Equitable Subrogation Ruling Clears the Air
The Appellate Division, Second Department, recently reversed established precedent and ruled that constructive notice is insufficient to defeat a claim of equitable subrogation of a mortgage lien to a priority position. Arbor Commercial Mortgage, LLC v. Associates at the Palm, LLC
, 2012 NY Slip Op 03968 (2nd Dept., May 23, 2012).
The panel specifically overruled contrary authority contained in Bank One v. Mon Leang Mui, 38 AD3d 809 (2nd Dept., 2007), Roth v. Porush, 281 AD2d 612 (2nd Dept., 2001), and R.C.P.S. Assoc. v. Karam Devs., 238 AD2d 492 (2nd Dept., 1999).
By adopting the rule embraced by the majority of States that have considered the issue, the Second Department also brought itself into line with the Third Department, citing specifically to Elwood v Hoffman, 61 AD3d 1073 (3rd Dept., 2009), and with the Court of Appeals ruling in King v. Pelkofski, 20 NY2d 326 (1967).
Equitable subrogation only gives priority to the portion of the junior lien equal to the amount paid-off lien. And that only happens when the paid-off lien is completely paid out of the proceeds of the junior loan. There are also policy questions surrounding the doctrine’s application to non-mortgage liens. The best practice is obviously to conduct a thorough title search. In the real world, title companies and representatives of junior lenders would be wise to 1) make sure that the prior lien is fully paid off using the proceeds of the junior loan, and 2) retain adequate evidence of the payoff for the life of the junior loan.
There is a dramatic divergence of authority among the high courts of many states on this issue. The ongoing debate concerning the effect that actual or constructive notice of a prior lien should (or shouldn’t) have on the priority of a subsequent mortgage is too broad to tackle in Constructive Notice.