Suntrust Bank v. Riverside Nat. Bank, 4D00-2341.

• Decision Date: 29 August 2001
• Docket Number: No. 4D00-2341.,4D00-2341.
• Citation: 792 So.2d 1222
• Parties: SUNTRUST BANK, Appellant, v. RIVERSIDE NATIONAL BANK OF FLORIDA, et al., Appellee.
• Court: Florida District Court of Appeals

792 So.2d 1222

SUNTRUST BANK, Appellant, v. RIVERSIDE NATIONAL BANK OF FLORIDA, et al., Appellee.

No. 4D00-2341.

District Court of Appeal of Florida, Fourth District.

August 29, 2001.

David S. O'Quinn of Dean, Mead, Minton & Klein, Fort Pierce, for appellant.

Alan S. Polackwich, Sr. of Clem, Polackwich, Vocelle & Berg, Vero Beach, for appellee.

EN BANC

KLEIN, J.

Pursuant to appellee's motion for en banc rehearing, the court agreed to consider this case en banc because the panel opinion receded from two prior decisions of the court. The majority of the court having agreed with the majority opinion of the panel, the panel opinion, filed February 14, 2001, is withdrawn and the following opinion, which is identical, is substituted in its place. The motions for rehearing are denied.

The issue presented in this foreclosure action is whether Suntrust Bank, which lost the priority of its original first mortgage when it refinanced and satisfied that mortgage, is entitled to relief under the doctrine of equitable subrogation. The trial court denied relief, holding that the mortgage of Riverside Bank, which was recorded between the original first mortgage and the refinancing mortgage, had first priority. We reverse.

In 1993 Suntrust recorded a balloon first mortgage in the amount of $148,500. Two years later Riverside recorded a $100,000 second mortgage, notifying Suntrust of the second mortgage and asking for a limitation of future advances. Three years after that, in 1998, Suntrust refinanced the first mortgage, lending $136,800. Suntrust's original first mortgage was paid from the proceeds and satisfied of record. Suntrust assumed that the new mortgage was a first mortgage because its title search failed to disclose the Riverside mortgage.

When the property went into foreclosure and Suntrust discovered it had lost its priority, it sought relief under the doctrine of equitable subrogation, which provides that when loan proceeds are used to satisfy a prior lien, the lender stands in the shoes of the prior lienor, if there is no prejudice to other lienors. The trial court determined that it was precluded from applying that doctrine because of two decisions of this court and granted Riverside's motion for summary judgment. Although the trial court was correct in its interpretation of our decisions, those decisions did not recognize an earlier Florida Supreme Court case which applied equitable subrogation under similar facts.

In Federal Land Bank of Columbia v. Godwin, 107 Fla. 537, 145 So. 883 (1933) the borrower had given a bank a first mortgage and Alderman a second mortgage. When the borrower refinanced the original mortgage with the bank, he told the bank there were no other mortgages of record, and the bank's title search failed to show the Alderman second mortgage. In the refinancing transaction, as in the present case, the original first mortgage was satisfied and a new mortgage was recorded.

Subsequently, in foreclosure proceedings, the bank discovered it had lost its priority. Under the doctrine of equitable subrogation, the bank sought to be subrogated to the priority of its original first mortgage, because the funds derived from the refinancing mortgage were used to satisfy the original first mortgage. The Florida Supreme Court granted the relief, explaining:

The doctrine of subrogation does not arise from statute or custom, but is peculiarly a creation of equity, grounded on the proposition of doing justice to the parties without regard to form. It rests on the maxim that no one shall be enriched by another's loss, and may be invoked when and. where justice demands its application. It has been greatly expanded in this country, may be employed to relieve from fraud or mistake, but is not allowed if it works any injustice to the rights of others. 25 R.C.L. § 2.

* * *

The rule is academic that one who makes a loan to discharge a first mortgage, pursuant to an agreement with the mortgagor that he shall have a first mortgage on the same lands to secure it, the lender will be subrogated to the rights of the first mortgagee, notwithstanding there is at the same time a second outstanding mortgage of which he (the lender) is ignorant.

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.

Godwin, 145 So. at 885-86.

The only distinction between Godwin and the present case is that in Godwin, in addition to the bank negligently failing to find the second mortgage when it searched the title, the owner fraudulently misrepresented that there were no other liens. Although there was no fraud in the present case, it is clear from the opinion in Godwin that equitable subrogation will be applied to relieve negligence, where the position of the original junior lienors will be no worse than before the first mortgage was satisfied.

The doctrine of equitable subrogation was more recently applied by our supreme court in Palm Beach Savings & Loan Ass'n, F.S.A. v. Fishbein, 619 So.2d 267 (Fla.1993). In Fishbein there had been first, second and third mortgages on a residence owned by a husband and wife who were in dissolution proceedings. In order to consolidate the debt, the husband borrowed $1.2 from a bank and forged his wife's signature to the mortgage. He used $930,000 of the loan proceeds to pay off the three existing mortgages.

When the bank's mortgage went into foreclosure it was uncontested that the wife had not consented to the mortgage and that the residence was a homestead. The trial court thus ruled that the mortgage could not be foreclosed, but did grant the bank an equitable lien to the extent that $930,000 of its loan was used to satisfy preexisting mortgages. This court reversed, concluding that the bank's negligence in not requiring the wife to sign the mortgage in person was not a basis on which to impose an equitable lien against a homestead.¹ The bank sought review in the Florida Supreme Court, which characterized the bank's argument as follows:

The bank argues, however, that because its loan proceeds were used to satisfy the prior liens, it stands in the shoes of the prior lienors under the doctrine of equitable subrogation. Thus, the bank argues that it has the same rights to enforce a lien against the homestead property as the prior lienholders.

Fishbein, 619 So.2d at 269.

The Florida Supreme Court held that the bank was entitled to equitable subrogation, emphasizing that if the bank had not lent the money which was used to pay off the three prior mortgages, the wife's interest in the home would have been subject to those mortgages, and she was "not entitled to a $930,000 windfall." Id. at 271.

The Florida Supreme Court has also recognized, without referring specifically to the doctrine of equitable subrogation, that equity will grant relief where a mortgage is satisfied by mistake and no rights of third parties have intervened. United Serv. Corp. v. Vi-An Constr. Corp., 77 So.2d 800 (Fla.1955) and cases cited. So has this court. Sunrise Sav. & Loan Ass'n v. Giannetti, 524 So.2d 697 (Fla. 4th DCA 1988).

Under the Restatement (Third) of Property: Mortgages section 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:

[u]nder 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 precisely that even if they are aware of an intervening lien. A refinancing mortgagee should be found to lack such an expectation only where there is affirmative proof that the mortgagee intended to subordinate its mortgage to the intervening interest.

In rejecting the doctrine of equitable subrogation in the present case, the trial court relied on two decisions of this court which we now address. The first of those decisions is Bank of South Palm Beaches v. Stockton, Whatley, Davin & Co., 473 So.2d 1358 (Fla. 4th DCA 1985), in which Stockton had a first mortgage on property owned by a builder, and there were several junior mortgages. When the builder fell behind on the Stockton loan, the builder asked Stockton for an additional loan, and Stockton agreed. Stockton apparently obtained oral agreements from the intervening lenders to subordinate their junior mortgages, but, through oversight, never procured the subordination agreements. When the Stockton second mortgage went into foreclosure, Stockton argued that the portion of its second loan which was used to pay off a portion of the first mortgage should have the same priority as the first mortgage. This court rejected that argument without addressing either the doctrine of equitable subrogation or Godwin.

The other...