by David L. Boyette
In the tidal wave of mortgage foreclosures filed in recent years, equitable subrogation has become a vitally important legal tool for mortgagees and other lienholders to protect their priority. The basic operation of subrogation is well described by the Restatement (Third) of Property in which it states that “one who fully performs an obligation of another, secured by a mortgage, becomes by subrogation the owner of the obligation and the mortgage to the extent necessary to prevent unjust enrichment.”1 Put another way, subrogation is an equitable remedy whereby, the new owner of the obligation and mortgage “steps into the shoes” of the previous mortgagee. The doctrine overrides the normal operation of the recording statutes.
This article aims to clarify Florida subrogation law in two areas where case law has recently revealed conflict: 1) the definition of “prejudice” to the junior lienor, and 2) the effect of knowledge of the intervening junior lien by the refinancing lender. In addition, this article will consider application of the doctrine in a double subrogation situation.
A Historical Review
On several occasions, the Florida Supreme Court has considered equitable subrogation in the context of a refinancing mortgage lender. Forman v. First National Bank of Quincy, 79 So. 742 (Fla. 1918), was the first Florida case to apply the doctrine in favor of a refinancing lender. Forman received a mortgage dated May 18, 1910, when he loaned $2,500 to the property owner for the purpose of paying off a first mortgage dated February 13, 1906, and two judgments from 1908.2 The First National Bank of Quincy held an intervening mortgage dated January 12, 1909.3 The court applied the doctrine of equitable subrogation in favor of Forman even though he had actual knowledge of the intervening mortgage held by First National Bank of Quincy. Just two years earlier in Boley v. Daniel, 72 So. 644 (Fla. 1916), the Florida Supreme Court had refused to apply subrogation in a similar situation and appeared to reject application of the doctrine for a refinancing mortgagee.
While Forman did not expressly overrule Boley, the acceptance of the doctrine by the Florida Supreme Court was made clear 15 years later in Federal Land Bank of Columbia v. Godwin, 145 So. 883 (Fla. 1933). In Godwin, Godwin gave a first mortgage on July 13, 1926, for $1,200 to First National Bank of Perry and a second mortgage on September 6, 1926, for $1,100 to Alderman.4 Godwin later refinanced and satisfied the first mortgage, but not the second. Subrogation was allowed supported by the following analysis:
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. Sec. 2. Bottomed on this premise, it follows that under our system of jurisprudence there is no limit to the circumstances that may arise in which this doctrine may be applied.5
Later in 1933, in Brannon v. Hills, 149 So. 556 (Fla. 1933), the Supreme Court expanded the doctrine to apply when the refinancing mortgage is defective or even void. The Brannon court noted that subrogation had been “greatly expanded in this country” and that Florida “has definitely aligned itself with the prevailing rule now generally obtaining in the United States to the effect that one who loans money on a defective mortgage for the purpose of discharging a prior valid mortgage on the same property, when it is made to appear that the money is to be used for that purpose, is ordinarily entitled to subrogation to the rights of the prior mortgage.”6
The Supreme Court applied subrogation for a refinancing lender that held a void mortgage in Palm Beach Sav. & Loan Ass’n v. Fishbein, 619 So. 2d 267 (Fla. 1993). In 1984, Fishbein acquired a house by assuming an existing mortgage and executing a purchase money second mortgage.7 A year later, he and his wife signed a third mortgage in which the existence of the prior two mortgages was acknowledged.8 In 1988, Fishbein forged his wife’s signature on a fourth mortgage for $1.2 million and approximately $930,000 of the loan proceeds were used to pay off the prior three mortgages and taxes.9 Palm Beach Savings, the refinancing lender, knew that Mr. and Mrs. Fishbein were engaged in dissolution proceedings, but permitted Mr. Fishbein to obtain his wife’s signature outside of its presence.10 In the foreclosure case, the former Mrs. Fishbein argued that Palm Beach Savings was negligent and that the forged mortgage could not be a lien against her homestead. The Supreme Court agreed with the lender’s assertion that it was entitled to an equitable lien subrogated to the position of the prior mortgages noting that the former wife stood in no worse position and otherwise would have received a $930,000 windfall.
