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Equitable Subrogation is an Over-used Remedy for Negligence
by Robert Franco | 2010/08/27 |

There is a great post on the Ohio Association of Independent Title Agent's (OAITA) blog - Ohio Supreme Court Says No to Equitable Subrogation.  The Ohio Supreme Court last week refused to apply the doctrine of equitable subrogation to save a lender from a "missed" mortgage when it refinanced the borrower's first mortgage.  My personal opinion - that is good news!

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Ordinarily in Ohio, the first mortgage presented shall be the first recorded, and the first mortgage recorded shall have preference. Commonly stated as "first in time, first in right."

In ABN AMRO v. Cuyahoga County Department of Development (CCDOD), the borrower originally had a first mortgage with First Ohio Mortgage Corporation (First Ohio) in the amount of $68,916, and a second mortgage with the CCDOD in the amount of $7,500.  Later, he refinanced the First Ohio mortgage with ABN AMRO, borrowing $77,000.  Unfortunately, the title examiner did not discover the CCDOD mortgage and it was not paid off, released, or subordinated.  Thus the CCDOD mortgage was the first recorded when ABN AMRO filed its foreclosure action against the defaulting borrower.

ABN AMRO argued that it should be paid first regardless of recording chronology because it paid off First Ohio and CCDOD had negotiated for a second lien position when its loan was made. 

Equitable subrogation is an exception to the "first in time, first in right" statute and is often used to advance the new lender to first position.   In 1898, the Ohio Supreme Court defined equitable subrogation:

Where money is loaned under an agreement that it shall be used in the payment of a lien on real estate, and it is so used, and the agreement is that the one who so loans the money shall have a first mortgage lien on the same lands to secure his money, and through some defect in the new mortgage, or oversight as to other liens, the money cannot be made on the last mortgage, the mortgagee has a right to be subrogated to the lien which was paid by the money so by him loaned, when it can be done without placing greater burdens upon the intervening lienholders than they would have borne if the old mortgage had not been released.

Interestingly, I wrote a blog about this case when it was decided at the appellate level - Equitable Subrogation.  The court of appeals danced around the important issues and it was unclear whether it actually reached the correct decision when it held that ABN AMRO was in first lien position. 

As I said in the previous blog:

There are two competing policy concerns at issue with equitable subrogation in such a case.  First, the title agency was negligent in failing to discover the CCDOD mortgage.  It searched the title and issued coverage to protect ABM from a loss due to its mortgage not having the first and best lien on the property.  Should the doctrine reward the party who was negligent in performing its duties?

Second, CCDOD had bargained for a second mortgage position.  If Kangah had not refinanced, CCDOD would have still been in second place.  Is it fair to reward it by allowing its mortgage to assume the first priority because of a mistake made by the title agent?

My personal opinion is that equitable subrogation is over-used.  The reason for obtaining title insurance is to insure lien position.  If the title company is negligent and misses a lien, I believe the proper recourse is a title insurance claim - not equitable subrogation.  And, that is more of less what the Ohio Supreme Court held.

Equitable subrogation is an equitable remedy that is appropriate only when the equities clearly favor the party asserting it.  In this case, we conclude that the equities disfavor ABN.

ABN would not be seeking equitable subrogation but for someone's negligence.  That circumstance alone was enough to defeat equitable subrogation in Jones [an earlier Ohio Supreme Court case].  Whether ABN or the title company it employed was negligent is uncertain.  If the title company was negligent, ABN may have a claim against it for its loss, negating its need for equitable subrogation.  CCDOD has no claim against ABN or the title insurance company.  Furthermore, CCDOD's note with Kangah prohibits it from seeking a judgment against Kangah; ABN's does not.

The emphasis of the Court's holding seems to be on the negligence in discovering the CCDOD mortgage when the ABN AMRO mortgage was made.  It does seem clear that where a title company is negligent and the lender has a valid claim on a policy of title insurance, equitable subrogation does not apply.  It is unclear how important it was that the CCDOD mortgage was non-recourse, but it was a factor the Court considered.

The Court also found that CCDOD was in a worse position because if equitable subrogation was applied it would be second to a larger mortgage that it was prior to the refinance.

