Daily Development for Tuesday, October 23, 2001

By: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
prandolph@cctr.umkc.edu

MORTGAGES; MODIFICATION; PRIORITY: Even absent language in the mortgage, senior mortgagee can replace existing mortgage with refinancing mortgage for different term, and replacement mortgage will have priority over junior whose lien attached between first mortgage and replacement.

Suntrust Bank v. Riverside Nat. Bank of Florida, 2001 WL 980818 (Fla. App. 4th Dist. 8/29/01)

Suntrust had a $148,500 first lien mortgage on certain property. Two years after that lien was recorded, Riverside loaned an additional $100,000 to the mortgagor, securing that loan with a second mortgage in the amount of $100,000. Riverside notified Suntrust of its loan, requesting a limitation on future advances on the first loan. In fact, the dissent here states that Riverside sent three notices, which were in Suntrust's files.. (A Florida statute permits juniors to file such a notice with future advance lenders.)

Three years after Riverside's mortgage, Suntrust refinanced the first mortgage. Although Riverside's mortgage was of record, and although Riverside had provided actual notice of its existence to Suntrust, Suntrust's title search did disclose the Riverside mortgage, but miscast the holder of that mortgage as a mortgagor related entity, which, for reasons not disclosed in the opinion, would not enjoy primacy over the Suntrust refinance. Suntrust released its earlier mortgage on the assumption that it had a first lien position.

Later, when the property went into foreclosure, Suntrust discovered Riverside's lien, and asked that it be given the priority of its original mortgage.

Suntrust apparently styled this request as a claim that it was entitled to equitable subrogation to its prior lien. The trial court, relying upon two prior Florida Appeals cases that had denied equitable subrogation, denied that relief here as well.

On appeal: Held: Reversed. The Florida Court of Appeals, en banc, in a split decision, 9-1-2, concluded that equitable subrogation ought to have been granted here. It reversed the two prior cases, concluding that they had not fully analyzed the doctrine of equitable subrogation. It noted that other Florida cases had embraced the doctrine.

The majority concluded, consistent with the view set forth in the Restatement, that equitable subrogation will be available when there is no adverse impact on the expectations of the party being primed. That was true here, it asserted, since Riverside was junior to the original Suntrust mortgage when it loaned, and remained junior only to that original mortgage. A concurrence emphasized that the opinion should not be construed to provide any other benefits other than its original priority to the reinstated Suntrust loan, but the concurrence appears to go on to say that Suntrust, pursuant to its rights under that loan, could extend the time or, in the appropriate case, make future advances as it might have done originally.

The dissent strongly criticized the majority on a number of fronts, emphasizing that there was no fraud here or even excusable neglect. It noted that subrogation is an equitable remedy which equity can withhold where not appropriate. The dissent also alleged that the effect here would be to extend the term of the Suntrust loan to that of the new loan- more than 20 years longer. It doesn't mention future advances because apparently there was no future advance right under this loan.

The dissent also noted that Suntrust had a claim against its negligent title insurer, and consequently had an inadequate equitable position from which to argue that it deserved relief.

Comment 1: What is most interesting about this case is that the entire analysis has almost nothing to do with the legal principles actually at stake. Despite the constant reference by all the opinions to the doctrine of subrogation, in fact the principle of subrogation has no relevance to these issues.

Subrogation is a doctrine that is available (or might be available) when one party pays off the mortgage of another party with higher priority, and later seeks to enjoy the priority of the party it paid. The editor would agree with the view of the dissent that subrogation ought not be dispensed like Halloween candy to every careless mortgagee, but that there should be a provable claim of fraud or excusable mistake. The Restatement would provide subrogation more readily.

But subrogation is not at issue when a lender replaces a mortgage that it holds with another mortgage to the same lender from the same borrower securing a refinancing of the same property. Now the question is simply whether a mortgagor and mortgagee implicitly have the right to modify the mortgage in ways that do not injure the interests of third parties.

If, indeed, Suntrust had the right to contract to modify its mortgage, then its new mortgage, which replaces the old one, simply takes the priority of the original mortgage automatically, at least when this was the apparent intent of the parties.

Subrogation involves the intervention of equity in a legal relationship.

It is that feature that drives the editor to believe that it should be granted only when equities justify affirmative intervention. But in the case of replacement or modification of a mortgage, no equitable intervention is required. If the original mortgage vested the parties with the right to modify their contract, then the replacement is simply the implementation of their contract rights. The only reason not to permit modification is when some equity arises that would render the implementation inequitable - as where a third party took an interest in reliance upon a record discharge of the prior mortgage and before the substitute mortgage was recorded. That didn't happen in this case.

The Restatement would hold that modification or replacement of the senior mortgage is available whenever there is no impact on the junior, regardless whether the senior mortgage so provides, and in the view of the Restatement reporters, and the traditional majority view, extension of the time for payment does not work a disadvantage to junior creditors.

So this case is a "lay down hand," and all the muttering and complaining about the intervention of equity in the case is moot.

Comment 2: The editor confesses that he himself was first confused on this issue, since it was presented by the court as a subrogation claim, and expresses gratitude for clarification of his thinking to Dale Whitman, whose work in the Restatement was once again cited incorrectly by the court.

Comment 3: The dissent (also assuming it was talking about subrogation) once again raises the notion that we saw in the recent Kim decision (the DD for 9/26/01) that equitable relief ought not to be granted when a party has title insurance. This is an idea that is apparently developing "legs," even though it has been soundly refuted on DIRT. Shows who listens to us!!

On the other hand, the editor confesses that he finds something in the argument that where a problem is of a nature that ordinarily careful business persons would know enough to protect themselves against their own error, then that is a factor justifying the court's denial of relief from that error. In other words (assuming we had the proper case, which this isn't), it doesn't matter that Suntrust had insurance, but it ought to matter that Suntrust could have protected itself from its own error in a number of ways, including through insurance.

To reiterate, I see no need for this analysis in this case because, properly viewed, this is not a case for equitable intervention, but just a case for recognition of the proper priority for an existing legal mortgage.

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 1‑6, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Maria Tabor at the ABA. (312) 988 5590 or mtabor@staff.abanet.org

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