Equitable subrogation: the evolution of the volunteer and the continued irrelevance of constructive notice.

• Author: Street, Brian
• Position: Florida

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The doctrine of equitable subrogation, particularly as applied to priority of mortgage liens, has long been a tool used by real property litigators seeking to rectify or mitigate priority issues caused by defectively executed or recorded mortgages. As a general rule, equitable subrogation is available to substitute (subrogate) a refinancing lender to the position of the mortgage or lien that the lender satisfied. The later lender, who anticipated taking the subrogated position when making the subject loan, is permitted to assume the lien priority of the loan it satisfied, notwithstanding its failure to gain de jur priority pursuant to Ch. 695's strict recording rules.

In 1933, the Florida Supreme Court set forth the general principles for the application of equitable subrogation in Florida, as specifically applied to mortgage liens and refinancing lenders:

[O]ne 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 ... will be subrogated to the rights of the first mortgagee, notwithstanding there is at the same time a second mortgage of which he (the lender) is ignorant. (1)

In stating this rule, the court considered the equitable basis for protecting the expectations of the intervening lien holder and the refinancing lender, reasoning that "[t]his rule works common justice to all; it prevents injury to [the refinancing lender] who furnished the money to pay off the first mortgage in ignorance of the second; it gives [the refinancing lender] the benefit of its payment, carries out the intention of the parties; and leaves ... the holder of the junior mortgage in his original position." (2)

Since Fed. Land Bank of Columbia v. Godwin, 145 So. 883, 885 (Fla. 1933), the Florida Supreme Court has not receded from this standard. Instead, the court has reiterated that the application of this standard is qualified only by the caveats that it is unavailable to volunteers (3) and should be applied only to the extent that no prejudice to the rights of intervening lien holders results. (4)

The district courts of appeal have followed suit, granting equitable subrogation to relieve a refinancing lender from the strict operation of Florida's recording statutes, (5) even in the face of a lender's negligence. (6) Under this doctrine, the refinancing lender will be subrogated to the value of the lien or obligation that was satisfied, including taxes paid upon the property to protect the security subject to the lien (7) and interest from the date the prior lien was satisfied. (8)

Despite the historical leniency afforded this doctrine by Florida courts, the recent turmoil affecting the Florida real estate market has rendered the question of priority one of immense importance--and increasing litigation. Pervasive over-leveraging of residential and commercial properties across the state has resulted in a glut of foreclosures, while simultaneous deflationary forces have acted to diminish, if not totally eliminate, the value of many inferior lien positions.

To that end, lien holders who intended to occupy a second priority behind existing first lien mortgages, and who may have previously acceded to subordination demands in recognition of their intended second lien positions, have been more active in challenging the subrogation rights of refinancing lenders whose mortgages are defective for any reason.

Under these circumstances, litigators representing the party seeking subrogation are increasingly being called upon to defend the argument that Boley v. Daniel, 72 So. 644 (Fla. 1916), a 1916 Florida Supreme Court opinion, limits the availability of equitable subrogation to refinancing lenders with constructive notice of an intervening lien and who have acted imprudently in taking the mortgage at issue.

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This article will discuss Boley, and explain how Boley was intended to affect and limit the doctrine of equitable subrogation by precluding its availability to volunteers. It will then explain how Boley's applicability was altered by three Florida Supreme Court cases rendered in 1933, which collectively redefined the Boley conception of a volunteer. It will conclude by addressing Picker Fin. Group, LLC, v. Horizon Bank, 293 B.R. 253 (M.D. Fla. 2003), the only case rendered in Florida since 1933 to interpret Boley to preclude subrogation based upon constructive notice, and will explain how the Picker court misconstrued and misapplied Boley, and why Boley should not be interpreted to preclude equitable subrogation premised on imputation of constructive notice to a refinancing lender.

Boley

In Boley v. Daniel, the appellant mortgagee, Daniel, made a loan to the mortgagor for the expressed purpose of satisfying an existing first mortgage against the subject property, under the belief (9) that no other liens existed. (10) Daniel had no pre-existing interest in and to the property, nor was he under any duty or obligation to satisfy the existing mortgage; he did so purely at the request of the mortgagor. (11) However, an intervening lien did exist, in favor of Boley, and the court was called upon to determine whether Daniel's mortgage should be equitably subrogated to the rights of the lien it had satisfied, and, thus, assume a superior priority to Daniel's intervening lien. (12)

In reaching its conclusion, Boley first discussed the two different forms of subrogation: legal subrogation (now commonly referred to as "equitable") and conventional subrogation. (13) Daniels attempted to avail himself of both aspects of the subrogation doctrine. (14)

The court addressed these doctrines sequentially. (15) It first summarily denied the availability to Daniel of equitable subrogation, under the singular premise that since "Daniel was under no obligation whatever to pay the note that was secured by the first mortgage on the property given by [the mortgagor] to [the first lien mortgagee], and had no interest in or relation to the property, there can be no legal subrogation of Daniel to the rights of the holder of the first mortgage." (16) The court later corroborated this justification as the sole predicate for denying Daniel equitable subrogation, stating that "[b]eing under no duty, legal or otherwise, to pay the first mortgage debts, Daniel is not entitled to a legal subrogation to the prior right that had existed in favor of the first mortgage holder." (17) It is clear, looking at these quotes in the context of the opinion, that the court's determination that Daniel had constructive notice of the existence of Boley's lien was not a predicate for the denial of equitable subrogation.

The court then moved on to the applicability of conventional subrogation, explaining that conventional subrogation requires that an assignment or similar agreement to maintain existing priorities and keep existing security alive must be in existence. (18) In response to Daniel's argument that he intended to occupy a first lien priority, and, thus, be superior to Boley's lien, the court explained that Daniel could not claim an implied agreement that he would occupy a "first lien position" over the Boley mortgage because, if Daniel had intended to do so, he would have included a reference to the Boley mortgage in the recorded satisfaction of mortgage. (19) The court reasoned that if Daniel had intended to keep the first lien security alive and, thus, assume its priority, he would have referenced the Boley lien in the recorded satisfaction; since he did not, and had constructive notice of its existence, the logical conclusion was that Daniel had formulated no such agreement or intent. (20) Thus, Daniel's argument for conventional subrogation was rejected.

As a result of Daniel's inability to recover under either equitable or legal subrogation, the court held that, "[w]hen a first mortgage lien existing against real estate is paid off, the lien of a second mortgage thereon becomes at once, by operation of law, a first lien on the property." (21)

As seen above, there were two separate holdings in Boley: one pertaining to equitable subrogation, and one pertaining to conventional...