In short: A refinancing lender paid off the first mortgage but not a recorded second mortgage, and asked a court to give it the first mortgage’s priority. The trial court did. On August 22, 2012, the Third District reversed, holding equitable subrogation unavailable because it harmed the second mortgagees. The second mortgage kept its record priority.
The Facts
In 2005 a Miami-Dade homeowner took a $688,000 first mortgage from Fremont. In 2006 the homeowner gave the Shermans a $100,000 two-year balloon second mortgage, recorded and expressly junior to Fremont. It had a due-on-sale clause but no clause requiring payoff on a refinance.
Later in 2006 the homeowner refinanced with Washington Mutual for $900,000, enough to pay off both Fremont, including a prepayment penalty of about $24,500, and the Shermans. The closing agent paid Fremont but not the Shermans, and instead disbursed over $129,000 to the homeowner. On the public record, the new WaMu mortgage was junior to the Shermans’ mortgage. Deutsche Bank later acquired the WaMu loan.
The homeowner defaulted on both loans. Deutsche Bank foreclosed and asked to step into Fremont’s first-priority position through equitable subrogation. After a non-jury trial, the court gave Deutsche Bank a first-priority equitable lien of about $998,000, ahead of the Shermans.
The Decision
The Third District reversed and ordered judgment foreclosing the Shermans’ mortgage according to its record priority, ahead of Deutsche Bank, with subrogation denied. Relying on its earlier decision in Velazquez v. Serrano, the court held subrogation is not allowed where it works an injustice on others. The refinance hurt the Shermans: it raised the homeowner’s monthly payments by about $1,800, the net proceeds that could have paid them went to the homeowner, and the bank’s claimed lien included the prepayment penalty plus interest on it, so it sought more than a return to where things stood before. Simply trimming the penalty on remand would not cure that harm.
Senior Judge Schwartz dissented. He would have affirmed under Palm Beach Savings and Loan v. Fishbein, reasoning that the lender’s carelessness hurt only itself and that the second mortgagee got an unearned windfall.
The Law
Equitable subrogation lets a lender that pays off an existing mortgage step into that mortgage’s priority, even though its own mortgage was recorded later. The Florida Supreme Court approved the doctrine in Palm Beach Savings and Loan v. Fishbein, 619 So. 2d 267 (Fla. 1993). But it is an equitable remedy, not a right, and it fails where it would prejudice an intervening lienholder. Record priority otherwise follows Florida’s recording statute, section 695.01.
Sherman shows the limits. When a refinance increases the borrower’s payment burden, sends cash out to the borrower instead of paying a known junior lien, or inflates the subrogated amount, a court may refuse to reorder priorities.
Lessons
- Lenders and closing agents should pay off or obtain a recorded subordination from every junior lienholder at a refinance.
- Equitable subrogation is not automatic. The lender must show the junior lienholder is not harmed.
- Asking for more than the original first mortgage balance, such as a prepayment penalty, can sink the whole claim.
- Holders of recorded second mortgages should assert record priority and affirmative defenses when a refinancing lender forecloses.
Watch the Oral Argument
This is the recording of the actual oral argument, posted on the channel. What lawyers and judges say at argument is not the ruling; the decision is summarized above.
Refinance Missed a Recorded Second Mortgage: Can the Lender Claim Equitable Subrogation? | Sherman v. Deutsche Bank
Go Deeper
- Deed Fraud in Florida: How Homes Are Stolen on Paper and How to Get Them Back
- The Florida Foreclosure Process, Step by Step
Frequently Asked Questions
What is equitable subrogation in a Florida foreclosure?
It is an equitable doctrine that lets a lender who paid off an earlier mortgage take over that mortgage’s priority position. It is meant to prevent unjust enrichment, but Florida courts deny it where it would prejudice an intervening lienholder, as the Third District did in Sherman.
Does a refinance lender automatically get first priority over a second mortgage?
No. On the public record, a refinance mortgage recorded after a second mortgage is junior to it. The lender must either get the second paid off or subordinated, or persuade a court that equitable subrogation applies without harming the second mortgagee. That burden is on the lender, not the junior lienholder.
What happens if a closing agent fails to pay off a second mortgage?
The second mortgage stays on the property. In Sherman, the cash that should have paid it went to the homeowner, and the court left the second mortgage ahead of the new lender rather than letting the lender jump ahead through subrogation. The closing error fell on the lender.
Can a prepayment penalty be included in an equitable subrogation lien?
In Sherman, the lender’s inclusion of the prior loan’s prepayment penalty, plus interest on it, was part of why the court found harm to the junior lienholder. Subrogation is generally limited to restoring the prior position, not improving it, and overreaching can cost the lender the entire claim.
Talk to a Florida foreclosure defense lawyer
Weidner Law, P.A. has defended Florida homeowners in foreclosure and foreclosure appeals for more than 25 years. If you need a foreclosure defense lawyer, call (727) 954-8752 or email weidner@mattweidnerlaw.com.
Read the law yourself, free: every Florida statute and court rule is on floridarules.net.
This article is general information about Florida law, not legal advice about your situation. Reading it, watching the videos, or contacting the firm does not create an attorney-client relationship. Every case turns on its own facts, and past results do not guarantee a similar outcome. The hiring of a lawyer is an important decision that should not be based solely upon advertisements.
