State, Dept. of Taxation v. Jones

• Decision Date: 23 January 1980
• Docket Number: No. 79-273,79-273
• Citation: 61 Ohio St.2d 99,399 N.E.2d 1215,15 O.O.3d 132
• Parties: , 15 O.O.3d 132 The STATE of Ohio, DEPT. OF TAXATION, Appellee, v. JONES et al., Appellees. Appeal of CLEVELAND FEDERAL SAVINGS & LOAN ASSN.
• Court: Ohio Supreme Court

Page 99

61 Ohio St.2d 99

399 N.E.2d 1215, 15 O.O.3d 132

The STATE of Ohio, DEPT. OF TAXATION, Appellee, v. JONES et al., Appellees Appeal of CLEVELAND FEDERAL SAVINGS & LOAN ASSN.

No. 79-273.

Supreme Court of Ohio.

Jan. 23, 1980.

This is an appeal by the Cleveland Federal Savings & Loan Association of Cuyahoga County (hereinafter appellant) from a decision of the Court of Appeals, dated December 29, 1978, affirming the judgment of the Court of Common Pleas denying appellant's lien priority over the intervening lien of the state of Ohio, Department of Taxation (hereinafter state).

On February 24, 1977, the state filed a complaint in foreclosure against the real estate owned by Bernard and Bonnie Jones (hereinafter appellees) and also named the appellant, the mortgagee of the subject premises, as a party-defendant.

Appellant filed its answer and cross-complaint, asserting priority of its lien on the subject premises over the lien of the state.

On December 8, 1972, a mortgage deed for $31,500 given by the appellees to the appellant was filed for record. Subsequently, appellees desired to refinance the loan from the appellant. Appellant employed the services of Midland Title Security, Inc. (Midland), to examine the condition of the subject premises. Midland performed a preliminary title search in August 1976, noting only the appellant's previous mortgage.

On September 16, 1976, an Internal Revenue Service tax lien in the amount of $8,860.28 was filed for record. Four days later, on September 20, 1976, two certificates of judgment liens of Frank, Seringer & Chaney, C.P.A.'s, in the amounts of $7,250 and $3,125 were filed for record.

On the following day, September 21, a second mortgage in the amount of $44,000 was executed by the appellees to the appellant, but was not filed for record until December 29 1976.

In between the time of the execution and the recording of the second mortgage, a state of Ohio, Department of Taxation, certificate of judgment lien in the amount of $70,000 was filed for record on October 19, 1976.

Midland performed an updated title search of the subject premises prior to the filing of the second mortgage. It is not clear from the record whether the second title examination was conducted before or after October 19, 1976, the date of filing of the Ohio tax lien. In any instance, the state's lien of $70,000 was neither discovered nor reported to the appellant before the filing of the second mortgage. The second title search did note the existence of the Internal Revenue Service tax lien of September 16, 1976, and the certificate of judgment liens of Frank, Seringer & Chaney, C.P.A.'s, of September 20, 1976.

Appellant did not authorize Midland to file the second mortgage until December 29, 1976, approximately three months from the loan execution date.

In January 1977, the appellant satisfied the two C.P.A. judgment liens and the federal tax lien, and cancelled its own first mortgage. Accordingly, the appellant found that the undiscovered judgment lien of the state had priority over its second mortgage. Appellant claimed priority of its second mortgage on a theory of subrogation.

The cause is now before this court pursuant to the allowance of a motion to certify the record.

Michael L. Thal Co., L.P.A., and Michael L. Thal, Cleveland, for appellee Ohio Dept. of Taxation.

Eric R. Jenson, Avon Lake, for appellees.

Charles T. Wochna, Cleveland, for appellant.

PER CURIAM.

I.

Appellant, in its first proposition of law, essentially asserts that the doctrine of subrogation should allow its claim to have priority over the undiscovered but properly recorded claim of the state.

