FOR PUBLICATION FILED
May 24 2012, 8:34 am
CLERK
of the supreme court,
court of appeals and
tax court
ATTORNEY FOR APPELLANT: ATTORNEYS FOR APPELLEE:
JEFFREY K. GRAHAM CRAIG D. DOYLE
Bingham Farrer & Wilson, P.C. KURT V. LAKER
Elwood, Indiana Doyle Legal Corporation, P.C.
Indianapolis, Indiana
IN THE
COURT OF APPEALS OF INDIANA
FINANCE CENTER FEDERAL )
CREDIT UNION, )
)
Appellant-Defendant, )
)
vs. ) No. 49A02-1111-MF-1089
)
RONNIE D. BRAND, DEBORA J. BRAND )
and GMAC MORTGAGE, LLC, )
)
Appellee-Plaintiff. )
)
APPEAL FROM THE MARION SUPERIOR COURT
The Honorable Cynthia J. Ayers, Judge
The Honorable Burnett Caudill, Magistrate
Cause No. 49D04-0909-MF-42341
May 24, 2012
OPINION - FOR PUBLICATION
VAIDIK, Judge
Case Summary
Ronnie D. Brand and Debora J. Brand (collectively, “the Brands”) refinanced their
first and second mortgages with GMAC Mortgage, LLC. Despite GMAC fully paying
off the Brands’ first and second mortgages as part of the refinancing process, the Brands’
second mortgage – a home equity line of credit with Finance Center Federal Credit Union
– was never released. Finance Center later advanced additional funds to the Brands.
When the Brands thereafter defaulted on the GMAC mortgage, a dispute erupted over the
priority of the GMAC and Finance Center mortgages. The trial court entered partial
summary judgment in favor of GMAC, finding that the GMAC mortgage had first
priority pursuant to the doctrine of equitable subrogation. Finance Center now appeals,
arguing that the GMAC mortgage does not have first priority because GMAC was
“culpably negligent.” Concluding that equity should not allow the Finance Center
mortgage to gain an unexpected elevated priority because of any negligence of GMAC
that did Finance Center no harm, we affirm.
Facts and Procedural History
In 1989, the Brands acquired title to 8732 Deer Run Drive in Indianapolis by
means of a warranty deed. Over a decade later, on July 12, 2002, the Brands executed
and delivered to Meridian Group Mortgage Corp. a mortgage securing repayment of a
loan in the principal amount of $107,200 (“Meridian Group mortgage”). This mortgage
was recorded on July 19, 2002.
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On July 23, 2002, the Brands granted a second mortgage to Finance Center
securing repayment of a $25,000 home equity line of credit (“Finance Center mortgage”).
This second mortgage was recorded on September 24, 2002.
In March 2007, the Brands refinanced their mortgages with First Republic
Mortgage Corporation. In anticipation of the refinance, Stewart Title Services of Indiana
performed a title search that revealed the two existing mortgages. Stewart Title requested
payoff statements from both Meridian Group and Finance Center. Meridian Group
provided a payoff amount of $103,769.57. Finance Center provided a payoff statement.
Closing occurred on March 30, 2007. The Brands executed a note and mortgage
in favor of First Republic in the principal amount of $163,516.99. First Republic later
assigned its interest to GMAC.1 This mortgage (“GMAC mortgage”) was recorded on
April 13, 2007. Proceeds from the GMAC mortgage were used to pay off the Meridian
Group and Finance Center mortgages. Stewart Title sent payment in the amount of
$103,769.57 in full satisfaction of the Meridian Group mortgage. Meridian Group then
released the mortgage. Stewart Title also sent two checks to Finance Center – one for
$25,175.07 and the other for $10,399.76 – in order to fully satisfy the amounts the Brands
owed to Finance Center at the time, including their line of credit. GMAC, as the
refinancing lender, intended to obtain a first-priority lien on the real estate. GMAC
would not have made the loan unless its mortgage had first priority.