What Constitutes Prejudice to the Intervening Lienor —Differing Views
A fundamental premise supporting subrogation for a refinancing lender is that it is necessary to prevent unjust enrichment to an intervening junior mortgage holder and prevent a windfall. A logical corollary to preventing unjust enrichment to the intervening junior lienor is the limitation that equitable subrogation can only be applied to the extent the junior lienor is not prejudiced. Subrogation only applies “to the extent necessary to prevent unjust enrichment.”11 The Supreme Court in Godwin defined prejudice, which it called “injury,” as when the intervening lienor is “in any worse position than if the prior lien had not been discharged.”12
In basic terms, the courts have consistently held that the subrogee can only step into the shoes of the first mortgage holder to the extent of the amount of the payoff of the original mortgage or lien, plus interest, fees, and costs. To give a simple example, take the case of a second mortgage for $20,000, which was given knowing that it was inferior to a $100,000 first mortgage. Excluding interest, fees, and costs from the equation, the refinancing lender who loans $150,000 can only subrogate to the extent of $100,000 with the balance of $50,000 remaining a third lien. The new interest rate on the $100,000 subrogated amount cannot exceed that of the original interest rate.13 As the Restatement explains, “if the payor demands a higher interest rate than prevailed under the original mortgage loan, the positions of intervening interest holders may be jeopardized, since the increased interest may result in the mortgage’s having a higher balance at the time it is later foreclosed.”14 Judge Stone in a concurring opinion in Suntrust Bank v. Riverside National Bank of Florida, 792 So. 2d 1222 (Fla. 4th DCA 2001), noted that the subrogation amount presumably includes interest at the default rate of the initial mortgage, along with attorneys’ fees and costs. Also, in Radison Properties v. Flamingo Groves, 767 So. 2d 587 (Fla. 4th DCA 2000), the court allowed interest to be added to the subrogation amount when loan proceeds were used to pay taxes and it was determined that the mortgage was invalid.
• The Approach of the First DCA in Defining Prejudice — In a recent case, the First DCA specifically discussed defining “prejudice” or “harm” to the junior lienholder and opined that the best guidance is found in the 1933 decision from the Supreme Court in Godwin. Consistent with Godwin, in Aurora Loan Services, LLC v. Senchuk, 36 So. 3d 716 (Fla. 1st DCA 2010), the First DCA found there was no prejudice when the subrogee stepped into the shoes of the first lienholder only to the extent of the amount due and owing on the first mortgage. A few months later in 2010, the Third DCA took a much more expansive view in Velazquez v. Serrano, 43 So. 3d 82 (Fla. 3d DCA 2010). Senchuk and Velazquez have very similar facts and present an apparent conflict.
In Senchuk, the Senchuks executed a first mortgage in favor of Wells Fargo Bank for $419,330. Shortly thereafter, the Senchuks executed a second mortgage in favor of John and Carmen Barry in the amount of $70,000.15 More than a year later, the Senchuks obtained a new loan from Aurora in the amount of $507,900. The proceeds of that loan were used to pay off the Wells Fargo mortgage. The balance of the loan proceeds were paid to the Senchuks, and none of the loan proceeds were used to satisfy Barry’s mortgage.16 After the Senchuks defaulted on both mortgages, both Aurora and the Barrys claimed priority.
The circuit court granted the Barrys’ motion for summary judgment and placed the Barrys’ mortgage first in priority on two grounds: 1) citing Picker Financial Group L.L.C. v. Horizon Bank, 293 B.R. 253 (M.D. Fla. 2003), that constructive notice barred the application of equitable subrogation; and 2) that to apply the doctrine (and place Aurora in the shoes of Wells Fargo) would be unfair to the Barrys because the Aurora loan was larger than the Wells Fargo loan — i.e., it was a risk that the Barrys had not contracted for when they lent to the Senchuks.17
The First DCA reversed, rejecting both arguments. On the first point, citing Forman, Godwin, and Eastern National Bank v. Glendale Federal Savings, 508 So. 2d 1323 (Fla. 3d DCA 1987), the court held that the doctrine could be applied even when the third lienholder (now seeking to stand in the shoes of the senior lienholder) had constructive notice of the second intervening lien. On the second point, the court in Senchuk couched the definition of “prejudice” in terms of risk:
As no prior cases offer guidance as to what constitutes prejudice pursuant to Godwin and Suntrust, this court must address the issue for the first time.…[When] a first mortgage loan is refinanced for more than the amount due and owing on the first mortgage, the risks assumed by the second lien holder increase without the second lien holder’s consent.
