Aurora Loan Serv. LLC v. Senchuk

• Decision Date: 28 May 2010
• Docket Number: No. 1D09-3512.,1D09-3512.
• Citation: 36 So.3d 716
• Parties: AURORA LOAN SERVICES LLC, Appellant,v.Yuri SENCHUK; Olga Senchuk; Any and all parties claiming by, through, under and against the herein named individual Defendant(s) who are not known to be dead or alive, whether said unknown parties may claim an interest as Spouses, Heirs, Devisees, Grantees or other Claimants; Highland Glen Owner's Association, Inc.; John G. Barry, III, and Carmen M. Barry; John Doe and Jane Doe as Tenants in Possession, Appellees.
• Court: Florida District Court of Appeals

36 So.3d 716

AURORA LOAN SERVICES LLC, Appellant,v.Yuri SENCHUK; Olga Senchuk; Any and all parties claiming by, through, under and against the herein named individual Defendant(s) who are not known to be dead or alive, whether said unknown parties may claim an interest as Spouses, Heirs, Devisees, Grantees or other Claimants; Highland Glen Owner's Association, Inc.; John G. Barry, III, and Carmen M. Barry; John Doe and Jane Doe as Tenants in Possession, Appellees.

No. 1D09-3512.

District Court of Appeal of Florida,

First District.

April 13, 2010.

Rehearing Denied May 28, 2010.

Gigi Rollini of Holland & Knight LLP, Tallahassee; Daniel K. Bean and Renee J. Maxey of Holland & Knight, LLP, Jacksonville, for Appellant.

William Nussbaum of Scott, Barker & Nussbaum, Jacksonville, for Appellees John G. Barry, III, and Carmen M. Barry.

WOLF, J.

Aurora seeks review of the trial court's order granting the Barrys' motion for summary judgment in the underlying foreclosure action which concluded, as a matter of law, that the Barrys' mortgage was first in seniority to Aurora's mortgage. We reverse.

The Facts:

On or about May 31, 2005, Olga and Yuri Senchuk (the Senchuks) executed a mortgage in favor of Wells Fargo Bank, in the principal amount of $419,330.00, and this mortgage was recorded on June 13, 2005. On August 3, 2005, the Senchuks executed and delivered a second mortgage (Barrys' mortgage) with a principal loan amount of $70,000, and this mortgage was recorded on August 11, 2005.

On November 16, 2006, the Senchuks executed the underlying Aurora mortgage for the amount of $507,900.00, which was used to pay off the first mortgage with the remainder being paid to the Senchuks personally. This mortgage was recorded shortly thereafter, but the record reveals the Senchuks did not use the additional proceeds to pay off the Barrys' mortgage and that mortgage remained unsatisfied.

At some point, the Senchuks defaulted on both the Aurora mortgage and the Barrys' mortgage and Aurora initiated a foreclosure action joining the Barrys as interested parties. The Barrys filed an answer/counterclaim to the foreclosure complaint seeking a ruling that their mortgage was superior to Aurora's based on the Florida recording statutes. The Barrys moved for summary judgment on the counterclaim, and Aurora asserted summary judgment was inappropriate because the doctrine of equitable subrogation should be employed to place Aurora's mortgage in the senior lien position. The trial court rejected Aurora's argument and entered a final order of foreclosure which granted the motion for summary judgment in favor of the Barrys and placed the Barrys' mortgage first in priority.

The Doctrine of Equitable Subrogation:

Among other issues, Aurora asserts the trial court erred in determining the doctrine of equitable subrogation did not apply to allow the Aurora mortgage, which refinanced the first mortgage, to step into the proverbial shoes of the original mortgage holder. Equitable subrogation is a remedy in equity and its application has been debated in several Florida opinions. Generally, subrogation is “[t]he substitution of one party for another whose debt the party pays, entitling the paying party to rights, remedies, or securities that would otherwise belong to the debtor.” Black's Law Dictionary 1440 (7th ed. 1999).

Equitable subrogation has been employed by courts to allow creditors refinancing a first mortgage to retain the position of senior lien holder in foreclosure actions in which an otherwise junior lien holder alleges seniority by virtue of the recording dates of the mortgages. The first Florida case considering equitable subrogation in this context was Boley v. Daniel, 72 Fla. 121, 72 So. 644 (1916).

In Boley, Daniel made a loan for the purpose of satisfying a property's existing first mortgage without actual knowledge of an existing second mortgage on the property with Boley. Id. at 645. After stating the facts, the Boley court reasoned:

The fact that a subsequent mortgagee's lien will occupy the same relation to the property, if one who has advanced money, secured by a mortgage on the real estate, to pay off the prior mortgage, is subrogated to the rights of the holder of such first mortgage, affords no reason why equity should permit the party so advancing the money to be subrogated to the right of the holder of the first mortgage.