Although the payments received from the closing of the GMAC mortgage fully
satisfied the Brands’ obligation to Finance Center at the time, Finance Center did not
1
Although the assignment did not occur until August 28, 2009, we refer to GMAC for sake of
clarity.
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release the mortgage. Notably, the Finance Center mortgage and the underlying note
each contain a provision requiring the borrower to send notice requesting release of the
lien. See Appellant’s App. p. 24 (“You are required to give 15 days prior written notice
of your account is to be paid off and closed [sic] all unused drafts returned with the
notice.”), 28 (“The Secured Debt includes a revolving line of credit. Although the
Secured Debt may be reduced to a zero balance, this Security Instrument will remain in
effect until released.”). Because notice was apparently not sent to Finance Center with
the payoff checks, Finance Center left the line of credit open and later advanced
additional funds to the Brands.
In September 2009, GMAC filed a Complaint on Note and to Foreclose Mortgage
on Real Estate against the Brands and Finance Center. GMAC alleged that the Brands
defaulted pursuant to the terms of the note and the mortgage by failing to tender the
monthly mortgage payment as promised. Id. at 7. GMAC also alleged that Finance
Center “may assert an interest in the subject property by virtue of a mortgage executed by
[the Brands] to [Finance Center] on July 23, 2002 and recorded on [September] 24, 2002
. . . .” Id. at 8. GMAC, however, claimed that its mortgage was first in priority. Id.
Finance Center filed a cross-complaint and counterclaim. Finance Center alleged
that it was due $25,215.69 plus interest and that its mortgage, not GMAC’s, was first in
priority. Id. at 22.
In December 2010, Finance Center filed a motion for summary judgment seeking
to establish and foreclose a first-priority lien on the real estate. GMAC filed a cross-
motion for partial summary judgment seeking only to establish the priority of its
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mortgage over the Finance Center mortgage. A hearing was held at which the parties
argued whether the doctrine of equitable subrogation allowed GMAC to place its
mortgage into the shoes of the Meridian Group mortgage and retain its priority. The trial
court granted partial summary judgment in favor of GMAC:
GMAC is entitled to a first lien against the real estate at issue in this action
in the amount of $103,769.57, plus interest on that amount from March 30,
2007, through the date of judgment at the rate of 6.25 percent per year,
which lien shall have priority over the mortgage lien asserted by Finance
Center Federal Credit Union. This entry of partial summary judgment shall
not adjudicate or prejudice any rights of GMAC to seek foreclosure of its
mortgage in the future. The Court expressly finds that there is no just
reason for delay, and directs that this entry of partial summary judgment
shall be a final judgment as to the issues decided, pursuant to Trial Rule
54(B).
Id. at 4-5.
Finance Center now appeals.
Discussion and Decision
Finance Center contends that the trial court erred in granting partial summary
judgment in favor of GMAC. Specifically, Finance Center argues that GMAC is not
entitled to a first lien against the real estate pursuant to the doctrine of equitable
subrogation because GMAC was “culpably negligent.”
We review a summary judgment order de novo. Bules v. Marshall Cnty., 920
N.E.2d 247, 250 (Ind. 2010). The purpose of summary judgment is to end litigation
about which there can be no factual dispute and which may be determined as a matter of
law. Shelter Ins. Co. v. Woolems, 759 N.E.2d 1151, 1153 (Ind. Ct. App. 2001), trans.
denied. We must determine whether the evidence that the parties designated to the trial
court presents a genuine issue of material fact and whether the moving party is entitled to
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a judgment as a matter of law. Ind. Trial Rule 56(C); Bules, 920 N.E.2d at 250. We
construe all factual inferences in the nonmoving party’s favor and resolve all doubts as to
the existence of a material issue against the moving party. Bules, 920 N.E.2d at 250.
