The Cardinals' Nest Egg Trust v. Sandton Credit Solutions Master Fund III, Lp ( 2020 )

RENDERED: DECEMBER 23, 2020; 10:00 A.M.
NOT TO BE PUBLISHED
Commonwealth of Kentucky
Court of Appeals
NO. 2019-CA-1827-MR
THE CARDINALS’ NEST EGG
TRUST APPELLANT
APPEAL FROM JEFFERSON CIRCUIT COURT
v. HONORABLE MITCHELL PERRY, JUDGE
ACTION NO. 18-CI-400336
SANDTON CREDIT SOLUTIONS
MASTER FUND III, LP APPELLEE
OPINION
AFFIRMING
** ** ** ** **
BEFORE: GOODWINE, MCNEILL, AND L. THOMPSON, JUDGES.
GOODWINE, JUDGE: The Cardinals’ Nest Egg Trust (“CNET”) appeals a
judgment of the Jefferson Circuit Court on cross-motions for summary judgment,
finding Sandton Credit Solutions Master Fund III, LP’s (“Sandton”) judgment lien
had first priority. CNET argues the trial court erred in denying it relief under the
doctrine of equitable subrogation. After careful review, finding no error, we
affirm.
This action began when The Bank of New York Melon (“BNYM”)
foreclosed on Norman and Anna Risen’s (“the Risens”) mortgage note. On June
25, 2018, in an alleged attempt to assume the Risens’ mortgage and avoid
foreclosure, CNET wired BNYM the outstanding balance of the mortgage. CNET
did not record any type of mortgage document at the time. On July 6, 2018,
Sandton recorded a judgment lien on the property. On July 14, 2018, BNYM
released its mortgage on the property. On August 14, 2018, CNET recorded its
mortgage on the property.
CNET then moved to reopen the foreclosure action and added
Sandton as a party. CNET sought to file an intervening complaint and subordinate
Sandton’s lien under the doctrine of equitable subrogation. Sandton and CNET
filed cross-motions for summary judgment about a year later. Following a hearing,
the trial court granted summary judgment in favor of Sandton. This appeal
followed.
On appeal, CNET argues the trial court erred in granting Sandton’s
motion for summary judgment because the doctrine of equitable subrogation
applies. “We review de novo the trial court’s grant or denial of a motion for
summary judgment.” Community Financial Services Bank v. Stamper, 586 S.W.3d
-2-
737, 741 (Ky. 2019) (citing Caniff v. CSX Transp., Inc., 438 S.W.3d 368, 372 (Ky.
2014)).
Under Kentucky law, lien priority is determined under the “race-
notice” rule. KRS1 382.270 provides that “[n]o mortgage, deed or deed of trust
conveying real property is valid against a purchaser for a valuable consideration,
without notice thereof, or creditors until it is properly filed.” Wells Fargo Bank,
Minnesota, N.A. v. Commonwealth, Finance and Admin., Dep’t of Revenue, 345
S.W.3d 800, 804 (Ky. 2011). KRS 382.280 states that “[a] mortgage, deed or deed
of trust shall take effect at the time it is filed.” Id. Together, these statutes require
a lienholder to “be the first to file the mortgage, deed or deed of trust” and “lack
actual or constructive knowledge of any other mortgages, deeds or deeds of trust
related to the property” to have priority over another lienholder’s interest in the
property. Id.
In addition to the recording statutes that create the race-notice rule,
Kentucky courts also apply the common law “first in time, first in right rule” in
determining lien priority:
This Court has long held [that] the first creditor to file its
lien enjoys the first right to the debtor’s property. This
general rule of lien preference has become known as
“first in time, first in right.” [Indiana] Truck Corp. of Ky.
v. Hurry Up Broadway Co., 222 Ky. 521, 1 S.W.2d 990
(1928). It is without question, however, that the
1
Kentucky Revised Statutes.
-3-
Kentucky General Assembly is empowered to create
statutory liens and establish their priorities; but, absent a
statute giving precedence to a statutory lien, its rank is
determined under the principle of first in time, first in
right. Midland-Guardian Co. v. McElroy, 563 S.W.2d
752 (Ky. App. 1978).
