Another Ohio Appeals Court Finds Negligence Is Not a Bar to the Application of the Doctrine of Equitable Subrogation

April 3, 2008

A recent Ohio appeals court decision may signal a new willingness of Ohio courts to apply the doctrine of equitable subrogation in situations in which a lender or its agent allegedly acts negligently.

Under Ohio law, the first mortgage presented and recorded generally has preference over a subsequently presented and recorded mortgage. Thus, in a situation where a first mortgage loan is refinanced with a new loan, and the refinancing lender fails to discover a pre-existing second mortgage, the new loan – which was always intended to be a first mortgage – would normally assume a lower priority than the pre-existing second mortgage. But this general rule may be overcome by the doctrine of equitable subrogation. The doctrine of equitable subrogation allows the lender whose loan proceeds were used to pay off the prior first mortgage to be subrogated or substituted into the priority of the prior first mortgage. The new loan thus retains priority over the pre-existing mortgage, to the extent the lender’s funds were used to pay off the first mortgage.

Many Ohio courts have been unwilling to apply the doctrine of equitable subrogation in situations in which the new lender – or its agent – has been negligent in failing to discover a pre-existing lien.[1] But two recent cases suggest that the doctrine may be gaining more widespread application. In Washington Mutual Bank, FA v. Aultman,[2] discussed in an earlier Frost Brown Todd LLC Client Advisory, the Ohio Court of Appeals for the Second District applied the doctrine of equitable subrogation in a situation in which the lender failed to discover a lien because of a defective title search. In Aultman, the court held that given the lender’s “mere mistake” in overlooking the pre-existing mortgage, the “application of equitable subrogation in this instance comports with the doctrine’s purpose of providing relief from mistakes.”

More recently, in Washington Mutual Bank v. Hopkins,[3] the Ohio Court of Appeals for the Tenth District also applied the doctrine of equitable subrogation in a situation in which the lender’s agent was negligent. In Hopkins, Kenneth and Pamela Hopkins gave a mortgage for their property to Camco Mortgage Corporation, and later obtained a second mortgage on the property through Heartland Bank. A year later, Hopkins refinanced through Washington Mutual (“WaMu”), using the proceeds of the WaMu loan to pay off the Camco mortgage. But WaMu’s title agent failed to perform a title search and, as a result, also failed to find the Heartland mortgage. When the Hopkins defaulted on their WaMu loan, WaMu filed a complaint in foreclosure, naming the Hopkins and Heartland as defendants. Heartland argued that as a result of the refinancing, its mortgage had first priority, and the trial court agreed, declining to apply the doctrine of equitable subrogation because of WaMu’s negligence.

The Court of Appeals reversed the trial court’s decision, and applied the doctrine of equitable subrogation in order to give WaMu’s mortgage first priority. The court held that WaMu’s title agent’s failure to discover the Heartland mortgage was nothing more than an “ordinary mistake.” Further, the court noted that Heartland never bargained to be in a first-lien position, and therefore would not be prejudiced by the application of the doctrine of equitable subrogation.

This second case adds to the split of authority in Ohio on whether the doctrine of equitable subrogation should be applied in the face of a lender’s, or a lender’s agent’s, negligence. In the appeal of Aultman, the Ohio Supreme Court recognized this conflict, certifying the question: “Does the doctrine of equitable subrogation overcome the general rule set forth in R.C. 5301.23 when… a lender [acts negligently in] its failure to discover a preexisting recorded subordinate mortgage or lien while conducting a title search and where the subordinate mortgage or lien-holder acts without fraud?”[4]Unfortunately, the Court was not able to answer the question. The appeal was dismissed shortly after the Court certified the question. Whether more Ohio courts will adopt the Second and Tenth Districts’ position on equitable subrogation, and whether the Ohio Supreme Court is presented with another case in which to resolve the split of authority concerning equitable subrogation, remains to be seen.



[1]See, e.g., Alegis Group L.P. v. Lerner, Delaware App. No. 2004-CAE-05038, 2004-Ohio-6205; Leppo, Inc. v. Kiefer (Jan. 31, 2001), Summit App. Nos. 20097 and 20105, 2001 Ohio App. Lexis 293; Associates Financial Serv. Corp. v. Miller, Portage App. No. 2001-P-46, 2002-Ohio-1610.

[2]172 Ohio App. 3d 584, 2007-Ohio-3706, 876 N.E.2d 617.

[3] 2007-Ohio-7008.

[4]Washington Mut. Bank, FA v. Aultman, 115 Ohio St. 3d 1471, 2007-Ohio-5735, 875 N.E.2d 626.

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