Our Supreme Court redefined the doctrine of equitable subrogation, which has
been recognized in Indiana for more than a century, in Bank of New York v. Nally, 820
N.E.2d 644, 651 (Ind. 2005). “The nature of equitable subrogation is, as its name
indicates, equity.” Neu v. Gibson, 928 N.E.2d 556, 560 (Ind. 2010). “Subrogation arises
from the discharge of a debt and permits the party paying off a creditor to succeed to the
creditor’s rights in relation to the debt.” Nally, 820 N.E.2d at 651 (citation omitted). In
other words, “[t]he doctrine substitutes one who fully performs the obligation of another,
secured by a mortgage, for ‘the owner of the obligation and the mortgage to the extent
necessary to prevent unjust enrichment.’” Neu, 928 N.E.2d at 560 (quoting Restatement
(Third) of Property § 7.6(a) (1997)); see also Nally, 820 N.E.2d at 653. “This avoids an
inequitable application of the general principle that priority in time gives a lien priority in
right.” Neu, 928 N.E.2d at 560 (citation omitted). “In considering whether to order
subrogation and thus bypass the general principle of priority, courts base their decisions
on the equities, particularly the avoidance of windfalls and the absence of any prejudice
to the interests of junior lienholders.” Id.; see also Nally, 820 N.E.2d at 653. Equitable
subrogation is “‘a highly favored doctrine, which is to be given a liberal application.’”
Nally, 820 N.E.2d at 652 (quoting Osterman v. Baber, 714 N.E.2d 735, 738 (Ind. Ct.
App. 1999), trans. denied).
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In Nally, our Supreme Court quoted the following excerpt from the Third
Restatement of Property:
“Perhaps the case occurring most frequently is that in which the payor [i.e.
the party asserting a right to equitable subrogation] is actually given a
mortgage on the real estate, but in the absence of subrogation it would be
subordinate to some intervening interest, such as a junior lien. Here
subrogation is entirely appropriate, and by virtue of it the payor has the
priority of the original mortgage that was discharged. This priority is often
of critical importance, since it will place the payor’s security in a position
superior to intervening liens and other interests in the real estate. The
holders of such intervening interests can hardly complain of this result, for
it does not harm them; their position is not materially prejudiced, but is
simply unchanged.”
Id. at 653 (quoting Restatement (Third) of Property § 7.6 cmt. e). Our Supreme Court
agreed with this portion of the Restatement as it applied to a conventional refinancing:
A lender providing funds to pay off an existing mortgage expects to receive
the same security as the loan being paid off. Refinancings are
commonplace in today’s economy. Permitting a junior lienholder to
leapfrog the priority of the current senior mortgage would impair the
owner’s access to more favorable interest rates. Unless a junior lienholder
is disadvantaged by permitting subrogation, we see no reason to give the
junior lienholder in effect the right to block or object to the refinancing.
We conclude that a mortgagee who refinances an existing mortgage is
entitled to equitable subrogation even if it had actual or constructive
knowledge of an existing lien on the property unless the junior lienholder is
disadvantaged or the mortgagee is “culpably negligent” . . . , but this
remedy is subject to the rights and limitations of the subrogor.
Id. at 653-54. Accordingly, as long as the refinancing lender is not culpably negligent,
the refinancing lender is entitled to stand in the shoes of the senior lien and retain its
priority status. Id. at 654.
Here, it is undisputed that as part of the refinancing process, GMAC paid off the
Meridian Group mortgage in full and the lien was discharged. And notably, Finance
Center does not argue that its mortgage was somehow superior to the Meridian Group
7
mortgage. Accordingly, unless Finance Center was prejudiced or GMAC was “culpably
negligent,” GMAC, as the refinancing lender, is entitled to stand in the shoes of Meridian
Group to the extent of its $103,769.57 payoff. Finance Center, however, argues that
GMAC was culpably negligent.
