May 20, 2008
Kimberly Mauer

 

You can determine who has priority on a piece of real property by looking at the date and time that particular encumbrances are filed. For example, if I buy a house and I go to a bank for a loan, the bank will probably require that I sign a mortgage on my house. Generally, they will promptly file the mortgage. Later if I decide that I need more flexibility and I ask another bank for a home equity loan, that bank will also secure its loan with a mortgage, but since the second bank is filing its mortgage after the first bank, the second bank’s mortgage will necessarily be paid only after the first bank’s mortgage is paid in full. This principal is known generally as “first in time is first in right.”

But is this always so? This was the question discussed by the court in Washington Mutual Bank, FA v. Aultman, 172 Ohio App. 3d 584 (Ohio 2007). In this case, Steven and Kathy Aultman purchased their home from Diana Caldwell. They borrowed $63,000 from Peoples Bank and Trust to finance the purchase and Peoples took a mortgage on the Aultman’s home. The $63,000 was not enough to purchase the house, however, and so Diana Caldwell agreed to finance $12,000 of the house. She took a mortgage to secure her interest in the house. The Caldwell mortgage was filed after the Peoples mortgage.

Years later, the Aultmans decided to refinance the Peoples mortgage and executed new loan documents and a new mortgage with American Equity Mortgage, Inc. for $97,500. The title work that American Equity had done did not disclose the Caldwell mortgage, and, as a result, the Caldwell mortgage was not paid off. American Equity then filed its mortgage. American Equity was purchased by Washington Mutual Bank.

The Aultmans defaulted on the Washington Mutual loan and Washington Mutual started foreclosure proceedings. It was at this time that Washington Mutual became aware of the Caldwell mortgage. Caldwell claimed that her mortgage was now a first mortgage on the property because it had been filed prior to the mortgage owned by Washington Mutual. The trial court agreed.

Washington Mutual then appealed claiming that the Caldwell mortgage should be “equitably subordinated” to Washington Mutual’s at least to the extent that Washington Mutual paid out the Peoples Bank mortgage, which no one disputes was ahead of the Caldwell mortgage. The Appellate Court stated that equitable subordination applies when someone has a right to the property and pays the debt due by another in a situation where equity requires that that person be entitled to the same security that the creditor that was paid had. The equity in favor of overruling the existing statutes must be strong and clear.

In this case, the court sided with Washington Mutual. It looked at the fact that Washington Mutual clearly thought that it was going to be the only lien on the real estate. The only reason that it was not was that the person who prepared the title report made a mistake. Furthermore, it was only claiming that it should be in first position in the amount that it took to pay off the Peoples mortgage. No one seemed to argue that anything beyond this amount was clearly in third position behind the Caldwell mortgage. Finally, Diana Caldwell’s position was not harmed: she was in second place behind Peoples and she would be in second place behind Washington Mutual in the same amount.

Therefore, first in time is not always first in right—just most of the time.