Because Aurora had agreed that it was entitled to step into the shoes of the first lienholder only “to the extent the proceeds from the Plaintiff’s mortgage were used to satisfy the prior mortgage,” the Barrys would be “no worse off” than they were with Wells Fargo’s lien in place.18
• The More Expansive Approach of the Third DCA — In Velazquez and another very recent case, the Third DCA has defined “prejudice” or injury” or “harm” much more expansively. In Velazquez, the Third District denied a claim of subrogation because it determined that the second priority lienholder would be prejudiced by its operation. On July 22, 2005, Velazquez sold property to Serrano. The closing documents at the time reflected a sales price of $320,000, which was 100 percent financed by first and second mortgages in favor of Hayhurst Mortgage for $256,000 and $64,000.19 In October 2006, Serrano gave Velazquez a third mortgage for $29,000.20 Velazquez and Serrano were apparently engaged in a classic dual contract scheme to mislead Hayhurst Mortgage. The court noted in a footnote that Velazquez admitted that the actual sales price as reflected in a contract addendum was $340,000 but Serrano could not qualify for financing for the higher sales price.21 The closing documents used with Hayhurst Mortgage showed the fake sales price of $320,000. The third mortgage to Velazquez included a “due-on-sale” clause.22 Within two months, Serrano sold the property for $395,000. This sale included a new mortgage that secured a note in the amount of $375,000, which was used to satisfy the Hayhurst mortgages with the remaining balance of approximately $30,000 paid to Serrano.23 Velazquez’s recorded third mortgage was not noted or paid off in connection with the closing. When Serrano and the new owners of the property subsequently defaulted on their respective mortgages, both Velazquez and Deutsche Bank, the holder of the $375,000 mortgage, asserted priority in the consolidated foreclosure actions. Dismissing the argument that Velazquez was in no worse position than before Deutsche Bank paid off the Hayhurst mortgages, the court reasoned that “Deutsche Bank’s failure to note and pay off Velazquez’s properly recorded mortgage when the property was sold . . . resulted in harm to Velazquez.”24 The court stated that “Velazquez [had] been deprived of a legal right — the payment of her mortgage upon the sale of the property pursuant to the due-on-sale clause” and that now it is “merely speculative whether Velazquez will recover anything from the foreclosure sale, as opposed to the certain recovery that was thwarted by the mistake made at the Montes/Serrano closing.”25 The Third DCA, therefore, held that the doctrine of equitable subrogation could not be used to place Deutsche Bank’s lien in a first position.
In an even more recent opinion, in Sherman v. Deutsche Bank, 37 Fla. L. Weekly D2025a (Fla. 3d DCA 2012), the Third District closely followed its decision in Velazquez. While the dissenting opinion from Judge Schwartz cited to Senchuk, the majority opinion did not distinguish or comment upon Senchuk. The Shermans accepted a second mortgage to secure a loan of $100,000, which expressly provided that it was inferior to a first mortgage for $688,000.26 Like Velazquez, the second mortgage had a due-on-sale clause. Unlike Velazquez, the first was not paid off in connection with a sale but rather was paid off in a refinance. The court noted that the second mortgage did not have a “due-on-refinancing” provision.27 The owner took a $900,000 refinance loan from Washington Mutual, of which $726,940 was used to pay off the prior first mortgage, and over $129,000 was paid to the owner.28 The $726,940 payoff amount to the first mortgagee included a prepayment penalty of $24,565. The trial court also included in the subrogation amount $300,618 of accrued interest and $56,300 in insurance and escrow disbursements for a total subrogated lien amount of $998,552.29 In a footnote, the majority opinion noted that the prepayment penalty was a “lien increase never consented to by the Shermans.”30 An interesting notation since none of the case law on subrogation has ever suggested that application of the doctrine depends on whether the intervening lienholder consents to the terms of the prior lien. To the contrary, in a subrogation situation, the intervening lienholder takes their position on constructive notice of the terms of the prior lien. In other words, when the Shermans agreed to take a second mortgage, the first mortgage was of record giving constructive notice of the prepayment penalty and they would have known that if they needed to redeem the first to protect their position the prepayment penalty would come due. Even so, the court noted that the appellee suggested that the case be remanded to the trial court for the prepayment penalty amount to be removed from the total subrogated lien amount. The Third District declined the invitation and reversed concluding there was prejudice based on several factors.
