The law recognizes and distinguishes between actual knowledge and constructive knowledge. In Fishman v. Murphy ex rel. Estate of Urban, 433 Md. 534, 72 A.3d 185 (August 15, 2013), the mortgagee had constructive notice of a lawsuit that had been filed before the subject loan was made, so the mortgagee was not a bona fide purchaser (a “BFP”) and was not entitled to a first priority position based on its deed of trust. However, the mortgagee did not have actual knowledge of the existence of the lawsuit, and therefore it was entitled to benefit from the doctrine of equitable subordination.
The facts in Fishman v. Murphy were as follows. Dorothy Mae Urban borrowed $60,838.36 from CitiFinancial on December 6, 2004 and gave CitiFinancial a deed of trust on her home in Pasadena, Anne Arundel County as security.
On May 30, 2007, Urban signed a deed to her son Robert Street for her house. This occurred after she was diagnosed with terminal cancer and while she was in a hospice and under medication. Urban died on June 5, 2007.
On January 3, 2008, Sheila Murphy, the personal representative of the Estate of Urban and the sister of Street, filed a suit in the Circuit Court for Anne Arundel County asking the court to declare the deed to be null and void because it was procured by Street’s fraud.
On February 18, 2008, Street took out a mortgage loan from 1st Chesapeake Home Mortgage in the amount of $91,350, of which $59,086.72 was used to pay off the CitiFinancial loan. 1st Chesapeake recorded the deed of trust (the “Street Deed of Trust”) on April 2, 2008. 1st Chesapeake Home Mortgage subsequently assigned the loan to Midfirst Bank.
On March 15, 2010, the Circuit Court for Anne Arundel County issued an order (the “Estate Order”) imposing a constructive trust on the property and ordering Street to execute a deed to the Urban estate. Street deeded the property to the Urban Estate on May 25, 2010.
On December 1, 2010, the substitute trustees under the Street Deed of Trust filed a foreclosure proceeding on behalf of Midfirst. Murphy moved to stay or dismiss the foreclosure case. She alleged that as a result of the Estate Order, Street had no interest in the property. Murphy also argued that the filing of the lawsuit by the Estate created a lis pendens, and that as a result the lien of the Street Deed of Trust was invalid.
Midfirst pointed out that the Estate Order did not declare that the deed to Street was void, but that there was a constructive trust placed on the property. Therefore, Street had an ownership interest in the property when he executed the Deed of Trust, albeit a voidable interest. Midfirst claimed to be a bona fide purchaser without knowledge of the constructive trust; the Circuit Court found that it was a “disputed material fact” as to whether or not Midfirst had actual knowledge of the pending lawsuit when the new loan was made.
The Circuit Court denied the Estate’s motion to dismiss the foreclosure sale, and the Estate appealed. The Court of Special Appeals reversed, holding that Midfirst had constructive notice of the lawsuit. The intermediate appellate court ruled that constructive notice was sufficient to defeat Midfirst’s claim to be a BFP and also was sufficient to allow it to avail itself of the doctrine of equitable subrogation.
The Court of Appeals granted a cert. petition. In its opinion, the Court of Appeals held that the filing of the lawsuit created a lis pendens on the property, and this imparted constructive knowledge to Midfirst. The Court of Appeals found that this defeated Midfirst’s claim to be a BFP because a BFP must acquire property for valuable consideration, in good faith, and without notice of another’s prior claim to the property – and that constructive notice was sufficient to defeat Midfirst’s claim to BFP status. As to this part of the case, the Court of Appeals agreed with the prior holding of the Court of Special Appeals.
The Court of Appeals went on to hold that Midfirst was entitled to avail itself of the doctrine of equitable subordination, and to this extent it overruled the Court of Special Appeals. Subrogation substitutes one creditor for another, with the substitute creditor having only the rights of the previous creditor. The purpose of subrogation is to prevent injustice, or, as the Court of Appeals stated, “inequitable consequences.” The Court of Appeals held that constructive notice alone was not sufficient to defeat a claim of equitable subrogation.
Therefore, the Court of Appeals held that Midfirst was subrogated to the extent of $59,086.72, the amount of the Midfirst loan that was used to repay the prior mortgage on the property held by CitiFinancial. This permits the Midfirst trustees to proceed with the foreclosure sale.
For questions about this, please contact Ed Levin at (410) 576-1900.