The OAITA blog addressed this issue rather well.

Unfortunately, the Ohio Supreme Court did not apply the reasonable solution which would have been to limit the bank's recovery to the amount it paid to satisfy the first mortgage, rather than the full amount of its own mortgage.  Clearly, the court was confused as to how to apply the doctrine.  It is unclear whether the briefs or oral arguments helped to clarify that point for the court.

Normally, when a bank recovers under equitable subrogation, they are only entitled to the amount they paid to satisfy the prior mortgage, not the full amount of their own mortgage.  Had the Ohio Supreme Court been aware of this important point, it may have made a difference.

But I think there is more to the issue than how much of the new mortgage should receive priority.  I am inclined to believe that missing the opportunity to get paid off has prejudiced CCDOD.  Perhaps the mere passage of time made it more likely that the CCDOD would not get paid.  The property may have depreciated, the new mortgage may have had a variable rate making default more likely, or the credit worthiness of the borrower could have changed.  Regardless, CCDOD should have been given the opportunity to subordinate its loan or insist that it be paid prior to the refinance.

Somethings we just don't know.  But, I rather like the Supreme Court's ruling in this case.  It most certainly is not "title friendly;" title companies have gotten out of many a jam by arguing equitable subrogation.  I do believe that equitable subrogation is useful in certain circumstances where justice is better served by applying the doctrine, but I don't think it should be a catch-all for negligence. 

My hope is that this case will give the title industry a chance to reconsider its lax search standards and the "cheaper, faster" approach to title searching.  There is a reason the title search is so important and it is about time the title industry starts recognizing the value of a skilled, professional title abstractor.  I don't mean to say that even the best title abstractor is immune from making mistakes, but the chances of mistakes can be minimized by choosing the right abstractor.

Robert A. Franco



Categories: Abstractors, Foreclosures, Title Problems, Title Standards

1671 words | 8945 views | 2 comments | log in or register to post a comment

Agree and Disagree


"But I think there is more to the issue than how much of the new mortgage should receive priority.  I am inclined to believe that missing the opportunity to get paid off has prejudiced CCDOD.  Perhaps the mere passage of time made it more likely that the CCDOD would not get paid.  The property may have depreciated, the new mortgage may have had a variable rate making default more likely, or the credit worthiness of the borrower could have changed...."

I agree with  you on this point. Clearly, CCDOD is in a worse position based solely on the fact that the borrower is now in foreclosure, but qualified for a refinance when the mortgage was missed.  However, I'm not sure the courts should throw the baby out with the bathwater on this one. I also don't think the big underwriters are relaxing search standards because they can rely on "equitable subrogation" to save the day.  The big underwriters view title insurance like property and casualty. They are willing to take the risk based on profit/risk analysis. This ruling will have no impact on search standards. The only result this ruling will have is to erode the equitable remedy available to title insurance companies, underwriters and good abstractors (read "experienced and diligent") who make a mistake. It hurts the smaller players in the market much more than the big ones.

by J. H. | 2010/08/30 | log in or register to post a reply

Good point...

This will probably hurt the "smaller players" who rely on equitable subrogation when they make an honest mistake.  Unfortunately, I think equitable subrogation has been abused and the fact that it was so freely applied has allowed those with lax search standards or just poor searching practice to be rewarded for their short-cuts. 

In the end though, I think the court's point that if there is a title policy, the lender already has a remedy and it doesn't need an equitable one from the court, is well founded.  That is the purpose of title insurance. 

The down side of course is that there will be more title insurance claims and many of these may ultimately come back on the agent's or abstractor's E&O policy.  So, in the end, they will likely face a greater burden because of this decision.

by Robert Franco | 2010/08/31 | log in or register to post a reply
Source of Title Blog

Robert A. FrancoThe focus of this blog will be on sharing my thoughts and concerns related to the small title agents and abstractors. The industry has changed dramatically over the past ten years and I believe that we are just seeing the beginning. As the evolution continues, what will become of the many small independent title professionals who have long been the cornerstone of the industry?

Robert A. Franco



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