W.M. SPECIALTY MORTGAGE, LLC. VS. COMMUNITY TRUST BANK, INC., ET AL.
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RENDERED: FEBRUARY 18, 2011; 10:00 A.M.
TO BE PUBLISHED
Commonwealth of Kentucky
Court of Appeals
NO. 2009-CA-002091-MR
W.M. SPECIALTY MORTGAGE, LLC
v.
APPELLANT
APPEAL FROM PULASKI CIRCUIT COURT
HONORABLE DAVID A. TAPP, JUDGE
ACTION NO. 03-CI-01058
COMMUNITY TRUST BANK, INC.;
DAVID FLOYD; AND KIM FLOYD
APPELLEES
OPINION
AFFIRMING
** ** ** ** **
BEFORE: TAYLOR, CHIEF JUDGE; KELLER, JUDGE; LAMBERT,1 SENIOR
JUDGE.
TAYLOR, CHIEF JUDGE: W.M. Specialty Mortgage, LLC, (Specialty Mortgage)
brings this appeal from a September 14, 2009, summary judgment of the Pulaski
Circuit Court adjudicating the priority of liens upon a tract of real property owned
by David Floyd and Kim Floyd (the Floyds). We affirm.
1
Senior Judge Joseph E. Lambert sitting as Special Judge by assignment of the Chief Justice
pursuant to Section 110(5)(b) of the Kentucky Constitution and Kentucky Revised Statutes
(KRS) 21.580.
We are called upon to review the circuit court’s determination that
Community Trust Bank, Inc., (Community Trust) held a prior and superior lien
upon residential real property owned in fee simple by the Floyds. The record
demonstrates that Community Bank extended a loan to the Floyds for the purchase
of residential property and that Community Bank recorded a purchase-money
mortgage lien upon such property on December 8, 1997. Thereafter, in 1999,
Community Bank extended a commercial loan to the Floyds. As security for the
commercial loan, Community Bank obtained liens upon two tracts of real property
owned by the Floyds, one of which was the residential real property, previously
encumbered by Community Bank’s purchase-money mortgage. Community Bank
recorded the mortgages upon the two tracts of real property on October 27, 1999.
The Floyds subsequently refinanced the mortgage debt on the
residential property with Specialty Mortgage.2 Specialty Mortgage forwarded
Community Bank the full payoff amount of the loan and recorded a purchasemoney mortgage lien on April 1, 2003. Unfortunately, the title examiner for
Specialty Mortgage overlooked the prior recorded lien by Community Bank, which
was obtained as additional collateral to secure the commercial loan to the Floyds in
1999.
Eventually, the Floyds defaulted upon the commercial loan and
Community Bank initiated a foreclosure action against the Floyds to enforce the
2
David and Kim Floyd originally refinanced the mortgage on the residential real property with
Ameriquest Mortgage Company. However, W.M. Specialty Mortgage, LLC, is the successor in
interest of Ameriquest, and we simply refer to Specialty Mortgage for simplicity and ease of
reading.
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liens against the two tracts of real property, including the residential property.
Specialty Mortgage was named a defendant as it also held a recorded lien in the
residential real property.
The foreclosure action was stayed after the filing of a bankruptcy
proceeding by Kim Floyd in the United States Bankruptcy Court, Eastern District
of Kentucky (bankruptcy court). The bankruptcy court ultimately lifted the stay,
and the Pulaski Circuit Court thereupon adjudicated the priority of Community
Bank’s and Specialty Mortgage’s respective lien claims to the residential real
property owned by the Floyds. On September 14, 2009, the court granted
Community Bank a summary judgment, holding that its lien claim was prior and
superior to that of Specialty Mortgage. This appeal follows.
Summary judgment is proper where there exists no material issue of
fact and movant is entitled to judgment as a matter of law. Kentucky Rules of
Civil Procedure 56; Steelvest, Inc. v. Scansteel Service Center, Inc., 807 S.W.2d
476 (Ky. 1991). The material facts of this case are undisputed and resolution
centers upon a determination of the priority of Community Bank’s and Specialty
Mortgage’s respective liens against the residential real property owned by the
Floyds.
It is undisputed that Community Bank’s lien upon the residential
property was recorded on October 27, 1999, and constitutes the first in time
recorded lien. Specialty Mortgage’s lien was not recorded until April 1, 2003,
some three and one-half years after the recording of Community Bank’s lien. It is
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also undisputed that Specialty Mortgage was unaware of Community Bank’s prior
recorded lien due to an error by its title examiner. If no such error had occurred,
Community Bank’s prior recorded lien would have been discovered by Specialty
Mortgage at the time it refinanced the Floyds’ indebtedness to Community Bank.
In this Commonwealth, the priority of liens upon real property is
governed by Kentucky Revised Statutes (KRS) 382.280, which reads:
All bona fide deeds of trust or mortgages shall take effect
in the order that they are legally acknowledged or proved
and lodged for record.
This priority is commonly referred to as “race notice.” Under our race-notice
statute, the lien recorded first in time has priority and is superior over later
recorded liens in the same real property. See Midland-Guardian Co. v. McElroy,
563 S.W.2d 752 (Ky. App. 1978). Thus, pursuant to the plain terms of KRS
382.280, Community Bank’s lien has priority over Specialty Mortgage’s lien upon
the residential real property.