First, the court noted that as a result of the refinancing, the owners’ mortgage payments increased by $1,800 per month and the homeowner thereafter defaulted on both loans. This reasoning does not account for the fact that the owner received more than $129,000 in cash from the refinancing closing. The new lender provided the owner with sufficient cash to payoff the Shermans in full. It would seem that to the extent there was harm, it was not caused by the refinance. Rather, the problem originated from the owners’ default on their promise to repay the Shermans. Second, the court cited as harm the fact that in the two years before judgment was entered, interest exceeding $300,000 had accrued and was included in the equitable lien amount. In particular, the court stated that the first mortgage principal balance at the time of the 2006 refinancing was $684,104.31 It may be that Deutsche Bank, the successor to Washington Mutual, was seen as having over-reached in the amounts it claimed for the equitable lien. The Third District might have reached a different result and allowed subrogation if the amount sought had been limited to $684,104. The Sherman opinion does not indicate what interest rate was used in the trial court, but Sherman seems to conflict with the Restatement (Third) of Property and with Riverside and Radison Properties, which indicate the subrogated equitable lien amount may include interest at the default rate in the initial loan.
Conflicting Approaches: Can They be Reconciled? — Velazquez and Sherman appear to conflict with Godwin, Forman, Suntrust, Senchuk, and other cases in which subrogation limited to the extent of the payoff of the first mortgage is not prejudicial, and other factors are not looked at as being prejudicial. In other words, historically equitable subrogation has only been disallowed to the extent the intervening lienholder is harmed or prejudiced by being placed in a worse position than if the prior lien had not been discharged. Using this test for prejudice, by definition, there is no scenario in which the intervening lienor could receive the windfall of being elevated to first lien position so long as the priority of the subrogee is limited to the amount owed on the first mortgage. Conversely, if an increase in the total loan payments required from the borrower each month, which naturally follows many refinances, is to be considered “prejudice” precluding equitable subrogation, it could be argued that a well-established legal doctrine has been eviscerated.
In both Velazquez and Senchuk: 1) the balance of the refinance loan proceeds after paying off the first lien went to the mortgagor who gave the second mortgage; 2) the refinance loan was large enough to pay the first mortgage and still provide the borrower on the second mortgage with sufficient cash to pay off the second mortgage; and 3) the borrower on the second mortgage did not pay the second mortgage despite the legal obligation to do so. How can these seemingly inconsistent rulings be reconciled?
The most obvious answer is that Velazquez is factually distinguishable because the court found there was prejudice because of the due-on-sale clause. The Senchuck opinion does not indicate whether the Barry mortgage had a due-on-sale clause. However, the Barry mortgage is available online in the official records of the clerk of court and the Barry mortgage did, in fact, contain a due-on-sale clause. Regardless, the apparent distinction in Velazquez seems to contradict well-established prior case law. From Forman to Godwin and thereafter, the Supreme Court has long held that there is no prejudice when the junior lienholder is left in no worse position than if the first mortgage had not been discharged. Velazquez knowingly accepted a third mortgage after $320,000 of prior mortgages and would have been in no worse position if subrogation had been permitted up to $320,000. Conversely, denying subrogation gave Velazquez a windfall, turning her $29,000 third mortgage into a first mortgage.
