, which mortgage was properly recorded. In 1998., AWL assigned its mortgage to Bank of New York, via recorded assignment. In 2002, the Ketchams executed a mortgage (for a business loan) to First National Bank in the amount of $97,500. In 2003, the Ketchams executed a third mortgage on the property to Countrywide, for the purpose of paying off the 1997 AWL mortgage. Prior to closing, Countrywide obtained a title insurance commitment that clearly showed both the 1997 AWL mortgage and the 2002 First National Bank mortgages as prior liens on the property.
The Ketchams subsequently defaulted under the First National Bank loan and the bank commenced foreclosure proceedings, claiming that its mortgage lien was the first and senior lien against the property. Countrywide and AWL asked the Wyoming District Court to apply the doctrine of equitable subrogation as set forth in the Restatement (Third) of Property (Mortgages), sec. 7.6 (1997) ("Restatement") and hold that the 2003 Countrywide was subrogated to the 1997 AWL mortgage and therefore superior to all subsequent encumbrances.
The District Court declined to apply the doctrine of equitable subrogation, instead ruling that Wyoming's "filing date priority" statute applied to the factual situation presented and therefore First National's 2002 mortgage had priority over all other encumbrances, including the 2003 Countrywide mortgage.
The Wyoming Supreme Court affirmed the decision of the District Court. The Supreme Court refused to follow the Restatement rule, agreeing with the District Court that lien priority in Wyoming is statutorily determined by the date of recording. The Wyoming Supreme Court reasoned that equitable subrogation would not apply where, as noted by the District Court, "a lender has actual and constructive notice of a junior mortgagee and could have taken any one of a number of steps to protect its interests." The court also stated that "We have not applied the doctrine of equitable subrogation as set forth in the Restatement to allow a refinancing mortgagee to step into the shoes of a prior mortgagee for purposes of obtaining lien priority."
The Wyoming Supreme Court noted that, by statute and case decision, Wyoming is a "filing date priority jurisdiction." That is, a mortgage properly recorded in the county clerk's office provides notice to subsequent purchasers and takes precedence over later conveyances. Therefore, according to the court, a subsequent purchaser (or mortgagee) has constructive notice of any burden upon title from the date of recordation. According to the court, "[W]e are not persuaded any manifest injustice results from applying the express language of [The Wyoming filing-priority statute] and adhering to the clear legislative intent that lien priority in Wyoming is to be determined by the date of recording." The court further stated that "[Plaintiff} was charged with knowing Wyoming is a 'first in time' jurisdiction." Id.
The court also reasoned that, "In addition, the primary purpose of our recording statute is to secure certainty of title (citation omitted). This countervailing public policy interest in clarity and certainty in matters of land title arguably outweighs the interests of private lending institutions which can be protected by simple due diligence." Id.
The court was careful to distinguish contractual, or "conventional," subrogation from "legal" subrogation (which the court acknowledged was the same as "equitable subrogation"), which the court said applied in this case. Such a right to legal subrogation is, according to the court, a creation of a court of equity, and is given "when otherwise there would be a manifest failure of justice," and "has come to be one of the great principles of equity of our jurisprudence, and courts incline to extend it rather than restrict it." Id. at P19. But, the court noted, "The mortgagee who refinances a prior mortgage more closely resembles a volunteer or intermeddler in whose favor courts have not been inclined to apply equitable subrogation. In our view equitable subrogation simply has no application [in this case] where a financial institution extends a loan for the purpose of enabling a mortgagor to pay off an existing mortgage, knowing that a subordinate lien exists on the real estate. Othe
r mechanisms are available for a re-financing lender to obtain first priority without invoking equity to achieve that result." Id. at P23.
Reporter’s Comment 1: In declining to apply the Restatement's position on equitable subrogation, the District Court, and the Wyoming Supreme Court, relied on Wyo. Stat. § 34-1-121, which provides in relevant part as follows:
§ 34-1-121. Recorded instrument as notice to subsequent purchasers; recordation of instruments issued by United States or state of Wyoming.
(a) Each and every deed, mortgage, instrument or conveyance touching any interest in lands, made and recorded, according to the provisions of this chapter, shall be notice to and take precedence of any subsequent purchaser or purchasers from the time of the delivery of any instrument at the office of the register of deeds (county clerk), for record.
Reporter’s Comment 2: The majority view of equitable subrogation in the United States is that the doctrine is only available if the party paying the prior lien has no actual knowledge of the intervening lien. The Restatement (Third) of Property (Mortgages) purports to expand the right of equitable subrogation, and provides that a refinancing lender is equitably subordinated to the priority of the first mortgage even where it has actual knowledge of the intervening lien:
Under the Restatement, subrogation can be granted even if the payor [the refinancing lender] had actual knowledge of the intervening interest; the payor's notice, actual or constructive, is not necessarily relevant. The question in such cases is whether the payor reasonably expected to obtain security with a priority equal to the mortgage being paid. Ordinarily lenders who provide refinancing desire and expect that result even if they are aware of an intervening lien. A refinancing mortgagee should be found to lack such an expectation only where there is affirmative proof that the mortgagee intended to subrogate its mortgage to the intervening interest.