To avoid application of KRS 382.280, Specialty Mortgage urges this
Court to apply the doctrine of equitable subrogation and cites to Louisville Joint
Stock Land Bank v. Bank of Pembroke, 225 Ky. 375, 9 S.W.2d 113 (1928), as
authority.3 Specialty Mortgage contends that its lien in the residential property was
3
We note that Louisville Joint Stock Land Bank v. Bank of Pembroke, 225 Ky. 375, 9 S.W.2d
113 (Ky. 1928) was rendered prior to enactment of KRS 382.280, our race-notice recording
statute.
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superior to Community Bank’s lien under the doctrine of equitable subrogation.4
Specifically, Specialty Mortgage’s argument is as follows:
The doctrine of equitable subrogation is long
established in Kentucky and holds that one who satisfies
a prior lien against real property steps into the shoes of
that first lien holder, or to use the language of the cases,
is “equitably subrogated” to the rights of the first lien
holder, and so holds a prior, and superior lien. The basis
for this doctrine is that it would not be equitable, and a
form of unjust enrichment, for a second lien holder to be
promoted to a position of priority when only the identity
of the first lien holder to be promoted to a position of
priority when only the identity of the first lien holder has
changed but the debt owed has not. The “payoff” of the
first lien is equivalent to an assignment of the lien to a
different creditor by operation of law and does not
extinguish the priority. (Citations omitted.)
....
. . . Had appellant not substituted its loan for that of
Community Trust, the second lien of Community Trust
would still be second to the existing first mortgage, as
had always been intended. Application of the doctrine of
equitable subrogation merely maintains the status quo
and preserves the lien of Community Trust in the same
priority as when it was created. The application of
equitable subrogation in no way impairs the expectations
or rights of Community Trust. However, it does do
equity to meet the expectations of [Specialty Mortgage]
and Floyd that [Specialty Mortgage’s] mortgage would
be a first, prior, and superior lien on Floyd’s residence
when the only known encumbrances, Community Trust’s
first mortgage, delinquent taxes and mechanics liens,
were paid from [Specialty Mortgage’s] loan proceeds.
Had that not been the expectation, the loan by
Ameriquest would never have been made and the first
4
We observe that Specialty Mortgage advances no argument under the recent Kentucky Court of
Appeals opinion of Kentucky Legal Systems Corp. v. Dunn, 205 S.W.3d 235 (Ky. App. 2006).
However, we take this opportunity to question the soundness of the reasoning and holding in that
decision based upon applicable real property law regarding lien priority in Kentucky.
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mortgage of Community Trust would not have been paid
in full.
Specialty Mortgage’s brief at 5-7. We believe Specialty Mortgage’s argument to
be without merit.
In Louisville Joint Stock Land Bank, the Court applied the doctrine of
equitable subrogation and explained that doctrine as follows:
Subrogation is a creature of equity, and rests upon
principles of natural justice. Without attempting a
comprehensive classification of cases in which the
doctrine of subrogation may be applied, it is generally
held that the right of subrogation will arise where the
party claiming it has advanced money to pay a debt
which, in the event of default by the debtor, he would be
bound to pay; or where the one making the payment had
some interest to protect; or where the money advanced to
pay the debt was under an agreement with the debtor, or
the creditor, express or implied, that he should be
subrogated to the rights and remedies of the creditor.
Id. at 115. The Court summarized equitable subrogation as providing that a
mortgage released or satisfied by mistake may be restored in equity to its original
priority if the intervening third party would not be prejudiced thereby. Id.
However, pivotal to the Court’s decision in Louisville Joint Stock Land Bank was
the fact that an agreement existed between the borrower and the bank that the
bank’s prior recorded lien would be subordinate to the later in time recorded lien of
a new lienholder.
By contrast, there existed no agreement between the Floyds and
Community Bank that the bank’s prior recorded lien would be subordinate to the
later in time recorded lien of Specialty Mortgage. Without such an agreement, we
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view Louisville Joint Stock Land Bank distinguishable from the instant case, and
we are unwilling to broaden the scope of Louisville Joint Stock Land Bank to the
facts at hand. See id.
Additionally, it must be observed that application of the doctrine of
equitable subrogation rests upon the equities of any given case. See id. Herein, the
record reveals that Community Bank extended a commercial loan to the Floyds
and that the Floyds defaulted under the terms of said loan. In conjunction with the
commercial loan, Community Bank obtained as additional collateral, which is
customary in Kentucky to fully secure a loan or personal guaranty, a mortgage lien
upon the Floyds’ residential property. Thereafter, Specialty Mortgage obtained
and recorded a mortgage lien upon the same residential real property. Through an
error of the title examiner, Specialty Mortgage was unaware of Community Bank’s
prior lien. Considering these facts and the equities herein, we do not believe the
circuit court erred by declining to apply the doctrine of equitable subrogation to reprioritize the liens upon the Floyds’ residential real property. The equities of this
case simply do not favor application of equitable subrogation. Consequently, we
hold that Community Bank held the prior and superior lien in the residential real
property; thus, the circuit court properly rendered summary judgment so
concluding.
We view any remaining arguments as moot or without merit.
For the foregoing reasons, the summary judgment of the Pulaski
Circuit Court is affirmed.
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ALL CONCUR.
BRIEFS FOR APPELLANT:
BRIEF FOR APPELLEES:
David L. Bohannon
Richmond, Kentucky
James B. Ratliff
Pikeville, Kentucky
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