The Senchuk court analyzed the guidance provided in prior case law as to what constitutes prejudice to the junior lienholder. Senchuk concluded that “[i]t is axiomatic that the position of a lien holder has no meaning unless and until a foreclosure action is initiated. Thus, it follows the determination of what constitutes prejudice to a second lien holder must be confined to what would constitute prejudice in the event of a foreclosure.”32 Consistent with prior case law, the Senchuk court evaluated whether there was prejudice at the time of the foreclosure proceeding. In a temporal inconsistency, the decisions in Velazquez and Sherman are based on perceived harm at the time of the sale and refinance transaction closing rather than at the time of the foreclosure.
The Velazquez decision was grounded upon the conclusion that Velazquez had been deprived of a legal right — to be paid upon a sale of the property. However, the new loan made by Deutsche Bank did not absolve Serrano of his legal obligation to repay the $29,000 at the time of the sale. As of the date of the sale and thereafter, Serrano was obligated to pay the $29,000 and Velazquez retained the legal right to collect from Serrano. In fact, as a result of the closing, Serrano had $30,000 of cash available to pay the $29,000 owed to Velazquez. However, in the mind of the Third DCA, Velazquez was harmed because payment should have occurred from the closing and collecting from the foreclosure sale was speculative. The Third DCA did not comment on the right of Velazquez to collect on the note from Serrano.
In all of the subrogation cases involving refinanced mortgages, whether there is a due-on-sale clause or not, the junior mortgagee has a legal right to be paid and, by definition, the borrower is in default on his or her obligation to pay. In practical terms, prior mortgages given by the seller are effectively always due-on-sale because buyers typically will only purchase when the seller conveys a marketable title that is free from prior encumbrances. In the subrogation cases, something has gone wrong causing the transaction to depart from the typical scenario such that the buyer does not receive the clean title that was expected or the refinancing lender does not receive the first lien it expected. Whether the something that went wrong is the result of fraud by the borrower or negligence by the lender, the equitable doctrine of subrogation steps in to prevent a windfall to the second position lienholder and to protect the party that discharged the prior first mortgage. In Velazquez and Sherman, the court did not allow the doctrine to step in and protect Deutsche Bank, and Velazquez and Sherman enjoyed the windfall of their inferior mortgages being transformed into first mortgages. Velazquez and Sherman seem to be out of step with Senchuk and the body of case law that is grounded on preventing an inequitable windfall to an intervening junior lienholder.
Constructive or Actual Notice of the Junior Lien: Does it Matter?
In the typical subrogation situation, the refinancing lender has constructive notice of the intervening junior lien because the second mortgage is recorded. If constructive notice disqualified a refinancing lender from stepping into the shoes of a prior mortgage discharged with the refinance loan proceeds, then the doctrine would rarely, if ever, operate. Moreover, since the Forman decision from almost 100 years ago, case law in Florida has held that even a refinancing lender with actual knowledge of the intervening junior lien is not disqualified from invoking the doctrine of equitable subrogation. The fact patterns in the cases vary with situations in which the refinancing lender had actual knowledge of the junior lien and others when the refinancer lacked actual knowledge due to fraud or mistake.
There are examples in which the refinancing lender had constructive notice, but not actual knowledge, and was permitted to subrogate. For instance, in Godwin, the refinancing lender did not have actual knowledge, as the borrower told the bank there were no other mortgages and their title search failed to show the second mortgage. In Eastern National Bank, Glendale refinanced a prior mortgage but negligently failed to update a title examination and used subrogation to prevail in a priority dispute with another new loan that was recorded in the gap. Also, in Southern Colonial Mortgage Co. v. Medeiros, 374 So. 2d 736 (Fla. 4th DCA 1977), proceeds from mortgage loans to condominium unit owners were used to secure releases of a construction mortgage that was recorded prior to a notice of commencement, and the lender was allowed to step into the shoes of the holder of the construction mortgage to take priority over construction liens that were recorded after the mortgage, but which enjoyed relation back priority.
