Ocwen Loan Servicing LLC v. Summit Bank, N.A. (In Re Francis)

United States Court of Appeals
For the Eighth Circuit
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No. 13-1615
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In re: Charles Ray Francis; Rhonda Kay Francis
lllllllllllllllllllllDebtors
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Ocwen Loan Servicing LLC
lllllllllllllllllllll Plaintiff - Appellant
v.
Summit Bank, N.A., et al.
lllllllllllllllllllll Defendants - Appellees
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Appeal from United States District Court
for the Western District of Arkansas - Hot Springs
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Submitted: December 20, 2013
Filed: April 25, 2014
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Before WOLLMAN, LOKEN, and KELLY, Circuit Judges.
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LOKEN, Circuit Judge.
GMAC Mortgage Corporation, the predecessor in interest of appellant Ocwen
Loan Servicing LLC, refinanced a first mortgage loan on a home and surrounding
twenty two acres of land owned by Ray and Rhonda Francis. In preparing a mortgage
securing GMAC’s loan, its agents described an adjacent eleven acres as the mortgaged
property and filed the flawed mortgage in the recorder’s office. See Ark. Code Ann.
§ 18-40-102. Ray Francis brought this error to GMAC’s attention, but GMAC failed
to correct it. Some months later, appellees Summit Bank, N.A., and Southern State
Bank (later renamed Farmers Bank & Trust) made additional loans to the Francises
secured by recorded mortgages on portions of the twenty-two-acre parcel. The
Francises filed for Chapter 7 bankruptcy protection in November 2007. GMAC filed
this adversary proceeding, claiming it is entitled to a first-priority lien by operation
of the Arkansas doctrine of equitable subrogation, or to reformation correcting the
mutual mistake in its mortgage. The district court1 denied both forms of relief.
Ocwen appeals the denial of equitable subrogation. We affirm.
I.
Southern State made the first mortgage loan on the twenty-two-acre property
in Hot Spring County, Arkansas. The Francises refinanced the loan in October 2005.
GMAC agreed to pay off the Southern State loan in exchange for a note and a first-
priority mortgage on the property. In preparing the mortgage documents, GMAC
hired an independent company to prepare title reports, identifying the land by street
1
The Honorable Ben Barry, United States Bankruptcy Judge for the Western
District of Arkansas, determined that the proceeding was related to the Francises’
Chapter 7 bankruptcy case but was not a core proceeding. See 28 U.S.C. § 157(c)(1);
Stern v. Marshall, 131 S. Ct. 2594, 2603-04 (2011). Uncertain whether the parties
consented to entry of a final order, Judge Barry held a one-day trial and issued
proposed findings of fact and conclusions of law to the Honorable Susan O. Hickey,
United States District Judge for the Western District of Arkansas, who adopted in part
Judge Barry’s proposed findings and conclusions. See § 157(c)(1), (2).
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address. The title reports mistakenly described by metes and bounds an adjacent
eleven-acre plot previously sold by the Francises’ company, Francis Construction
Corporation. GMAC incorporated that description in the mortgage documents. Ray
Francis, a former Hot Spring County tax assessor, noticed the smaller acreage when
a notary brought him the mortgage documents to sign. The notary knew nothing
about it. The mortgage was signed and filed in that mistaken form. GMAC’s loan
proceeds repaid Southern State, which then recorded a satisfaction of its first
mortgage. See Ark. Code Ann. § 18-40-104.
At trial, Ray Francis testified that he later realized the documents described his
neighbor’s land and attempted to bring the error to GMAC’s attention. When GMAC
did not respond, Francis commissioned a survey that divided the land into 10.5- and
11.5-acre parcels (“Parcel A” and “Parcel B”), so that correct mortgage documents
could be prepared. GMAC advised that it only worked from tax parcel numbers.
Francis then obtained new tax parcel cards from the county tax assessor, but GMAC
still did not modify the loan and mortgage documents. The bankruptcy court found
“that the debtor’s testimony at trial regarding his communication with GMAC was
credible.” Like the district court, we defer to this finding. See In re Quality
Processing, Inc., 9 F.3d 1360, 1364 (8th Cir. 1993).