A volunteer or one charged with “culpable negligence” may not be entitled to
equitable subrogation. Id. Culpable negligence “contemplates action or inaction which is
more than mere inadvertence, mistake or ignorance” and “focuses on the activity of the
party asserting subrogation.” Id. (quotation omitted). Although preserving the rights of
intervening creditors who record their interests is “plainly equitable,” leapfrogging a
senior claim is “precisely what equitable subrogation is designed to prevent.” Id. at 655.
Finance Center claims that GMAC was culpably negligent in failing to obtain a
release of the Finance Center mortgage and that this negligence bars equitable
subrogation. We addressed a similar issue in JPMorgan Chase Bank v. Howell, 883
N.E.2d 106 (Ind. Ct. App. 2007), and found no culpable negligence in the refinancing
lender’s failure to ensure that it had properly paid off the junior line-of-credit mortgage.2
In Howell, Howell refinanced his real estate, which was subject to a senior
conventional mortgage and a junior line-of-credit mortgage. The refinancing lender paid
off the senior mortgage in full and attempted to pay off the junior line-of-credit mortgage.
However, the refinancing lender’s payoff of the junior line-of-credit mortgage was $300
short; accordingly, the line of credit remained opened. After additional funds were drawn
2
Finance Center argues that two additional cases from this Court are dispositive, but we find
them distinguishable on several grounds. See Bank of Am., N.A. v. Ping, 879 N.E.2d 665 (Ind. Ct. App.
2008); Liberty Mortg. Grp. v. Nat’l City Bank, 755 N.E.2d 639 (Ind. Ct. App. 2001), trans. denied. One
of these distinguishing grounds is that the line-of-credit lenders in Liberty Mortgage and Ping had senior
liens. Here, however, the line-of-credit lender, Finance Center, had a junior lien.
8
from the line of credit (with a final balance of $42,235.63), a priority dispute erupted. In
addressing the line-of-credit lender’s culpable-negligence argument, we held:
[A]ny negligence in [the refinancing lender’s] failure to confirm whether it
had fully satisfied [the line-of-credit] mortgage—a failure for which [the
line-of-credit lender] bears some responsibility[3]—did not prejudice [the
line-of-credit lender] and in fact benefited [the line-of-credit lender] to the
tune of over $42,000. In sum, [the refinancing lender] was not culpably
negligent. See [Nally, 820 N.E.2d] at 655 (“Equity should not allow the
[junior] mortgage to gain an unexpected elevated priority status because of
the negligence of [the senior lienholder’s subrogee] or its assignee that did
the [junior lienholder] no harm.”).
Howell, 883 N.E.2d at 112.
The same can be said here. That is, any negligence in GMAC’s failure to ensure
that the Brands’ second mortgage with Finance Center was released did not prejudice
Finance Center because the Finance Center mortgage was always junior to the senior
Meridian Group mortgage, which was fully satisfied with the loan proceeds from the
GMAC refinancing. Allowing GMAC to step into the shoes of the Meridian Group
mortgage will leave Finance Center in the very same junior position. This is a clearly
equitable result. See Nally, 820 N.E.2d at 655 (“The mere fact that a person seeking
subrogation was negligent does not bar him or her from relief where such negligence is as
to his or her own interests and does not affect prejudicially the interest of the person to
whose rights subrogation is sought.” (quotation omitted)). Although GMAC failed to
ensure that the Brands gave proper notice to Finance Center to release the lien, GMAC
was not culpably negligent. The doctrine of equitable subrogation thus applies to this
3
This is an apparent reference to the fact that that the line-of-credit lender did not advise the
refinancing lender of the $300 shortfall in the attempted payoff. Likewise, GMAC argues here that
Finance Center bore some responsibility in this case for not including instructions for closing the line of
credit with its payoff statement. Appellee’s Br. p. 14 n.7.
9
case. Accordingly, we affirm the trial court’s grant of partial summary judgment in favor
of GMAC.
Affirmed.
CRONE, J., and BRADFORD, J., concur.
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