When a first mortgage lien existing against real estate is paid off, the lien of a second mortgage thereon becomes at once, by operation of law, a first lien on the property; and this first lien, and the right to enforce it as such, are vested rights.

Courts of equity will not apply the doctrine of subrogation where to do so would be to deprive a party of a legal right.

Being under no duty, legal or otherwise, to pay the first mortgage debts, Daniel is not entitled to a legal subrogation to the prior right that had existed in favor of the first mortgage holder. And not having shown an agreement that the lien of the first mortgage should be kept alive for his benefit, but it appearing merely that the agreement was for ‘a first lien on the property covered by’ the last mortgage, which included other property besides that covered by the first mortgage, and that Daniel, ‘in the belief that there were no other liens on the property, caused to be satisfied on record the first mortgage,’ there is no clear showing of a right to a conventional subrogation.

Id. at 645-46 (citations omitted). Boley appears to have rejected the doctrine of equitable subrogation in the mortgage context. However, while this case was never expressly overruled, in Forman v. First National Bank of Quincy, 76 Fla. 48, 79 So. 742 (1918), the supreme court narrowed the holding of Boley to its facts and for the first time, applied the doctrine of equitable subrogation to allow a refinancer of a first mortgage to retain the seniority of the first mortgage against a second. In Forman, the court noted:

The complainant banks cannot complain at this conclusion. It leaves them in precisely the same position, with respect to their security, that they occupied at the time they became the holders of the notes which are the basis of their claims.

Id. at 744.

Several years later, in Federal Land Bank of Columbia v. Godwin, 107 Fla. 537, 145 So. 883, 885-86 (1933), the court again applied the doctrine, stating:

In representing that there were no other incumbrances on the lands mortgaged, Godwin perpetrated a fraud on appellant. As a result of this fraud and failure to locate any adverse claimant to said lands, appellant advanced money to retire Godwin's first mortgage on the express agreement that it (appellant) was to have a first lien on said lands to secure repayment of the sum loaned. It would be grossly inequitable under such circumstances to hold that the appellant was not entitled, as against the holder of the second mortgage, to be treated as the assignee of the first mortgage, and thus by chance or fortune raise the second mortgage to the dignity of the first, contrary to the intention of the parties.

The application of this rule works common justice to all; it prevents injury to appellant, who furnished the money to pay off the first mortgage in ignorance of the second; it gives appellant the benefit of its payment, carries out the intention of the parties; and leaves Alderman, the holder of the junior mortgage, in his original position. One of the first tests determining the application of this rule is whether or not subrogation to the place of the prior or retired lien puts the holder of the second lien in any worse position than if the prior lien had not been discharged.

Godwin suggests if the first mortgage holder made all reasonable efforts to discover any mortgages or encumbrances against the property, the doctrine of equitable subrogation should be employed to protect its security interest. However, in doing so Godwin again reiterated the importance of determining if the second mortgage holder would be left in the same position for which the second mortgage holder had originally contracted. Id.

Since this early line of cases, equitable subrogation was again discussed in 1987 when the Third District in Eastern National Bank v. Glendale Federal Savings and Loan Association, 508 So.2d 1323, 1324-25 (Fla. 3d DCA 1987), considered a case very similar to the underlying case and stated in pertinent part:

Some courts have refused to apply the doctrine where the party seeking to invoke it is negligent, stating that to do so would be to reward negligence. Fort Dodge Bldg. & Loan Ass'n v. Scott, 86 Iowa 431, 53 N.W. 283 (1892). However, two grounds are recognized for permitting subrogation against intervening interests even where there is a negligent failure to discover a prior recorded junior lien. First, negligence which has not resulted in harm to anyone will not be invoked to permit unjust enrichment of the later lienors through their fortuitous advancement in priority by reason of mistake. See Federal Land Bank v. Joynes, 179 Va. 394, 18 S.E.2d 917 (1942); Banta v. Vreeland, 15 N.J.Eq. 103, 107 (1862). Second, the function of constructive notice is to preserve an existing advantage and not to gain a new one. Martin v. Hickenlooper, 90 Utah 150, 59 P.2d 1139 (1936); Note Equitable Substitution of Mortgages, 26 Harv. L. Rev. 261 (1913).

However, after discussing constructive notice and its bearing on the application of the equitable subrogation doctrine, the court declined to rule on the matter, finding conventional subrogation, or subrogation contracted for between the original parties, provided the refinancing bank relief because a contractual provision existed between the debtors and the refinancing bank which stated the bank would be entitled to the rights and remedies of the first mortgage holder. Id. at 1325.

Several years later, in Suntrust Bank v. Riverside National Bank of Florida, 792 So.2d 1222 (Fla. 4th DCA 2001), an en banc decision,...