In February 2006, the Francises mortgaged Parcel A to Summit Bank to secure
a new loan. Ray Francis told Summit that he intended to grant GMAC a first
mortgage on the entire twenty-two-acre property, but GMAC had not corrected its
flawed mortgage. Summit’s loan officer initially assumed that Summit obtained a
second mortgage lien on Parcel A. The Francises requested an extension of the loan’s
maturity in April 2007. In reviewing the mortgage documents, Summit noted that its
title insurance policy showed a GMAC lien “on another parcel of property.” Summit
therefore concluded that it held a first mortgage on Parcel A and extended the loan’s
maturity in May 2007 and again in May 2009.
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Later in 2007, the Francises mortgaged all twenty two acres to Southern State
to secure two additional loans, first, a mortgage on Parcel A in October 2007, and the
following month, a mortgage on Parcel B to refinance another loan. The Francises
told Southern State that GMAC had no apparent intent to correct its flawed mortgage.
Southern State concluded that GMAC had no mortgage lien on the property; therefore,
Southern State would have a first mortgage lien on Parcel B, and its lien on Parcel A
would be second to the lien of Summit.
II.
Under Arkansas law, “subrogation is an equitable remedy that rests upon
principles of unjust enrichment and attempts to accomplish complete and perfect
justice among the parties.” St. Paul Fire & Marine Ins. Co. v. Murray Guard, Inc., 37
S.W.3d 180, 183 (Ark. 2001). Equitable subrogation, which arises by operation of
law, “is broad enough to include every instance in which one person, not acting
voluntarily, has paid a debt for which another was primarily liable and which that
other party should have paid.” Id.
Ocwen argues it is entitled to equitable subrogation because GMAC satisfied
the prior first mortgage of Southern State in a transaction in which the Francises
intended GMAC to have a first mortgage lien. This is a claim of equitable
subrogation in a well-known context. The doctrine applies when a lender advances
money to pay off an incumbrance on realty at the request of the landowner with the
understanding that the advance will be secured by a first lien on the property; “in the
event the new security is, for any reason, not a first lien on the property, the holder of
such security, if not chargeable with culpable and inexcusable neglect, will be
subrogated to the rights of the prior [lienholder], and to this end equity will set aside
a cancellation of such security, and revive the same.” Newberry v. Scruggs, 986
S.W.2d 853, 857-58 (Ark. 1999) (quotation omitted). As a leading treatise explains:
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In this setting the subrogee [the new lender, here, GMAC] wants more
than a lien; he or she wants a lien with the priority of the original
mortgage, and this is precisely what subrogation gives. The holders of
intervening interests can hardly complain about this result, for they are
no worse off than before the senior obligation was discharged.
Restatement (Third) of Property: Mortgages § 7.6 cmt. a (1997). But equity will only
intercede “provided it can be done without working hardship or injustice to innocent
parties.” Wooster v. Cavender, 15 S.W. 192, 192 (Ark. 1891). The fundamental
purpose of the doctrine is “the doing of complete and perfect justice between the
parties without regard to form.” Newberry, 986 S.W.2d at 857.
The situation in this case is unlike the facts in these prior Arkansas cases. The
Francises did intend that GMAC have a first mortgage lien on the twenty-two-acre
property after satisfying Southern State’s prior first mortgage. But GMAC did not end
up with a “new security” that was “not a first lien on the property.” Newberry, 986
S.W.2d at 857. It ended up with no security by reason of its own negligence in
preparing and filing a new mortgage that described other property. Of even greater
importance, the liens of Summit and Southern State that Ocwen now seeks to
subordinate through equitable subrogation did not exist when the prior Southern State
first mortgage was satisfied using GMAC’s loan proceeds. Summit and Southern
State are not holders of “intervening interests” who took their mortgages with full
knowledge of Southern State’s prior recorded, unsatisfied first mortgage. They are
subsequent creditors who extended secured loans when Southern State’s first
mortgage had been satisfied and GMAC had no recorded lien on the property. Thus,
Summit and Southern State would have every reason to complain about the fairness
of allowing Ocwen to step into the shoes of a revived Southern State first mortgage
through equitable subrogation. This is not doing justice “without working hardship
or injustice to innocent parties,” as the doctrine requires.
