For title companies issuing title insurance policies and
attorneys who defend these companies, a recent case from the Eighth
Circuit should serve as a reminder that, if mistakes in legal
descriptions are made, they should be corrected as soon as
possible. When a mistake is made, discovered, and left uncorrected,
the doctrine of equitable subrogation cannot be used to reform a
In Ocwen Loan Servicing, LLC v. Summit Bank, N.A., (In re
Francis), 750 F.3d 754 (8th Cir. 2014), a recent Eighth Circuit
case, the Francises (the "Debtors") owned a 22-acre
parcel of land that was divided into two portions: a 10.5-acre
parcel ("Parcel A") and an 11.5-acre parcel ("Parcel
B"). GMAC Mortgage Corporation ("GMAC") refinanced a
first mortgage loan on the Debtors' home and full 22 acres, but
inadvertently described the adjacent 11 acres on the mortgage
document, which was signed and filed. Mr. Francis realized the
error and attempted to bring it to GMAC's attention, but GMAC
did not modify the loan documents.
Subsequently, the Debtors mortgaged Parcel A to Summit Bank
("Summit") to secure a new loan. The Debtors told Summit
about their intent to grant GMAC a first mortgage, but that GMAC
had not corrected its error in the mortgage. Summit therefore
concluded that it held a first mortgage on Parcel A. The Debtors
then mortgaged all 22 acres to Southern State to secure two
additional loans after Southern State also concluded that GMAC had
no mortgage lien on the property.
Without GMAC's Mortgage Lien
Parcel A (1) Summit
(2) Southern State
Parcel B (1) Southern State
With GMAC's Mortgage Lien
Parcel A (1) GMAC
(3) Southern State
Parcel B (1) GMAC
After the Debtors filed for bankruptcy, GMAC's successor in
interest ("Ocwen") argued that it should be entitled to
equitable subrogation under Arkansas law because GMAC satisfied the
prior first mortgage on the property and the Debtors intended GMAC
to have a first mortgage lien. The Eighth Circuit concluded that
the doctrine of equitable subrogation should not apply in this
context because "equity will only intercede provided it can be
done without working hardship or injustice to innocent
parties." Not only would allowing Ocwen to revive GMAC's
first mortgage be unfair to Summit and Southern State, but
GMAC's position was also a product of its own negligence.
GMAC's agents prepared the flawed loan documents and did not
heed the Debtors' warnings to correct the legal description of
the property. As such, the court refused to stretch the doctrine of
equitable subrogation to revive Ocwen's lien.
When mistakes in legal descriptions occur, it is important to
take immediate steps to correct the problem. The Ocwen court
emphasized that GMAC was to blame for its own position; the Debtors
warned GMAC of the error, but the problem went uncorrected. Without
this carelessness, the court may have been more sympathetic to
Ocwen's position. Additionally, it is important to note that an
attempt to revive a mortgage lien like GMAC's with an equitable
subrogation argument may not succeed for the reasons discussed by
the Eighth Circuit. Equitable subrogation must not work hardship or
injustice on innocent parties, and the party seeking subrogation
must be without fault. In situations such as this in which a party
failed to correct a mistake in a mortgage document, the doctrine
cannot be used to salvage a lien.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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