On the other hand, Riverside provides an example of a situation in which the lender successfully asserted subrogation even though it had actual knowledge of the intervening lien. Suntrust refinanced its own first mortgage with actual knowledge of a second mortgage because it was disclosed in a title commitment as well as the fact that the second mortgage holder had sent Suntrust three notices by certified mail asking Suntrust to refrain from future advances.33 Riverside National Bank unsuccessfully argued that Suntrust should be left in third lien position because Suntrust was negligent. The Suntrust majority disagreed, stating:
We respectfully disagree with Judge Farmer’s interpretation of Godwin in his dissent. His reading of Godwin would make the availability of the doctrine of equitable subrogation depend on how negligent was the party seeking to apply the doctrine. Yet in both Godwin and in the present case the second mortgage was of record, but the lender refinancing the first mortgage did not pick it up. We read Godwin as standing for the proposition that equitable subrogation will be granted to prevent unjust enrichment, even though the party seeking it was negligent, as long as there is no prejudice.34
Traditionally, most states have not allowed subrogation when the new mortgagee had actual notice of the junior lien.35 However, a growing number of states, including Florida, supported by the Restatement (Third) of Property, do not consider actual notice a bar to subrogation.36 According to the Restatement, the “modern” or “liberal” view of subrogation deems actual notice irrelevant, focusing instead on “whether the payor reasonably expected to get security with a priority equal to the mortgage being paid”37 and will only disallow subrogation when “the intervening lender suffers some prejudice.”38 This principle was recently reaffirmed in Tribeca Lending Corporation v. Real Estate Depot, 42 So. 3d 258 (Fla. 4th DCA 2010), in which the court specifically acknowledged that “a refinancing lender is equitably subrogated to the priority of the first mortgage even when it has actual knowledge of an intervening lien.”39
Picker Financial Group L.L.C. v. Horizon Bank, 293 B.R. 253 (M.D. Fla. 2003), created some confusion by concluding that constructive notice barred subrogation. The Picker court concluded that there existed uncertainties in Florida law, and since the Florida Supreme Court had not expressly receded from Boley, it was required to deny subrogation due to constructive notice. Prior and subsequent Florida case law contradicts this conclusion. Moreover, the Picker opinion makes no mention of Brannon in which the Florida Supreme Court clearly stated that the denial of subrogation in Boley was not based on the fact that there was notice but rather “related to payments by ‘volunteers’ pure and simple.”40 The court in Picker did note in a footnote that the Florida Supreme Court, in Dade County School Board v. Radio Station WQBA, 731 So. 2d 638 (Fla. 1999), cited with approval Eastern National Bank in which “dicta seems to completely eviscerate Boley.”41
The court in Senchuk pointed to several flaws in the reasoning and holding in Picker. First, the Senchuk court declares that “Picker’s assertion that Boley ‘clearly’ stated constructive notice bars the application of equitable subrogation is erroneous; nothing in Boley considered constructive notice and the opinion does not rely on such notice to determine Daniel was not entitled to subrogation.”42 Furthermore, the Senchuk court states that “even if Picker’s interpretation of Boley had been correct, the reasoning does nothing to reconcile the later Florida Supreme Court cases which applied the doctrine without regard to constructive notice.”43 The Senchuk court continues, “As these cases indicate, Florida precedent, leading up to the Suntrust decision, has applied the modern view generally allowing subrogation unless the rights of the second lien holder are violated.”44 This is consistent with the statement in Eastern National Bank that “the function of constructive notice is to preserve an existing advantage and not to gain a new one.”45
The Double Subrogation Shuffle
Many times property owners refinance more than once. When this happens, does the lender retain the subrogation priority enjoyed by the prior lender who happened to have paid off another prior lender? An example and illustration may be of assistance. Take for instance the owner/borrower who gives a first mortgage for $100,000 (Mortgage A) and a home equity line of credit second mortgage for $20,000 (Mortgage B), and later refinances with a $150,000 mortgage (Mortgage C) that pays off the first mortgage but not the second. Later still, the owner refinances again and takes out a $160,000 mortgage (Mortgage D), that pays off the $150,000 mortgage, but not the $20,000 second mortgage. All of the mortgages are promptly and properly recorded. To illustrate, see Figure 1.
