Picker Financial Group L.L.C. v. Horizon Bank

• Decision Date: 12 May 2003
• Docket Number: No. 8:03-CV-17-T-30EAJ.,8:03-CV-17-T-30EAJ.
• Parties: PICKER FINANCIAL GROUP L.L.C., Appellant, v. HORIZON BANK, Appellee.
• Court: U.S. District Court — Middle District of Florida

293 B.R. 253

PICKER FINANCIAL GROUP L.L.C., Appellant, v. HORIZON BANK, Appellee.

No. 8:03-CV-17-T-30EAJ.

United States District Court, M.D. Florida, Tampa Division.

May 12, 2003.

Dawn A. Carapella, Trenam, Kemker, Scharf, Barkin, Frye, O'Neill & Mullis, P.A., Tampa, FL, Robin F. Frydman, Berger Singerman, Ft. Lauderdale, FL, for Picker Financial Group L.L.C.

Lynn V. Cravey, Ruden, McClosky, Smith, Schuster & Russell, P.A., Tampa, FL, for Horizon Bank.

ORDER

MOODY, District Judge.

This is an appeal from the United States Bankruptcy Court, Middle District of Florida, and this Court has jurisdiction pursuant to 28 U.S.C. § 158. Factual findings of the Bankruptcy Court are accepted unless clearly erroneous and questions of law are reviewed de novo. In re Patterson, 967 F.2d 505 (11th Cir.1992). The Court has considered the briefs of the parties as well as their oral arguments. While the law in Florida is unclear, the Court determines that the Bankruptcy Court's Order, though correct under the view of some cases, is contrary to the present state of the law in Florida and must be reversed.

FACTS

In November, 1996, Debtor borrowed money from American Bank ("American") and American duly recorded a UCC-1 financing statement perfecting its interest in various assets of the Debtor. Charles Connolly was at that time a vice-president and commercial loan officer at American. In February, 1999, Picker Financial Group LLC ("Picker") made a loan to Debtor and filed its UCC-1 perfecting its security interest covering the same assets.

Charles Connolly left American and, in October of 1999, became the president and chief executive officer at a new bank, Horizon Bank ("Horizon"). To generate business for Horizon, Connolly solicited loans from his prior customers at American, including Debtor. American, obviously distressed by the solicitation of its customers by one of its former officers, adopted the policy of not doing business with Horizon. For example, when Horizon took away a customer and paid off that customer's loan with American, American would refuse to assign its security position to Horizon, and only accept payment, as it must, and then satisfy the loan. Horizon knew of this policy and therefore did not even seek assignments from American.

In February of 2000, Horizon loaned Debtor $800,000 and received a security interest in Debtor's assets. Before entering into this loan, Horizon's attorney performed a UCC-1 search which revealed Picker's second position security interest. Horizon's attorney gave the UCC-1 search to Connolly immediately before the loan closing, but Connolly failed to look at the search. When Horizon made the loan to Debtor, a portion of the loan proceeds were paid directly to American in full satisfaction of Debtor's obligation. American filed a UCC-3 form with the Florida Secretary of State acknowledging that it had released its security interest in the collateral.

In addition to constructive notice from the UCC-1 filings, Appellant asserts that Connolly also had actual knowledge. He knew that Debtor had borrowed money from Picker because Connolly had seen a reference to a loan from Picker in Debtor's financial records. The Bankruptcy Court found that Connolly did not "know" of Picker's security interest. This Court accepts the Bankruptcy Court's finding that Connolly did not have actual knowledge of Picker's security interest. It is undisputed that Connolly had constructive knowledge.

DISCUSSION

The issue is simple: whether one who fails to look at a UCC-1 search showing the existence of a second position lienor is subrogated to the priority and security rights of the first lienor when it pays the indebtedness due to the holder of the first lien. One would expect this issue to have been long settled, but such is not the case. In fact, courts across the country, including Florida, are in considerable conflict. This lack of resolution is due largely because it arises from a court's equitable powers governed only by the case-by-case dispensation of justice to the parties.

Traditional v. Liberal View

The Supreme Court of Utah in Martin v. Hickenlooper, 90 Utah 150, 59 P.2d 1139 (1936), surveyed subrogation cases from many states and attributed the conflicting decisions to the lack of clear-cut rules of guidance.

There is much confusion in the reasoning of the cases as far as stating a definite basis for allowing subrogation. This is for the simple reason that the court saw, through the minds of the chancellors who sat upon them, situations which they thought called for equitable relief without stating in clear-cut fashion the real basis for it — thus further illustrating that the application of the doctrine of subrogation is one depending primarily upon the inherent justice or equity of each particular case. It may also be remarked that while many of the decisions do homage to the requirement of an express or implied contract for subrogation as the basis for their decisions, it requires a very great stretching of the facts to find either.

