In Ohio, mortgages are generally entitled to priority based on the dates they are filed for record. In other words, a properly recorded mortgage is entitled to priority over a subsequently recorded mortgage. However, there are exceptions to this rule. The common law doctrine of equitable subrogation is one such exception. It has often been invoked by mortgage holders seeking relief from their mistakes or oversights, with regard to prior mortgages.
On August 19, 2010, the Ohio Supreme Court issued its decision in ABN AMRO Mortg. Group v. Kangah (2010 Ohio 3779), substantially limiting the application of equitable subrogation in Ohio.
The case presented a common fact pattern. Lender 1 had a first mortgage and Lender 2 had a second mortgage. Lender 3 made a loan to pay off Lender 1’s mortgage, but due to Lender 3’s own negligence or that of its title searcher, it overlooked Lender 2’s mortgage. When Lender 3 subsequently commenced a foreclosure, Lender 2 claimed priority based on its mortgage having been filed prior to Lender 3’s. Lender 3 argued that because its funds were used to pay off Lender 1, it was entitled based on equitable subrogation, to “step into the shoes of Lender 1,” and was, therefore, entitled to priority.
Earlier cases blocked the application of equitable subrogation where the party asserting it was negligent. However, in recent years, some Ohio courts started a trend whereby equitable subrogation was applied more liberally to allow a lender in Lender 3’s position to jump ahead of Lender 2, even where Lender 3 or its title searcher had been negligent. These courts focused on the facts that Lender 2 expected to be in second position when it made its loan, and Lender 3 expected to be in first position when it made its loan.
However, in the Kangah case, the Ohio Supreme Court stopped the trend and re-established the more stringent standard, stating that “equitable subrogation is an equitable remedy that is appropriate only when the equities clearly favor the party asserting it.” Because Lender 3’s overlooking of Lender 2’s mortgage was the result of Lender 3’s own negligence or that of its title searcher, it was not entitled to equitable subrogation, and therefore, its mortgage was not entitled to priority over Lender 2’s mortgage. .
This case, which is now controlling authority in Ohio, will limit the application of equitable subrogation throughout the state, especially in cases where a lender or its title searcher have negligently overlooked a properly recorded mortgage. As a practical matter, the decision will provide competing mortgage holders with more consistency and predictability in the outcome of these cases.
The case underscores the critical importance for mortgage lenders to obtain not only a title search, but title insurance to cover their expected priority of their mortgage. Without title insurance, the lender risks a loss due to prior liens of which it might not have been aware.
Thoroughbred Title Agency, Inc. offers both loan policies of title insurance for new loans and owners policies of title insurance in connection with the sales of REO’s throughout Ohio, as well as Kentucky, Indiana, and Michigan.
Weltman, Weinberg & Reis Co., LPA (WWR) regularly handles mortgage litigation, and will continue to follow developments as the courts continue to refine the application of equitable subrogation.
If you have any questions on this matter, please contact Michael F. Schmitz, Esq. Mr. Schmitz is an associate in Litigation & Defense, working with the Real Estate Default Group of Weltman, Weinberg & Reis Co., L.P.A. (WWR), located in the Cleveland office. Mr. Schmitz can be reached at (216) 685-1106 or via e-mail at mschmitz@weltman.com.
