LIBERTY MORTG. CORP. v. National City Bank, No. 88A01-0103-CV-82.

• Decision Date: 13 September 2001
• Docket Number: No. 88A01-0103-CV-82.
• Citation: 755 N.E.2d 639
• Parties: LIBERTY MORTGAGE CORPORATION, INC., Appellant-Defendant, v. NATIONAL CITY BANK, Appellee-Plaintiff.
• Court: Indiana Appellate Court

755 N.E.2d 639

LIBERTY MORTGAGE CORPORATION, INC., Appellant-Defendant, v. NATIONAL CITY BANK, Appellee-Plaintiff.

No. 88A01-0103-CV-82.

Court of Appeals of Indiana.

September 13, 2001.

Steven A. Gustafson, Fox & Cotner, New Albany, IN, Attorney for Appellant.

Garret B. Hannegan, Morgan & Pottinger, P.S.C., Louisville, KY, Attorney for Appellee.

OPINION

FRIEDLANDER, Judge.

Liberty Mortgage Corp., Inc. (Liberty) appeals from a judgment and decree of foreclosure, in which the trial court granted summary judgment in favor of National City Bank of Southern Indiana (National City). The following issue is dispositive of this appeal: Did the trial court err in not applying the doctrine of equitable subrogation?

We affirm.

On October 21, 1995, Steven and Teena Morris opened up a line of credit with National City and executed an Equity Reserve Agreement, in the amount of $35,000, with interest accruing at a variable rate. The equity reserve account was an open-ended line of credit from which the Morrises could obtain cash advances for a period of ten years. In order to secure the repayment of any debt owed pursuant to the Equity Reserve Agreement, the Morrises executed and delivered to National City a form mortgage on their residence located at 6765 E. Motsinger Road in Pekin, Indiana.¹ The mortgage at issue was dated October 21, 1995 and recorded in the office of the Recorder of Washington County, Indiana on October 26, 1995. It stated that it was taken to secure payment of: "certain PROMISSORY (`NOTE(S)'), dated 10-21, 1995, in the sum of $35,000 ..., with terms of payment as therein provided, or as extended or renewed...." Appendix at 17. It further provided:

The Mortgage shall also secure the payment of any other liabilities, joint, several, direct, indirect, or otherwise, of Mortgagors to the holder of this Mortgage, when evidenced by promissory notes or other evidence of indebtedness stating that said notes or other evidence of indebtedness are secured hereby.

Id.

Between October 21, 1995 and July 7, 1998, the Morrises borrowed against nearly all the credit available to them on the Equity Reserve Agreement with National City. On July 7, 1998, the Morrises also borrowed money from American Mortgage Corporation (American). They executed a promissory note in favor of American that was secured by a mortgage on their residence, located at 6765 E. Motsinger Road, in the principal amount of $124,000. The closing on the Morrises' mortgage with American was held on July 7, 1998 at The Title Company in New Albany, Indiana. The mortgage was assigned to Liberty on the day of the closing, and it was subsequently recorded in the office of the Recorder of Washington County.

Sometime prior to the time of the actual closing on the American mortgage, the closing agent at The Title Company contacted National City to obtain a payoff amount. On the day of the closing, National City sent a fax to The Title Company with regard to the amount the Morrises owed National City pursuant to the Equity Reserve Agreement executed on October 21, 1995. The fax stated in pertinent part:

The following is the information you requested concerning the amount owed on

Home Equity Reserve 4489 3087 2000 1956

Account Styled: Steve E Morris Teena D Morris Balance On: 7-7-98 $33,066.45

The amount given does not include any purchases or finance charges that may be added to the account. The customer will receive a final statement. A signed statement from the customer requesting the account to be closed is also required.

If I may be of any further assistance, please contact me.

Sincerely, Customer Service Send to: NC Customer Service Loan Services

ATTN: Equity Closeouts P.O. Box 5570 Cleveland, OH 44101

Appendix at 90 (emphasis in italics supplied). The Title Company sent a check dated July 11, 1998 in the amount of $33,066.45 to National City. A notation on the front of the check stated, "RE: 6765 E. Motsinger Road", and a notation on the sheet attached to the check stated, "NCB of KY Payoff". Id. at 91. After the $33.066.45 check was applied to the National City account and finance charges were applied, the statement sent to the Morrises for the Equity Reserve Agreement line of credit showed an outstanding balance due of $99.26.