Martin, at 1143.

In Martin, the Court distilled the confusion surrounding equitable subrogation into court's accepting one of two views. Under the traditional view, constructive notice of a second position lienor prevented subrogation to the first lienor by a subsequent lender who paid off the first lienor.¹ Other courts, including the Martin Court, adopted the so called modern view.² Under the modern view, which this Court calls the pure liberal view, constructive notice is irrelevant and subrogation is allowed unless the intervening lender suffers some prejudice.³

These two conflicting views have given rise to directly contrary results not only in different states, but even in the same state. A good example of such contrary results can be found in equitable subrogation cases from Missouri. At the turn of century, Missouri followed the traditional view. See Bunn v. Lindsay, 95 Mo. 250, 7 S.W. 473 (1888).⁴ In Bunn, the Missouri Supreme Court held that equitable subrogation did not apply to a lender who had constructive notice of an intervening lien. See id. at 476. By 1955, the Missouri Supreme Court had completely reversed its position and adopted the more liberal view of subrogation, holding that a lender was entitled to subrogation without regard to his negligence in learning of an intervening lien. See Anison v. Rice, 282 S.W.2d 497 (Mo.1955). Recently, the Missouri Supreme Court changed yet again reversing back to the traditional view,⁵ or perhaps a mixed view allowing some relaxation of the traditional view but disallowing equitable subrogation where there is constructive notice. See Thompson v. Chase Manhattan Mortgage Corp., 90 S.W.3d 194, 207 (Mo.App.S.D.2002).⁶

Differences in Terminology Used

Courts not only differ in their application of either the traditional or liberal view of subrogation, but also in their definition of the terminology involved. For example, it is often said (as it is in Florida) that equitable subrogation is not available to a mere volunteer. Dade County School Board v. Radio Station WQBA, 731 So.2d 638 (Fla.1999). But, what is a volunteer? Is a prospective lender who has no present interest in the property a "volunteer" when it makes a loan and pays off a prior lender intending to protect the interest it acquires? Yes, say some courts. See Aetna Life Ins. Co. of Hartford v. Town of Middleport, 124 U.S. 534, 8 S.Ct. 625, 31 L.Ed. 537 (1888) and Boley v. Daniel, 72 Fla. 121, 72 So. 644 (1916). No, say other courts. See Anison v. Rice, 282 S.W.2d 497 (Mo.1955) and Federal Land Bank of Columbia v. Godwin, 107 Fla. 537, 145 So. 883 (1933). There are cases in Florida on both sides of this issue.

Some courts say that even a volunteer is entitled to equitable subrogation. These courts base their reasoning on the prevention of a windfall to the intervening lienor. That is, if a new lender pays off the first lien, why should the second lienor receive a windfall by moving up to a first position when it would be where it had bargained to be by remaining in the second position if the new lender is subrogated only to the extent of its payment to the first lienor. This is the liberal view in its purest sense. In this view, constructive notice to the new lender is immaterial — even if the new lender is negligent in failing to examine the record, equity will offer its protection as long as other parties do not suffer. A good example of this view is found in Rinn v. First Union National Bank of Maryland, 176 B.R. 401 (D.Md.1995) wherein the Court explained:

Whereas inexcusable neglect of the parties seeking subrogation may preclude relief, the mere fact that the party has in some respects been negligent, or been guilty of acts of omission, does not necessarily and in the absence of intervening equities defeat his right to subrogation. (Citations omitted). Especially where such ordinary negligence is as to the lender's own interest and does not affect prejudicially the interest of the person to whose rights he seeks to be subrogated, or where the negligence does not increase the burdens of any lienholder, relief will not be barred. (Citations omitted).

176 B.R. at 411.

As pointed out in a recent Florida Fourth District Court of Appeal opinion, the Restatement has now adopted the liberal view:

Under the Restatement (Third) of Property: Mortgages § 7.6 cmt. e (1996), a refinancing lender is equitably subrogated to the priority of the first mortgage even where it has actual knowledge of the intervening lien:

Under this restatement, however, subrogation can be granted even if the payor (the refinancing lender) had actual knowledge of the intervening interest; the payor's notice, actual or constructive, is not necessarily relevant. The question in such cases is whether the payor reasonably expected to get security with a priority equal to the mortgage being paid. Ordinarily lenders who provide refinancing desire and expect...