The Ohio Supreme Court in ABN AMRO Mortgage Group, Inc. v. Kangah (2010), 126 Ohio St.3d 425, resolved a split of authority among the Ohio Appeals Courts regarding the doctrine of equitable subrogation. The Ohio Supreme Court determined that a lender cannot use the doctrine of equitable subrogation to obtain a first lien position when that lienholder had no actual knowledge of a competing lien due to its mistake, or the mistake of a third party, even if the competing lienholder had the expectation that its interest would be junior at the time that it received its interest. Ohio Appellate Courts had split across the state on this issue.
In Kangah, the borrower Jacob Kangah signed two promissory notes that were both secured by a mortgage on his property. The first mortgage was held by First Ohio Mortgage Corporation, and the second mortgage held by the Cuyahoga County Department of Development (“CCDOD”).
Approximately a year later, Kangah refinanced his first mortgage with ABN AMRO Mortgage Group (“ABN AMRO”) which became the owner of a Note which should have been secured by a first mortgage. ABN AMRO, however, did not discover through its title search the second mortgage on record held by the CCDOD. Thus, ABN AMRO loaned Kangah $77,000, and retired the first mortgage, but the CCDOD mortgage was not extinguished in the refinance.
ABN AMRO eventually filed for foreclosure on the property. CCDOD filed a Crossclaim asserting that it now held the first and best mortgage lien on the property.
ABN AMRO argued that it was protected by the doctrine of equitable subrogation, and that its lien should be the priority lien because (1) under the doctrine of equitable subrogation, ABN AMRO intended to hold the first and best lien, and (2) CCDOD always had the expectation that it was going to be a “second” mortgage, and that its interest would be junior to the first mortgage. Therefore, ABN AMRO argued that it should hold the first lien position under the doctrine of equitable subrogation as CCDOD suffered no harm.
The Ohio Supreme Court disagreed and found that the doctrine of equitable subrogation would not apply and that the ABN AMRO mortgage would be junior to that of CCDOD.
The Ohio Supreme Court first noted that, under Ohio Revised Code § 5301.23(A), mortgages take effect in the order of their presentation. In other words, the mortgage first filed in time (in this case CCDOD) has priority over subsequently filed mortgages.
The Court then noted that the doctrine of equitable subrogation had been, in fact, applied by the Ohio Supreme Court in other cases. However, the Ohio Supreme Court distinguished those cases on the grounds that, in general, (1) the doctrine would only apply if the holder of the second mortgage would not be in a “worse position” by application of the doctrine, and (2) here, ABN AMRO was seeking equitable subrogation as a result of its negligence or the negligence of its title insurance company. Under these circumstances, the Court ruled the doctrine of equitable subrogation will not apply.
The Ohio Supreme Court’s decision is significant as lenders will now not be able to utilize the doctrine to take priority lien positions, if previously filed liens are missed in the title search. Lenders will now have to seek redress against title companies for such claims. As a result, lenders will now, without question, be forced to either threaten or file litigation against title insurance companies.
It remains to be seen whether the doctrine will be extended to less sophisticated lenders. The Ohio Supreme Court’s case also leaves a potential “open door” if the lender can show that the junior lien holder would not otherwise be in a “worse position” by application of the doctrine. For example, this might be proven by showing that the original loan is now refinanced for a lesser amount, and therefore, the owner of the second mortgage is actually in a somewhat improved position from the time of the filing of the first mortgage.
If you have any questions regarding this case or any issues involving creditor’s rights, or secured interest in real estate, please feel free to contact any of the members of the Finance and Creditor’s Rights or Real Estate Practice Groups.