August 25, 2010 –
The Ohio Supreme Court has reversed the Eighth Appellate District (Cuyahoga County, Ohio) and a trial court holding that the doctrine of equitable subrogation does not apply to allow a mortgagee-bank to take priority over a second mortgage to the Cuyahoga County Department of Development (CCDOD) when the mortgagee-bank refinanced the prior first mortgage and inadvertently provided CCDOD with mortgage priority in the corresponding foreclosure.
This is the first time since 1980 that the Ohio Supreme Court has entered the fray on the issue of equitable subrogation and the result could not have been worse for title insurance agents and title insurance underwriters doing business in Ohio.
In 2000, the homeowner executed two mortgages. The first to a mortgage company in the amount of $68,916.00 and the second to CCDOD for $7,500.00. Although unclear from the Ohio Supreme Court’s review of the facts, the CCDOD promissory note apparently prevented CCDOD from filing for foreclosure.
This becomes an issue later on.
In 2001, the homeowner refinanced the first mortgage through the mortgagee-bank named in the appeal for $77,000.00. The loan paid off $69,468.60 for the mortgage company first, but failed to find and pay off the CCDOD second.
In 2006, the mortgagee-bank filed for foreclosure against the homeowner. The trial court granted priority to the bank over the CCDOD mortgage. The appellate court upheld that determination and, upon the homeowner’s motion, certified a conflict to the Ohio Supreme Court because there were several appellate district court’s with differing views on the subject. The Ohio Supreme Court, in an unanimous decision, held that equitable subrogation depends on the facts and circumstances of each case and that the party asserting it must have strong equity and a clear case. In particular, the court said that if the title agent that performed the search was negligent, the bank may have a valid title claim against it thereby negating the need for equitable subrogation. Further, the court stated that CCDOD’s note prohibited it from seeking a judgment against the homeowner; whereas, the bank’s note did not.
Most significant for the court’s holding was the fact that CCDOD was in a worse position than it would have otherwise been because rather than being behind a first mortgage to the tune of roughly $68,000.00, CCDOD was now behind a first mortgage in the amount of $72,000.00. Thus, CCDOD’s position was worse. Consequently, the Ohio Supreme Court held against the bank and the title insurance industry.
What does this mean to title agents and the industry?
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. For title insurance agents, the case result is simple. Be thorough and no harm will come to you. Be careless and stuff like this will happen.
It would be interesting to learn why the CCDOD mortgage was missed when it was apparently executed the same day as the first mortgage and presumably filed in order. Was there a search anomaly? Did the examiner have errors and omissions? Was this a direct operation’s work?
It would also be interesting to find out why the mortgagee-bank or the title insurer for the bank was so stubborn to not pay off and remove the CCDOD mortgage when it became certain that an appeal to the OSC was possible. After all, it was only $7,500.00. Seems like a huge gamble on principle for such a small harm.
Despite the holding, equitable subrogation will remain viable in Ohio — albeit on a form of life support. As the OSC states, these cases are measured on a case and fact-specific basis. In circumstances where the intervening mortgagee has suffered no change in position as a result of the doctrine, it is possible to recover even despite the decision of the court.
For those interested, the case is ABN-Amro Mortgage Group, Inc. v. Kangah, 2010 WL 3272260 (Ohio), 2010-Ohio-3779. A copy of the case is embedded below.