Restatement (Third) of Property: Mortgages § 7.6 cmt.e (1996).
Reporter’s Comment 3: But the more liberal Restatement position is still the minority view. In any event, there are prudent steps that a real-estate practitioner who represents mortgage lenders can take to avoid the loss of priority of a new mortgage, where some or all of the proceeds from the mortgage are intended to be disbursed to pay off a prior recorded mortgage. Obviously, the mortgage loan documents should -- and almost always do -- clearly state the intention of both the mortgagor and the mortgagee that the mortgagee is to receive a properly perfected first mortgage lien against the property. If the parties are aware of an existing intervening mortgage lien (as in the Countrywide case, supra), it also would be beneficial to state clearly in the loan documents that it is their intention that the refinancing mortgagee is to receive the same priority as the existing mortgage that is being paid off (if it is not to be released). The refinancing mortgagee's attorney should obta
in a title commitment to ascertain the status of title and to determine if there are any presently existing mortgage liens or other encumbrances against the property (and whether there are any subsequent liens or encumbrances appearing thereafter), and a title policy should be issued insuring the new mortgagee's security interest as a prior, valid and enforceable first mortgage lien on the property. (The availability, extent and scope of such coverage will depend on the facts and circumstances of each transaction, as well as underwriting considerations based on applicable case law and title insurance regulations). The refinancing mortgagee's attorney also would find it beneficial to have an existing mortgage lienholder, whose loan is to be paid off from the proceeds of the new loan, assign the existing mortgage to the new mortgagee (in those situations where there are intervening lienholders or encumbrancers) instead of releasing the mortgage from record (or at least leave the exi
sting mortgage of record until the new mortgagee's loan is paid in full). An alternative prudent action would be to require, as a condition to the refinancing mortgage loan, that any known or identified intervening lienholder execute (and agree to have recorded) an intercreditor or subordination agreement, whereby the intervening lienholder would consent to the new mortgage lien and confirm that its lien would be subordinate to the new refinancing mortgage (at least to the extent of the outstanding amount of the prior lien being paid from the proceeds of the new loan). As the Wyoming Supreme Court noted in footnote No. 3 (P25) in the Countrywide case, supra, "The district court mentioned a subrogation agreement or an assignment of the AWL mortgage as two possibilities for achieving a first priority lien." It is simply amazing (at least to me) that a lender as supposedly sophisticated and experienced as Countrywide did not act to protect its interest by one of these methods, especi
ally when it had actual knowledge of the intervening lien.
Reporter’s Comment 4: It may seem reasonable (consistent with the Restatement rule) that a court should be able to find a "convention," sufficient to invoke conventional subrogation, whenever a refinancing lender can show that it intended to pay off a senior debt (at least in those situations where it is without actual knowledge of an unpaid junior lien), and that in exchange it intended to receive a first mortgage on the property. On the other hand, the doctrine of equitable subordination tends to foster uncertainty and unpredictability with respect to mortgage priority issues, and "clouds" real property records (and creates headaches for title insurers). Most real estate practitioners would prefer real property priority and recording rules that are clear and consistent. The only certainty, in many states, may be that there is still some uncertainty as to how state courts (and bankruptcy courts construing applicable state law) will rule on this issue. As the bankruptcy court in
In re Pearce, 236 B.R. 261, 266-67 (Bankr. S.D. Ill. 1999, correctly noted, "[e]quitable subrogation is, quintessentially, a factual inquiry, and its application is dependent on the facts and circumstances of each case (citations omitted)."
Reporter’s Comment 5: As to the issue of the scope of equitable subrogation (and its offspring, "conventional subrogation"), litigation is often necessary to determine whether a mortgage lender who has paid off a prior lien is entitled to the priority of the earlier recorded lien. The goal of the actions such those mentioned above (e.g., requiring a specific assignment of the original mortgage or a subordination agreement with the intervening lienholder) is to avoid, at all costs, a court challenge to the priority of the new mortgage. Decisions in this area of the law are highly fact-specific and uncertain, and mortgage priority disputes can be time-consuming and expensive for mortgage lenders to resolve. The resolution of such litigation often depends on off-record facts that are difficult to determine and prove -- and meanwhile, title to the property remains undetermined and "in limbo" until the litigation is concluded. See generally, David H. Cox and Vernon W. Johnson III, Stat
e Equity Doctrine Helps Title Insurers, The National Law Journal, p. B17, Feb. 7, 2000.
The Reporter for this item was Jack Murray of First American Title Insurance Company - Chicago Office.
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