Despite the italicized language contained in National City's fax to The Title Company and the notations referring to a payoff on the check and on the accompanying sheet sent by The Title Company to National City, neither The Title Company nor Liberty ever provided National City with a "signed statement from the [Morrises] requesting the account to be closed." Appendix at 90. National City did not close the equity line of credit, and the Morrises thereafter continued to make withdrawals against the line of credit available to them pursuant to the Equity Reserve Agreement. As of November 23, 1999, the Morrises' balance on the National City equity line of credit was $33,636.89.

The Morrises defaulted on the notes to both National City and Liberty and, at some point, filed bankruptcy. National City brought this action against the Morrises and American, seeking to have the mortgage securing the equity line of credit adjudged as a first lien on the property and to foreclose on that mortgage. Liberty, as the successor to American, defended and argued that its mortgage lien was not inferior to that of National City. Liberty also counterclaimed, arguing, among other things, (1) that its payment of the Morrises' debt to National City obliged National City to release its mortgage on the Morrises' property, (2) if National City continued to have a valid lien against the property, such lien was inferior to that of Liberty, and (3) Liberty should be equitably subrogated to National City's mortgage priority. National City filed a motion for summary judgment, which the trial court granted.

In reviewing a grant of summary judgment, we stand in the shoes of the trial court, utilizing the same standards and resolving any questions of fact or inferences drawn therefrom in favor of the non-moving party. Summary judgment should be granted when the designated evidentiary matter shows that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. The trial court's grant of summary judgment will be affirmed if it is sustainable on any theory found in the evidence designated to the trial court.

Bacompt Systems, Inc. v. Ashworth, 752 N.E.2d 140, 143 (Ind.Ct.App.2001) (citations omitted).

In Osterman v. Baber, 714 N.E.2d 735, 737-38 (Ind.Ct.App. 1999), trans. denied, this court discussed the doctrine of equitable subrogation:

Equitable subrogation is applicable when a "party, not [acting as] a mere volunteer, pays the debt of another which, in good conscience, should have been paid by the one primarily liable." Loving v. Ponderosa Sys., Inc., (1985) Ind., 479 N.E.2d 531, 536 (citing National Mutual Ins. Co. v. Maryland Cas. Co. (1963), 136 Ind.App. 35, 41, 187 N.E.2d 575, 578,trans. denied). At that time, if equity permits, the party who has paid the creditor, or subrogee, becomes entitled to the legal rights and security originally held by the creditor. "Subrogation depends upon the equities and attending facts and circumstances of each case." Ticor Title Ins. Co. v. Graham (1991) Ind.App., 576 N.E.2d 1332, 1338,trans. denied. It is "a highly favored doctrine, which is to be given a liberal interpretation." 73 Am.Jur.2d Subrogation § 7 (1974) (citations omitted). However, while ordinary negligence will not bar the application of subrogation, "[t]he remedy will not be allowed where the party is guilty of culpable negligence." Ticor, supra at 1338. Thus, a party who pays the debt of another may be substituted in place of the other if he was not acting (1) as a mere volunteer, and (2) with "culpable negligence."

Because there are no degrees of negligence under Indiana common law, it is difficult to place the term "culpable negligence" within an appropriate frame of reference. Osterman v. Baber, 714 N.E.2d at 738. Nonetheless, the term contemplates action or inaction that is more than mere inadvertence, mistake, or ignorance. Id.; 83 C.J.S. Subrogation § 6 (1953). In Osterman, this court found guidance from cases outside Indiana and noted that other jurisdictions imposed stricter standards on professionals in assessing whether mistakes are excusable for purposes of equitable subrogation, particularly when the professional relationship arises out of a commercial transaction involving consideration.

This court in Osterman also noted that there are no Indiana cases discussing whether a party may be subrogated to another's rights when there is actual knowledge of an intervening lien, but determined that it was appropriate to balance the subrogee's knowledge in deciding whether equitable subrogation was appropriate or whether culpable negligence prevented application of the doctrine. Osterman v. Baber, 714 N.E.2d 735. The court stated:

In applying the culpability factor to the facts of this case, we hold that in a commercial transaction, a

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