In a broad sense, one person is subrogated to certain rights of another person where he is substituted in the place of such other person so that he succeeds to those rights of the other person. Aetna Cas. & Sur. Co. v. Hensgen (1970), 22 Ohio St.2d 83, 258 N.E.2d 237.

The doctrine of subrogation incorporates both conventional subrogation and legal (or equitable) subrogation. Conventional subrogation is premised on the contractual obligations of the parties, either express or implied. The focus of conventional subrogation is the agreement of the parties which must, in essence, allow the payor-creditor to be substituted for the creditor who is being discharged by the payor's loan.

The trial court, in its judgment entry, declared that "there is no evidence tending to support any claims that Cleveland Federal expressly intended to be subrogated to the rights of the three prior lienholders at the time said liens were discharged."

In addition to the foregoing, the appellees' loan application disclosed that the purpose of the refinancing was "to go into business (;) sales/servicing."

Furthermore, Albert Herman, an officer of the appellant, testified that the various debts had been satisfied in January 1977 in order to extinguish the liens. There is no express or implied mention of appellant's obtaining the priority of the claims discharged.

The thrust of the agreement was to extinguish the liens. Accordingly, we affirm the judgment of the Court of Appeals denying the application of the doctrine of conventional subrogation in the instant cause.

Appellant asserts that Ohio case law provides that an oversight or misrepresentation should not deny a creditor subrogation. Appellant cites Straman v. Rechtine (1898), 58 Ohio St. 443, 51 N.E. 44, and Union Trust Co. v. Lessovitz (1931), 51 Ohio App. 69, 199 N.E. 614, as allowing subrogation in similar instances. However, in both cases, conventional subrogation is discussed, but not legal (equitable) subrogation. In both cases, a clear agreement had been shown for the payor to obtain a first and best lien priority. ^* As noted previously, the facts in the instant cause do not support the application of the doctrine of conventional subrogation, since there is no clear evidence of an express or implied agreement to have the appellant subrogated.

Legal subrogation, as distinguished from conventional subrogation, " * * * arises by operation of law when one having a liability or right or a fiduciary relation in the premises pays a debt due by another under such circumstances that he is in equity entitled to the security or obligation held by the creditor whom he has paid." Federal Union Life Ins. Co. v. Deitsch (1934), 127 Ohio St. 505, 510, 189 N.E. 440, 442-43.

In Canton Morris Plan Bank v. Most (1932), 44 Ohio App. 180, 184 N.E. 765, the court, commenting on the doctrine of subrogation, stated, at page 184, 184 N.E. at page 766:

"We choose first to remark that equity in the granting of relief by subrogation is largely concerned with and rests its interference, when called upon, on the prevention of frauds and relief against mistakes, and it is correctly stated that the right to it depends upon the facts and circumstances of each particular case. * * * "

In order to entitle one to subrogation, his equity must be strong and his case clear. Harshman v. Harshman (1941), 35 Ohio Law Abs. 633, 636, 42 N.E.2d 447. In the instant cause appellant does not clearly show that the equities mandate subrogation.

A review of the facts reveals that the appellant's own actions led to its dilemma of not obtaining the best priority lien. Appellant was in complete control of the refinancing application, and, yet, by appellant's own actions and inactions, the state, without acting fraudulently, was able to secure priority of its claim by its filing on October 19, 1976.

Appellant controlled the disbursement of the funds, the filling out of all the forms, the date of the filing and even the hiring of the title company.

The appellant expressly told the title company not to file the second mortgage until instructed to do so, which was on December 29, 1976, approximately three months from the date of execution of the second mortgage. Fred C. Jones, title officer of Midland, indicated by his testimony that it is not usual to hold a mortgage "for this length of time."

Additionally, appellant went ahead and imprudently cancelled its own first mortgage in the amount of $31,500 in January 1977 without first having received any title guarantee from Midland, which title company was hired by the appellant.

Fred C. Jones testified further that the normal procedure is to allow the title company to cancel existing debts.

Appellant was made aware of the appellees' unusual debts to the accounting firm and also the Internal Revenue Service claim, but did nothing to inquire further as to any...