G.E. Capital Mortg. Services, Inc. v. Levenson, 101

• Decision Date: 01 September 1994
• Docket Number: No. 101,101
• Citation: 338 Md. 227,657 A.2d 1170
• Parties: G.E. CAPITAL MORTGAGE SERVICES, INC. v. Steven A. LEVENSON. ,
• Court: Maryland Court of Appeals

Page 227

338 Md. 227

657 A.2d 1170

G.E. CAPITAL MORTGAGE SERVICES, INC. v. Steven A. LEVENSON.

No. 101, Sept. Term, 1994.

Court of Appeals of Maryland.

May 12, 1995.

Lawrence J. Gebhardt (Mark M. Dumler, Gebhardt & Smith, all on brief), Baltimore, for petitioner.

David P. Sutton (William Hoffman, both on brief), Baltimore, for respondent.

Argued Before ELDRIDGE, RODOWSKY, CHASANOW, KARWACKI, BELL and RAKER, JJ., and JOHN F. McAULIFFE, Judge (retired) Specially Assigned.

RODOWSKY, Judge.

This case involves the operation and effect of equitable subrogation on the priority of liens against realty. Subrogation is

"the substitution of one person to the position of another, an obligee, whose claim he has satisfied. ... The basic principles underlying subrogation are the same as those in constructive trusts, prevention of merger, and equitable liens, i.e., restitution to prevent forfeiture and unjust enrichment."

G.E. Osborne, Handbook on the Law of Mortgages § 277, at 561 (2d ed. 1970) (Osborne). Although the doctrine of equitable subrogation may be applied in many contexts, one context involves the refinancing of a mortgage. Osborne states:

"Where a lender has advanced money for the purpose of discharging a prior encumbrance in reliance upon obtaining security equivalent to the discharged lien, and his money is so used, the majority and preferable rule is that if he did so in ignorance of junior liens or other interests he will be subrogated to the prior lien. Although stressed in some cases as an objection to relief, neither negligence nor constructive notice should be material."

Osborne, § 282, at 570.

In the action before us a mortgage lender refinanced a first mortgage, unaware that judgment liens had arisen against the subject realty before the first mortgage was released and the new mortgage placed on the property. On foreclosure the new lender bought the property for less than the refinanced debt. The circuit court ruled that, under equitable subrogation, all liens against the realty, i.e., the judgment and new mortgage liens, were extinguished, as if the refinanced first mortgage had been foreclosed. Cf. Blanch v. Collison, 174 Md. 427, 431, 199 A. 466, 468 (1938); Leonard v. Groome, 47 Md. 499, 504 (1878); A. Gordon, IV, Gordon on Maryland Foreclosures § 10.03, at 351-52 (3d ed. 1994) (Gordon). In Levenson v. G.E. Capital Mortgage Servs., Inc., 101 Md.App. 122, 643 A.2d 505 (1994), the Court of Special Appeals ruled that, under equitable subrogation, the new lender, as foreclosure purchaser, held the realty subject to the lien of the first mortgage for the amount refinanced and subject to the judgment liens, as if there had been a foreclosure sale under a third lien subject to superior liens, so that the only lien extinguished was that of the new mortgage. Cf. Tolzman v. Gwynn, 267 Md. 96, 99-100, 296 A.2d 594, 596 (1972); Baltimore Fed. Sav. & Loan Ass'n v. Eareckson, 221 Md. 527, 529-30, 158 A.2d 121, 123-24 (1960); Gordon, § 10.01, at 349-50. Under the latter analysis, the foreclosure sale proceeds were to be credited against the portion of the new mortgage debt that exceeded the refinanced balance of the released first mortgage. Levenson, 101 Md.App. at 137, 643 A.2d at 512. For the reasons explained below, we agree with the analysis of the circuit court.

The party advocating the circuit court model of equitable subrogation is the petitioner, G.E. Capital Mortgage Services Inc. (G.E. Capital). G.E. Capital says that the refinancing and foreclosing mortgagee was its "predecessor." Brief of Appellant at 2. The party advocating the Court of Special Appeals model of equitable subrogation is the holder of the judgment liens, the respondent, Steven A. Levenson (Levenson).

The public record facts out of which this problem arose are set forth below. Of significance is that the names Yolanda Salcedo, Yolanda M. Better, Y. Maria Benson, Yolanda M. Benson, and Yolanda Benson are of one and the same person. She is the daughter of Miquel and Yolanda Better. The property is improved residential realty at 11 Gatespring Court in the Cockeysville area of Baltimore County.

April 15, 1980: Deed from Albert J. Bertini and wife to Miquel Better and Yolanda Better, his wife, as to an undivided half interest, and to Jaime Salcedo and Yolanda Salcedo, his wife, as to an undivided half interest.

