Mortgage lenders and title insurance companies regularly rely on the doctrine of equitable subrogation to establish a lender’s intended lien position when a mortgage lien fails due to a defect in form, execution, or recording, or when a prior junior lien was missed in a title search and not satisfied and, thus, would have priority over the new lender’s mortgage under the recording statute. The doctrine serves as an important exception to Florida’s recording statute, which subjects the liens of subsequent mortgages to previously recorded mortgages. The following outline summarizes the doctrine under Florida law.
Florida courts have long employed the doctrine of equitable subrogation to allow a lender who satisfies an existing first mortgage with the proceeds of its loan to step into the shoes of the senior lien it has satisfied to avoid a prior junior lienholder from having priority over the new lender’s lien under Florida’s recording statute. The doctrine is intended to protect the expectations of the parties, avoid injustice, and prevent windfalls. As the prior junior lienholder would be subject to the original first mortgage, and the doctrine allows subrogation only to the extent of that prior first lien position, the prior junior lienholder gets what it bargained for and is not prejudiced. This equitable doctrine thus provides a valuable tool for preserving lenders’ investments and avoiding unjust enrichment.
When Does Equitable Subrogation Apply?
Courts typically take one of three approaches to the application of the doctrine. See Equitable Subrogation: Can a Refinancing Mortgagee Establish Priority Over Intervening Liens? A majority of jurisdictions take the view that a lender with actual knowledge of a prior junior lien is not entitled to equitable subrogation, while a lender with only constructive notice may be entitled to it. A minority of courts find that either actual or constructive knowledge of a prior junior lien is sufficient to preclude application of the doctrine. In contrast, other courts have adopted the position of the Restatement (Third) of Property: Mortgages, which treats notice or knowledge of the prior junior lien as irrelevant and instead looks exclusively at whether the lender satisfied the prior lien and whether application of the doctrine is necessary to prevent unjust enrichment. The doctrine in Florida has evolved toward the Restatement view.
Florida’s Seminal Cases
Almost a century ago, the Florida Supreme Court held that a lender whose loan proceeds satisfied a first mortgage on the property was not entitled to be equitably subrogated to the position of the first mortgage because he had no obligation to pay the note secured by the first mortgage and had no prior interest or relation to the property. Boley v. Daniel. The Boley opinion is not a model of clarity, however, because in addition to equitable subrogation, the Court also addressed—in the same condensed passage—conventional subrogation, which applies when the parties expressly agree that the first mortgage will continue for the benefit of the new lender. In addition to holding that he was not entitled to equitable subrogation because he was a volunteer, the Boley Court also held that Daniel, the new lender, was not entitled to conventional subrogation, as he did not have actual knowledge of the junior lien and thus could not have expressly contracted around it. In doing so, the Boley Court observed that the prior junior lien was recorded, thus putting Daniel on constructive notice of it, and was therefore binding on Daniel. The Boley Court noted that the satisfaction of the prior first lien vested the prior junior lienholder with a first lien by operation of law and that the application of the equitable doctrine would deprive it of this vested legal right against the property.
Although the Boley Court appeared to reject the application of the doctrine where the prior junior mortgage is properly recorded, the Florida Supreme Court later significantly limited its opinion in Boley in Federal Land Bank of Colombia v. Godwin. The Godwin Court held that a refinancing lender who satisfied a first mortgage was entitled to equitable subrogation where the prior junior lienholder would be in no worse position because of the subrogation. The Godwin Court reasoned that the application of the doctrine worked a common justice to all, prevented injury to the new lender, gave the lender the benefit of his payment, carried out the intention of the parties, and left the prior junior lienholder in his original position. The Godwin Court also distinguished Boley, observing that, among other things, unlike in Boley, the new lender was not a volunteer and took precautions to clear title. Shortly after issuing the Godwin opinion, the Florida Supreme Court affirmed this principle in Brannon v. Hills, holding that a refinancing lender is not a mere “volunteer,” who may be precluded from subrogation on that ground alone.
Will the Lender’s Constructive or Actual Knowledge Preclude Application?
Subsequent Florida cases have confirmed that Florida has moved away from Boley and that the doctrine of equitable subrogation is available even if the new lender has constructive knowledge of the prior junior lien. For example, the Florida Fourth District Court of Appeal relied on Godwin in holding that equitable subrogation was available to a lender who negligently failed to find the recorded prior junior lien when it searched title, as long as the prior junior lienholder would be no worse off than it would have been if the original first mortgage had not been satisfied. SunTrust Bank v. Riverside Nat’l Bank of Fla.
