Independence National Bank v. Buncombe Professional Park, LLC, et al.

In 2007 an existing first mortgage was re-financed by Plaintiff, Independence National Bank. Due to an error by the closing attorney a second mortgage (held by a member of the bor-rower LLC) was not subordinated to the new mortgage. In 2010 the borrower defaults on the new mortgage and Independence files an action for foreclosure. The trial court entered judgment reforming the mortgage and ruled that the new mortgage was entitled to priority over the second mortgage based on the doctrine of equitable subrogation.

The Court of Appeals heard the case in 2013 and ruled the trial court erred in granting the reformation and awarding priority to Independ-ence based on the doctrine of equitable subro-gation because The Court of Appeals found that 4 of the 5 required elements were established by Independence however they imputed the closing attorney’s actual notice of the second mortgage onto Independence.
In order to be equitably subrogated to an original mortgage the party seeking subrogation must show (1) it paid the first mortgage, (2) it was not a volunteer, but had a direct interest in the discharge of that mortgage, (3) it was sec-ondarily liable for that mortgage, (4) no injustice would be done to the prior in time lien holder by the allowance of equitable subrogation, and (5) it did not have actual notice of the prior in time lien holder’s lien at the time of closing.

The Supreme Court reversed the Court of Appeals on the equitable subrogation ground by finding that the actual notice of an agent (the closing attorney) imputes constructive notice on the principal (Independence), thus all 5 prongs of equitable subrogation were present.

The Court of Appeals decision also provide the following on reformations in SC: In SC a “contract may be reformed on the ground of mistake when the mistake is mutual and consists in the omission or insertion of some material element affecting the subject matter or the terms and stipulations of the contract, incon-sistent with those of the parole agreement which necessarily preceded it.” The party seeking reformation must establish this by clear and con-vincing evidence.

Link to Case