Relating to Real Estate
Refinancing Lender Assumes First Priority Position of Original Lender
On May 5, 2005, First Equity Mortgage Inc. extended a loan of $443,450 (First Equity Loan) to Denzil and Simone Waldron to purchase a house in Adamstown, Frederick County (Property). The First Equity Loan was secured by a first priority deed of trust on the Property (First Equity Deed of Trust). On the same day, the Waldrons obtained a home equity line of credit from Branch Banking and Trust Company (BB&T) in the amount of $83,000 (BB&T Line of Credit), which was secured by a second priority deed of trust on the Property (BB&T Deed of Trust).
One month later, the Waldrons obtained two new loans from Wells Fargo Bank, N.A. With the first of those loans (which was subsequently assigned to JP Morgan and which is called the “JP Morgan Loan”), Wells Fargo refinanced the First Equity Loan with a deed of trust loan of $450,000, of which $446,104.35 went to pay off the outstanding balance of the First Equity Loan, including principal and accrued interest. Thereupon, First Equity released the First Equity Deed of Trust. In August 2017, Wells Fargo assigned the JP Morgan Loan and the deed of trust that secured it to JP Morgan Chase Bank, N.A. With its second loan, Wells Fargo extended to the Waldrons a line of credit with a maximum draw of $83,000 (Wells Fargo Line of Credit), secured by another new deed of trust in favor of Wells Fargo. The proceeds of the Wells Fargo Line of Credit were used to pay the balance of the BB&T Line of Credit down to zero. However, the Waldrons did not terminate their line of credit with BB&T, and BB&T did not release the BB&T Deed of Trust. The Waldrons later drew on the BB&T Line of Credit and then defaulted on it.
On October 12, 2018, BB&T docketed a foreclosure action against the Waldrons under the BB&T Deed of Trust and sent notice to JP Morgan of its intent to sell the Property at foreclosure. According to JP Morgan, that was when it learned that the BB&T Deed of Trust had never been released.
On January 22, 2019, JP Morgan brought an action in the Circuit Court for Frederick County, requesting that the court declare the BB&T Deed of Trust to be released and that JP Morgan be equitably subrogated to the rights and priority lien position of First Equity by virtue of JP Morgan’s having paid off the First Equity Loan. However, the circuit court ruled in favor of BB&T, finding that JP Morgan was aware of the BB&T Line of Credit and, as a sophisticated party, had an obligation to investigate whether BB&T had released the BB&T Deed of Trust. The circuit court also found that the Waldrons, and not BB&T, had the ability to close the BB&T Line of Credit and that the delay by JP Morgan in raising its claim of equitable subrogation prejudiced BB&T. Therefore, the circuit court denied JP Morgan’s motion for summary judgment and granted BB&T’s.
JP Morgan appealed to the Maryland Court of Special Appeals (CSA) which reversed in part and vacated part of the decision of the circuit court. JP Morgan Chase Bank, N.A. v. Truist Bank, No. 1658, Sept. Term 2019, 2020 WL 7401279 (Md. Ct. Spec. App. Dec. 17, 2020).
The CSA stated that “equitable subrogation … applies when a lender pays off a prior debt neither to protect the lender’s own interests nor as a volunteer, but with the expectation of taking the same rights as the lender whose debt is paid off. ... The result of equitable subrogation is thus to place a lender whose funds were used to extinguish a debt in the position occupied by the original lender, provided that that was the intention of the parties and no other party would be prejudiced by doing so.” The CSA held that equitable subordination will not be prevented either by the lender’s negligence nor constructive notice of an intervening lien. While unreasonable delay and resulting prejudice to an intervening lien will preclude the operation of equitable subrogation through laches, an intervening creditor’s loss of a windfall benefit, such as an enhanced priority position, is not cognizable prejudice. In this context, the CSA ruled that the relevant question was not whether JP Morgan had knowledge of the BB&T Deed of Trust, but whether JP Morgan had knowledge that the BB&T Deed of Trust would continue in place after the JP Morgan Loan was made.
The CSA agreed with the circuit court’s denial of JP Morgan’s claim that the BB&T Deed of Trust should be released. The CSA found that JP Morgan’s release claim, made 13 years after the JP Morgan Loan was made, was barred by laches, because the delay was unreasonable and it caused prejudice to BB&T.
For more information, contact Edward J. Levin.
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