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Ocwen responds that it should nonetheless be equitably subrogated to the prior
Southern State first mortgage because subsequent lienholders Summit and Southern
State “had actual knowledge of the mistake.” They rely on the principle of Arkansas
law that an unrecorded deed is not valid against a subsequent purchaser of the real
estate “unless that purchaser has actual notice of the prior interest,” that is, notice of
facts that “would put a person of ordinary intelligence and prudence on such inquiry
that, if diligently pursued, would lead to knowledge of these prior interests.” Killam
v. Tex. Oil & Gas Corp., 798 S.W.2d 419, 422 (Ark. 1990); see Ark. Code Ann. § 14-
15-404(b). Without question, the trial record reflects that Summit and Southern State
“had actual knowledge of [GMAC’s] mistake.” Ray Francis explained the situation
to them. But we reject this contention for three distinct reasons.
First, we agree with the district court that “equity will not intervene, where
there are equal equities or where there are no equities.” At the time Summit and
Southern State made their new loans, knowledge that GMAC made a mistake by
describing the wrong property on its earlier mortgage was not knowledge that GMAC
had or even claimed to have a superior unrecorded interest, because GMAC had for
many months made no attempt to correct the known error, or to reform its mortgage.
Second, we doubt that the principle in Killam applies in mortgage priority
disputes. By statute in Arkansas, “[e]very mortgage of real estate shall be a lien on
the mortgaged property from the time it is filed in the recorder’s office for record, and
not before.” Ark. Code Ann. § 18-40-102 (emphasis added). In McLain v. Jordan,
298 S.W. 10, 11 (Ark. 1927), the Court held that a mortgage filed for record “was a
superior and prior lien” to an earlier mortgage that described the wrong property and
was not reformed until later that year. In Drew County Bank & Trust Co. v. Sorben,
28 S.W.2d 730, 731 (Ark. 1930), the Court held that a defective earlier mortgage
“constituted no notice to third parties of the existence of the mortgage.” Therefore,
a later mortgage had priority so far as the mortgages covered the same real estate.
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However, the later mortgage failed to describe 40 of the 120 acres it intended to
include. As to these 40 acres:
[the mortgagee] gained no priority of lien over [the earlier mortgagees]
by reason of recording its mortgage. It had no mortgage lien on said 40-
acre tract and obtained none by recording its mortgage. . . . Even a
reformation of [the later] mortgage would not relate back to the date
same was recorded so as to bind or affect third parties.
Id. (emphasis added). These cases reflect the basic purpose of mortgage recording
statutes -- to create a regime that allows secured lenders to extend credit confident that
only properly recorded liens will have priority over their liens. Taking away the lien
priority of a secured lender because it was aware of facts that would have caused a
prudent lender to investigate whether another lender’s unrecorded lien had greater
priority would seriously destabilize the mortgage lending market.
Third, as the district court recognized, the blame for the uncertainty regarding
GMAC’s lien position lies with GMAC. GMAC agents prepared the flawed mortgage
documents. After the transaction, Ray Francis urged GMAC to correct the error to
protect its lien position. GMAC did not heed this warning, correct the legal
description, and perfect a first lien on the property before Summit and Southern State
recorded mortgages securing new loans. In refinancing the Francises, both Summit
and Southern State were told their lien priority was the result of GMAC’s error, and
that GMAC, alerted to the mistake, did nothing to correct it. Had GMAC taken timely
action, it would have held the senior recorded lien, leaving no need for this attempt
to stretch the doctrine of equitable subrogation beyond its established bounds. “[T]he
party seeking subrogation must be without fault.” Troyer v. Bank of De Queen, 281
S.W. 14, 16 (Ark. 1926).
For these reasons, the judgment of the district court is affirmed.
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