In Aurora the Court of Appeals for the First District of Florida had for the first time an opportunity to determine what constitutes prejudice when the doctrine of equitable subrogation is used to allow a refinancer of a first mortgage to retain the seniority of the first mortgage against a second when the second was not paid off during the refinancing. The court determined that Florida adheres to the modern/liberal view when it comes to the application of the doctrine of equitable subrogation. Under the modern view, as opposed to the traditional view, constructive notice of the second lien to the first does not preclude the application of the equitable subrogation doctrine. The court will only look to whether the second lien holder would be prejudiced if the doctrine of equitable subrogation is applied.
In determining if the second lien holder is prejudiced, the court looks to whether the lien holder was left in a worse position than if the prior lien had not been discharged. The court found that when a first mortgage loan is refinanced for more than the amount due and owing on the first mortgage, the risks assumed by the second lien holder increase without the second lien holder’s consent and prejudice ensues.
Aurora is unique in that the refinanced holder of the first mortgage agreed to cap their claim at the amount of the original first mortgage, despite the fact that the re-finance was for a considerably higher amount. The court found that the doctrine of equitable subrogation applied and permitted the re-financed first mortgage holder to maintain its first position over the second lien holder.
Aurora Loan Services, LLC v. Senchuk, et al, 2010 Fla.App.LEXIS 4869
Date: April 13, 2010