April 9, 2015
by Reginald P. Corley and Ronald C. Scott
Scott & Corley, P.A. – USFN Member (South Carolina)
The Supreme Court of South Carolina recently clarified the state’s position on the doctrine of equitable subrogation. In its ruling, the Supreme Court discussed the general principles of equitable subrogation, as well as defined what constitutes actual notice to a party seeking this relief. [Independence National Bank v. Buncombe Professional Park, LLC, Case No. 2013-000915].
Equitable subrogation essentially allows one party who pays off the claim or debt owned/held by another party to take the position of the payee. In this particular case, a bank refinanced a first mortgage and was attempting to use the doctrine of equitable subrogation to claim first mortgage priority over the existing “second” mortgage holder.
The facts of the case involve the refinance of a commercial transaction. The petitioner, Independence National Bank, held a first mortgage on property owned by the respondent, Buncombe Professional Park, LLC. The bank agreed to refinance the first mortgage with the LLC. David DeCarlis was the sole member of the LLC, and also held a “second” mortgage on the property. An attorney was hired to conduct the mortgage closing transaction. The attorney represented both the bank and the LLC, which is a common practice in South Carolina in non-adverse transactions (although not typical in a commercial transaction). The attorney had actual notice of the “second” mortgage held by DeCarlis, but didn’t communicate the existence of the mortgage to the bank. The attorney also did not obtain a release, satisfaction, or subordination of this mortgage.
The bank filed a foreclosure action alleging equitable subrogation. In order to be equitably subrogated to the original mortgage, the bank must show, among other factors, that it did not have actual notice of the DeCarlis mortgage. At the trial level, the Master in Equity ruled in the bank’s favor. The LLC appealed, and the South Carolina Court of Appeals reversed the Master in Equity’s decision, holding that the attorney was the bank’s agent, and the attorney’s actual knowledge of the DeCarlis mortgage constituted actual knowledge to the bank. The South Carolina Supreme Court reversed the appellate court’s decision, ruling that the attorney’s actual notice only constituted constructive notice to the bank.
Citing numerous cases, the Supreme Court held that the bank’s constructive notice did not defeat a claim for equitable subrogation. Therefore, the bank’s 2007 mortgage was equitably subrogated and was determined to have priority over DeCarlis’s 2006 mortgage.
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