Secured Lender's Negligent Screw-Up When Failing To Pay Off All Existing Real Estate Liens Gives Unpaid Lienholder Priority Over New Mortgage In Ohio

Lexology reports:

• A recent Ohio appellate holding reinforces last year’s Ohio Supreme Court decision on the negligence exception to the doctrine of equitable subrogation. In Deutsche Bank National Trust Co. v. Boswell, 2011-Ohio-673, 2011 Ohio App. LEXIS 589 (Ohio App. 1st Dist. 2011), the plaintiff bank brought suit seeking foreclosure on defendants’ property. The bank argued that the doctrine of equitable subrogation gave its mortgage priority over a judgment lien recorded two weeks prior to the mortgage. Although not specified in the opinion, the defendants used part of the bank’s mortgage to satisfy other existing liens on the property. The judgment lien holder argued that the doctrine did not apply since the bank’s predecessor in interest (the mortgage company that originated the loan) failed to discover the judgment lien.

• The doctrine of equitable subrogation operates as an exception to the general rule of “first in time, first in right.” Under the doctrine, a mortgage “jumps” other liens in priority if part of its proceeds satisfy higher priority liens on the property.

• Last year, the Ohio Supreme Court examined the doctrine in ABN Amro Mtge. Group v. Kangah, 126 Ohio St.3d 425, 2010-Ohio-3379, holding that equitable subrogation did not apply to a fact pattern similar to Boswell. The Court held that a mortgagee was not entitled to the benefits of equitable subrogation if it was negligent in failing to discover existing liens prior to executing a mortgage.

• In Boswell, the First District Court of Appeals found that the plaintiff bank failed to explain why it had not discovered the judgment, a matter of public record, prior to executing and recording its mortgage. As a result, the court granted priority to the judgment lien over the bank’s mortgage.

Source: Recent Ohio decision reinforces negligence exception to doctrine of equitable estoppel (requires subscription; if no subscription, GO HERE, or TRY HERE - then click appropriate link for the story.).