April 15, 1980: Deed of trust securing $60,000 in favor of First Federal Savings and Loan Association of Annapolis (First Federal) from Miquel Better, Yolanda Better, his wife, Jaime Salcedo and Yolanda Salcedo, his wife.

April 23, 1986: Deed from Jaime Salcedo and Yolanda Salcedo to Yolanda Salcedo as to an undivided half interest. There was no monetary consideration for this deed, which recites that it was made "pursuant to a Separation and Property Settlement Agreement."

June 23, 1988: Levenson secured three judgments by confession in the Circuit Court for Baltimore County against Yolanda M. Better. These judgments aggregated $94,076.

March 21, 1990: Deed from Miquel Better and Yolanda Better to Y. Maria Benson (also known as Yolanda M. Benson) as to an undivided one-half interest in 11 Gatespring Court.

April 6, 1990: Execution of a deed of trust from Yolanda M. Benson to Trustee for Travelers Mortgage Services, Inc. (Travelers), the holder of a note secured thereby in the amount of $131,200. The Travelers' deed of trust stated in part:

"This Deed of Trust is a refinance of an existing Deed of Trust dated April 15, 1980 unto the Trustees for First Federal Savings and Loan Association recorded in Liber No. 6155, folio 238, which has been paid in the amount of $56,283.14, and the borrower herein certifies that said property is her principal residence and that she was one of the original borrowers of the aforementioned Deed of Trust."

April 17, 1990: Acknowledgement of payment endorsed on original deed of trust note by First Federal.

May 3, 1990: Deed of trust to Travelers recorded.

January 2, 1991: Original note, with acknowledgement of payment by First Federal, recorded.

Y. Maria Benson had applied on February 28, 1990 to Travelers for the aforesaid loan. In the written loan application Y. Maria Benson did not disclose as liabilities the judgments in favor of Levenson. Travelers' title examination did not pick up the judgments in favor of Levenson.

On February 12, 1991, power of sale foreclosure proceedings were instituted against the security. The advertisement for sale described the instrument empowering foreclosure as the deed of trust dated April 6, 1990. The statement of mortgage debt accompanying that docketing was signed by G.E. Capital as holder of, or agent for the holder of, the note secured by that deed of trust.

Several days prior to the public sale of 11 Gatespring Court the trustee for G.E. Capital obtained from a current title report actual knowledge of the Levenson judgments. The title insurer was notified, but no decision concerning the priority status of the Levenson judgments was made by G.E. Capital, its trustee, or its title insurer as of the date of sale. Counsel for Levenson attended the sale, and, prior thereto, he advised the trustee that Levenson claimed priority over the deed of trust securing G.E. Capital. By telephone the trustee sought and obtained instructions from G.E. Capital. That lender would bid up to, but not above, $45,000, an amount roughly approximating the difference between the debt secured by the April 6, 1990 deed of trust and the amount of the Levenson judgments, with interest. If any bid exceeded $45,000, the auctioneer was to withdraw the property from sale. G.E. Capital's rationale was that it could not be hurt if it bought in at $45,000, even if the Levenson judgments had priority.

The respective parties to this action frankly acknowledge that they were not consciously aware of the doctrine of equitable subrogation at the time of the sale. Levenson did not bid. G.E. Capital successfully bid at $45,000.

After the sale had been ratified, and before any report by the auditor, Levenson filed a petition in the foreclosure action seeking a determination that his judgments had priority over G.E. Capital's deed of trust. In response, G.E. Capital contended that, under equitable subrogation, G.E. Capital stood in the shoes of First Federal and enjoyed a first priority to a maximum of $56,283.14, an amount that comfortably absorbed the $45,000 credit bid. The refinancing lender's legal position is that the junior liens of the Levenson judgments and of its own deed of trust were extinguished by foreclosure of the first lien acquired by subrogation. Consequently, G.E. Capital submits, it purchased the property free of liens and can convey an unencumbered title to a contract purchaser.

Levenson's position is that, under the circumstances of this case, equitable subrogation does not apply. He emphasizes that G.E. Capital advertised the sale as one made under an instrument recorded later than his judgments. Because his liens appeared to have priority, and because G.E. Capital never asserted a first priority based on equitable subrogation until after the foreclosure sale had been conducted, Levenson had no reason to bid at the sale, and, Levenson submits, he was thereby prejudiced. Had he bid cash to the amount of G.E. Capital's subrogated claim, he would then have been in a position to increase his cash bid by credit utilizing the principal amount and accumulated interest of his judgments. In this way, he may have acquired the property at foreclosure. Having been deprived of that opportunity Levenson submitted in the courts below that equitable subrogation should not be applied, and he argues before us that the Court of Special Appeals' resolution of the matter should be affirmed. Alternatively, Levenson argues that he was not given in advance of sale the notice that a junior lienor is entitled to receive, both constitutionally and under Maryland statutes...