Although most Florida courts have embraced the doctrine, one federal district court applying Florida law did not allow its application. In Picker Financial Group, L.L.C. v. Horizon Bank, the court recognized and discussed the Restatement rule and the Riverside opinion but nevertheless denied equitable subrogation, concluding that Boley is still good law and the Boley Court denied equitable subrogation based on the lender’s constructive notice of the prior junior lien. The Picker Court declined to interpret Godwin as a total abandonment of constructive notice as a factor in equitable subrogation.
More recent Florida opinions, however, have again confirmed the doctrine’s application under Florida law and have moved closer to the Restatement position. For example, the Florida First District Court of Appeal, recently carefully summarized Florida law on equitable subrogation, expressly disagreed with the district court’s opinion in Picker, and found Riverside to be binding on the trial court. Aurora Loan Servs., LLC v. Senchuk. The Senchuk Court held that the trial court erred in holding that Boley barred application of equitable subrogation merely because the lender had constructive notice of the intervening lien.
What Is Prejudice, and When Does It Preclude Application?
In addition to the issue of notice or knowledge of the intervening lien, one of the key concepts in the application of this doctrine is whether the prior junior lienholder would be prejudiced. The Boley opinion is once again the outlying opinion, apparently holding that equitable subrogation will not apply where a senior lien is satisfied thus vesting in the prior junior lienor a legal right to a first lien position. This broad ruling would appear to preclude application of equitable subrogation in almost every situation where the prior first lien is paid off and the prior junior lien is properly recorded, but both the Godwin Court and the Riverside Court expressly applied the doctrine in just this situation. Both Courts made clear, however, that a new lender would only be entitled to equitable subrogation to the extent that the prior junior lienholder would be in no worse position than if the original first mortgage had not been satisfied. The Senchuk Court likewise held that equitable subrogation could not be applied to prejudice the prior junior lienholder. The Senchuk Court further helpfully defined “prejudice” as prejudice in the context of a foreclosure, finding that a new lender would be entitled to equitable subrogation only to the extent of the amount due and owing on the original first mortgage.
In a recent and factually unique case, the Florida Third District Court of Appeal refused to apply equitable subrogation on the basis of prejudice to the prior junior lienholder. Velazquez v. Serrano. In Velazquez, a lender satisfied two prior mortgages with its loan proceeds when its borrower purchased the property. However, a third lien went unpaid. The new lender claimed it was entitled to be equitably subrogated to the two prior mortgages, but the Third District Court of Appeal held that equitable subrogation did not apply because the third lienholder had been harmed when the property was sold and her mortgage loan was not satisfied. Because there were proceeds available from the closing that could have been used to pay off the third lien and because the third lien mortgage contained a due-on-sale clause, the Court rejected application of the doctrine. However, Velazquez appears to be limited to its unique facts and thus distinguishable from the other equitable subrogation cases in Florida.
Who Is a Volunteer, and Does It Matter?
While the Boley Court denied equitable subrogation to a lender because he was under no obligation to pay the first mortgage, the Godwin Court moved away from Boley’s definition of “volunteer” by holding that a new lender is not a volunteer, even though the lender had no previous interest in the property or obligation to satisfy the first mortgage. Even the Picker Court recognized that the Florida Supreme Court had changed its definition of the term “volunteer” from Boley to Godwin. Thus, to the extent that subsequent Florida cases, such as Senchuk, do not even discuss the issue of whether a refinancing lender is a volunteer, the “volunteer” analysis now appears unnecessary to determining whether a lender is entitled to equitable subrogation.
John C. Murray, Equitable Subrogation: Can a Refinancing Mortgagee Establish Priority Over Intervening Liens?, 45 REAL PROP., TR. & EST. L.J. 249 Summer 2010.
RESTATEMENT (THIRD) OF PROPERTY: MORTGAGES § 7.6 SUBROGATION (1997).
Boley v. Daniel, 72 So. 644 (Fla. 1916).
Fed. Land Bank of Colombia v. Godwin, 145 So. 883 (Fla. 1933).
Brannon v. Hills, 149 So. 556 (Fla. 1933).
SunTrust Bank v. Riverside Nat’l Bank of Fla., 792 So. 2d 1222 (Fla. 4th DCA 2001).
Picker Fin. Group, L.L.C. v. Horizon Bank, 293 B.R. 253 (M.D. Fla. 2003).
Aurora Loan Servs., LLC v. Senchuk, 36 So. 3d 716 (Fla. 1st DCA 2010).
Velazquez v. Serrano, 43 So. 3d 82 (Fla. 3d DCA 2010).
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