Of course, the end of the story is that the owner defaults on the two remaining mortgages which encumber the property, Mortgages B and D. In a priority battle between Mortgage B and D, what happens? There is no doubt that Mortgage D came later in time which, by operation of the recording statutes, would give Mortgage B priority. However, Mortgage C would have been able to claim a right of subrogation to the extent of the $100,000 payoff to retain the first priority of Mortgage A. This would be the classic situation in which Mortgage B bargained for a second priority position and C would be entitled to retain first priority to the extent of the payoff of A, with interest at the rate provided in Mortgage A. Does anything change when Mortgagee C is no longer a party, but Mortgagee D is now claiming to step into Mortgagee C’s shoes? Allowing D to retain first priority to the extent of C’s position, that is, to the extent of $100,000, which was identical to A’s position, would do nothing to prejudice B. The holder of Mortgage B still has what it bargained for: a second mortgage inferior to a first lien of $100,000. In fact, any other outcome would result in a windfall and unjust enrichment to B, which is exactly what the doctrine of subrogation is meant to avoid.46
This may seem like a novel idea, but double subrogation has been allowed in Florida and other states. The only known case in Florida that is factually on point is Godwin.47 On July 13, 1926, Godwin executed a mortgage in favor of the First National Bank of Perry for $1,200 (Mtg. A).48 On September 6, 1926, Godwin executed a mortgage in favor of F. G. Alderman for $1,100 for the same property except 40 acres (Mtg. B).49 Then, on December 30, 1927, Godwin executed another mortgage to the First National Bank of Perry for $1,631 (Mtg. C) to secure the renewal or extension of the first mortgage, Mtg. A.50 Finally, on August 28, 1928, Godwin executed a mortgage in favor of the Federal Land Bank of Columbia (Mtg. D) for $1,600, of which $1,500 was meant to pay the mortgage to First National Bank of Perry, Mtg. C.51 While the court did not formally call it “double subrogation,” it analyzed the situation as illustrated above. First, the court determined that Mtg. C was intended to retain the priority of Mtg. A, so, therefore, it would retain said priority.52 Then, while declaring “that under our system of jurisprudence there is no limit to the circumstances that may arise in which this doctrine may be applied,” the court determined that Mortgage D was intended to take the priority of Mtg. A by virtue of the satisfaction of Mtg. C.53 The court held that the doctrine of subrogation “works common justice to all, it prevents injury to appellant who furnished money to pay off the first mortgage . . . it gives appellant the benefit of its payment, carries out the intention of the parties, and leaves Alderman . . . in his original position.”54 Further support for recognizing double subrogation can be found in case law from New Jersey, Ohio, Virginia, and the District of Columbia.55
The doctrine of equitable subrogation is necessary to ensure that the intention of the parties involved is carried out and that no party is unjustly enriched at the expense of another. So long as the junior lienor is in the same or better position as that which was bargained for, the doctrine of subrogation will operate to ensure that refinancing mortgagees are protected. This is true regardless of whether the refinancing lender had notice of the junior lien and even if the refinancing lender was negligent. While the case law is sparse on the issue of double subrogation, the principles at work apply equally well in this factual circumstance. In light of the copious number of mortgage loans taken out during the real estate boom and the current cataclysm of mortgage foreclosure cases, double subrogation is probably more commonly used in Florida’s trial courts than is recognized.
1 Restatement (Third) of Prop.: Mortgages § 7.6(a) (1997) [hereinafter Restatement].
2 Forman v. First National Bank of Quincy, 79 So. 742, 743 (Fla. 1918).
3 Id. at 743.
4 Fed. Land Bank v. Godwin, 145 So. 883, 884 (Fla. 1931).
5 Id. at 885.
6 Brannon v. Hills, 149 So. 556 (Fla. 1933).
7 Palm Beach Sav. & Loan Ass’n v. Fishbein, 619 So. 2d 267, 268 (Fla. 1993).
8 Id. at 268.
11 Restatement, at supra note 1 §7.6(a). See, e.g., Fed. Land Bank v. Godwin, 145 So. 883, 886 (Fla. 1931) (“One of the first tests in 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.”).