Wells Fargo Bank, 345 S.W.3d at 804.
Kentucky recognizes the doctrine of equitable subrogation as an
exception to the first in time, first in right rule. “Equitable subrogation permits a
creditor who pays the debt of another to stand in the shoes of the original creditor,
enjoying all rights and remedies of the original creditor.” Mortgage Electronic
Registration Systems, Inc. v. Roberts, 366 S.W.3d 405, 408 (Ky. 2012) (quoting
Wells Fargo, 345 S.W.3d at 806). The purpose of equitable subrogation “is to
prevent unjust enrichment at another’s expense.” Id. at 411. Under Kentucky law,
“equitable subrogation is barred if the subsequent lienholder has actual or
constructive knowledge of the existing lien.” Id. (citing Wells Fargo, 345 S.W.3d
at 807). “A party seeking to invoke the doctrine of equitable subrogation bears the
burden of proving the applicability of the doctrine.” Wells Fargo Bank, 345
S.W.3d at 807.
Cases involving equitable subrogation typically address each party’s
culpability for a defective title examination. Id. at 808. However, in this instance,
neither party conducted a defective title examination. When CNET examined the
title to the Risens’ property, BNYM held the only recorded mortgage on the
-4-
property. When Sandton recorded its judgment lien, there were no recorded liens
on the property.
The facts do not support application of the doctrine of equitable
subrogation. CNET argues equitable subrogation entitles it to first priority because
CNET did not have actual or constructive notice of Sandton’s lien when it paid off
the mortgage note and because BNYM released the underlying mortgage “by
mistake” instead of assigning it to CNET. Appellant’s Brief at 4. CNET asserts
the due diligence it performed prior to paying off BNYM’s mortgage note revealed
that CNET’s lien would have first priority.
CNET’s interpretation of the equitable subrogation doctrine is
incorrect. The relevant inquiry is not whether CNET had notice of Sandton’s lien
at the time it paid BNYM’s mortgage, but whether CNET had notice of Sandton’s
lien at the time it recorded its mortgage lien. Roberts, 366 S.W.3d at 411. CNET
paid the outstanding balance on BNYM’s mortgage loan. At that time, there were
no known recorded liens on the property. Sandton recorded its judgment lien
before CNET recorded its mortgage lien. By the time CNET recorded its lien, it
had actual or constructive notice of Sandton’s recorded judgment lien.
CNET knew or should have known that failing to diligently pursue an
assignment of BNYM’s recorded mortgage lien or failing to quickly record its lien
could result in another lienholder taking first priority. Although CNET intended to
-5-
take an assignment of the mortgage, it is undisputed that BNYM did not assign its
interest to CNET when CNET paid the outstanding balance on the Risens’
mortgage note. CNET argues BNYM released its mortgage lien in error but
provided no evidence that BNYM meant to assign its mortgage to CNET aside
from a self-serving affidavit. Furthermore, CNET waited to record its mortgage
lien until after Sandton recorded its judgment lien and fifty days after it paid off
BNYM’s mortgage note. The doctrine of equitable subrogation does not aid the
negligent. Wells Fargo Bank, 345 S.W.3d at 807.
CNET argues Sandton will be unjustly enriched by receiving first
priority. Although Sandton will benefit from gaining first priority, it will not be
unjustly enriched as it will receive only the amount of its judgment. Roberts, 366
S.W.3d at 411. As Sandton recorded its judgment lien before CNET filed its
mortgage lien and CNET presented no compelling evidence that the equitable
subrogation doctrine applies, it is undisputed that Sandton has first priority under
the recording statutes.
For the foregoing reasons, we affirm the summary judgment of the
Jefferson Circuit Court.
ALL CONCUR.
-6-
BRIEFS FOR APPELLANT: BRIEF FOR APPELLEE:
J. Gregory Joyner W. Scott Stinnett
Louisville, Kentucky Louisville, Kentucky
-7-