12 Godwin, 145 So. 883, 886 (Fla. 1931).
13 Restatement at §7.6 cmt. e. para. 8.
15 Senchuk, 36 So. 3d 716 (Fla. 1st DCA 2010).
19 Velazquez, 43 So.3d 82 (Fla. 3d DCA 2010).
20 Id. at 82.
24 Id. at 84.
26 Sherman, 37 Fla. L. Weekly D2025a (Fla. 3d DCA 2012).
29 Id. Note there was also an adjustment of $88,640 for payments received on the mortgage.
32 Senchuk, 36 So. 3d 716 (Fla. 1st DCA 2010).
33 Riverside, 792 So. 2d 1222 (Fla. 4th DCA 2001).
34 Id. at 1227.
35 Restatement, at §7.6 cmt. e. para. 5, rep. notes cmt. e. para. 4.
36 See id. at §7.6 cmt. e. para. 5, rep. notes cmt. e. para. 2.
37 Id. §7.6 cmt. e. para. 5.
38 See Senchuk, 36 So. 3d at 719-21; Riverside, 792 So. 2d at 1225-27; Glendale, 508 So. 2d at 1324-25.
39 In Tribeca Lending, Henry Thornton entered into a sale and leaseback with Real Estate Depot in an effort to save a home from foreclosure. Later, a forged quitclaim deed from Real Estate Depot to Thornton was recorded. Real Estate Depot then recorded an affidavit in the public record stating that the quitclaim deed was a forgery. Thornton then gave a mortgage to Tribeca Lending for $321,300, which was used to satisfy the $265,942 that was owed on the pre-existing first mortgage that was in foreclosure. Real Estate Depot sued Tribeca Lending to quiet title. In light of the forgery, the Tribeca Lending mortgage was invalid. The court recognized an equitable lien for $265,942 in favor of Tribeca Lending subrogated to the position of the prior first mortgage. Real Estate Depot argued that equitable subrogation was unavailable because Tribeca Lending had unclean hands since it loaned despite the recorded affidavit of forgery. The court rejected the unclean hands defense noting that “at most” Tribeca was guilty of negligence and a party asserting unclean hands “must prove that he was injured in order for the unclean hands doctrine to apply. McCollem v. Chidnese, 832 So. 2d 194, 196 (Fla. 4th DCA 2002).”
40 Brannon, 149 So. at 557.
41 Picker, 293 B.R. 253.
42 Senchuk, 36 So. 3d at 720 (citing Boley v. Daniel, 72 So. 644, 645 (Fla. 1916)).
43 Id. at 721 (citing Fed. Land Bank v. Godwin, 145 So. 883 (Fla. 1931); Forman v. First Nat’l Bank of Quincy, 79 So. 742 (Fla. 1918); E. Nat’l Bank v. Glendale Fed. Sav. & Loan Ass’n, 508 So. 2d 1323 (Fla. 3d DCA 1987)).
45 E. Nat’l Bank, 508 So. 2d at 1325 (emphasis added).
46 See note 1.
47 Godwin, 145 So. 883. See also First Union Nat’l Bank v. Harmon, 2002 Ohio 2002 (Ct. App. 2002).
48 Godwin, 145 So. at 884.
51 Id. at 884, 886.
52 Id. at 884-85.
53 Id. at 885.
54 Id. at 885-86.
55 United States v. Avila, 88 F. 3d 229 (3d Cir. 1996); First Union Nat’l Bank v. Harmon, 2002 Ohio 2002 (Ct. App. 2002); The Federal Land Bank of Baltimore v. Thomas, 18 S.E. 2d 917 (Va. 1942); and First Am. Title Ins. V. Stevenson, 2008 Bankr. Lexis 644. However, note that “derivative subrogation” was rejected in Colorado, Joondeph v. Hicks, 235 P. 3d 303 (Colo . 2010).
David L. Boyette practices in the Sarasota office of Adams and Reese LLP. His practice focuses on real property litigation, and he is a member of the Florida Land Title Association. He is board certified by The Florida Bar in business litigation. In 1995, he authored “Title Insurance Liability Beyond the Policy,” published in The Florida Bar Journal. The author thanks Steven W. Ferrell, Jr., for his assistance in the development of this article during his 2012 summer clerkship with Adams and Reese.