The Court of Appeals of Tennessee affirmed the Chancery Court's denial of Citicorp Mortgage, Inc.'s request for equitable subrogation to replace Bancorpsouth Bank's lien with its own. The court ruled that Citicorp was aware of Bancorpsouth's deed of trust prior to extending a loan to Wilburn W. Johns, which disqualified it from claiming equitable subrogation. The case involved a property owned by Johns, who sought to refinance existing debts, including loans secured by liens on the property. Johns applied for a loan from Citicorp to refinance these debts but did not disclose the third lien held by Bancorpsouth, which he had granted as additional security for a troubled line of credit. Despite Citicorp's conditional loan approval, which required all existing liens to be paid off, the bank's prior knowledge of the existing deed of trust ultimately led to the court's decision. The opinion was delivered by Judge W. Frank Crawford, with Judges David R. Farmer and Holly M. Kirby concurring.
The Shelby Bank Deed of Trust must be either released or subordinated to the Citicorp Deed of Trust, but Citicorp insisted on a full release of the Shelby Bank lien rather than subordination. Maddox contacted Shelby Bank for this release, but the bank's Board ultimately refused. A letter from Shelby Bank's president, Danny O. Eaton, confirmed an existing $200,000 line of credit for National Auto Leasing, Inc., which had been satisfactorily bonded.
On January 10, 1990, Citicorp loaned $253,700 to Will Johns, requiring that all liens on the property be cleared and that the line of credit secured by the Shelby Deed of Trust be paid off entirely. However, Maddox disbursed the Citicorp loan proceeds to settle debts under the Empire and Smith Loans instead of paying off the Shelby Bank lien, which remained unreleased. Maddox acknowledged receipt of closing instructions from Citicorp, which he claimed to have followed, yet the failure to release the Shelby Deed of Trust went unnoticed during Citicorp's post-closing review.
In 1991, after Johns defaulted on his payments to Citicorp, foreclosure proceedings were initiated. During a title search, it was revealed that the Shelby Bank Deed of Trust had not been released. Despite claims by Maddox that a release existed, he failed to produce it. Following this, Shelby Bank also initiated foreclosure proceedings due to Johns' default on its obligations. On December 17, 1991, Shelby Bank foreclosed on the property and purchased it for $225,000, while Citicorp did not attempt to prevent the foreclosure or place a bid on the property.
On August 14, 1992, Citicorp initiated legal proceedings and recorded an Abstract of Suit on August 17, 1992. Citicorp later filed an Amended Complaint on November 17, 1998, seeking equitable subrogation of its lien to a first lien position against Shelby Bank and Maddox. Shelby Bank responded with an Answer on May 9, 2001, and an Amended Answer on August 12, 2003. On September 10, 2003, the parties submitted a joint Stipulation of Facts, and the case was heard on December 11, 2003. The trial court issued an Order of Final Judgment on January 12, 2004, determining several key points: Maddox requested Shelby Bank to subordinate its lien for Citicorp's benefit; Citicorp's claim against Johns was extinguished due to a bankruptcy discharge; claims against Maddox’s firm and partner, Roberts, were barred by the statute of limitations; and Shelby Bank’s Board declined to subordinate the lien, leading to the conclusion that Citicorp was not entitled to equitable subrogation. Citicorp appealed, questioning whether it should be equitably subrogated to the lien position of satisfied creditors from a refinancing loan. The appeal is subject to de novo review with a presumption of correctness regarding the trial court's factual findings. Generally, liens are prioritized by recording order, and subrogation serves as an equitable remedy contingent upon the circumstances of the case, not an inherent right.
Subrogation is generally inappropriate when the equities of the parties are equal, the rights of the parties are unclear, or it prejudices another's legal rights. The degree of negligence of the party seeking subrogation is relevant; while ordinary negligence typically does not bar subrogation, culpable negligence does. In this case, Citicorp had actual knowledge of the Shelby Bank Deed of Trust before closing its loan on January 10, 1990. Citicorp was informed of the Shelby Deed of Trust through documents prepared by Maddox, and its internal notes indicated the necessity of having this line of credit closed and paid in full to avoid complications. Citicorp insisted that the Shelby Bank Deed of Trust be released and did not agree to subordinate it to its own lien. Furthermore, Citicorp's internal communications reflected a clear refusal to accept a subordination agreement due to concerns over the loan-to-value ratio exceeding acceptable limits. Ultimately, Shelby Bank's Board declined to subordinate or release the Deed of Trust. Citicorp, aware of these circumstances, could have opted not to extend the loan to Johns or could have provided sufficient funds to pay off existing debts, thereby preventing the financial loss that ensued.
Closure of the line of credit required Shelby Bank to release its Deed of Trust, allowing Citicorp to assume first lien position. Citicorp contends that its loan to Johns benefitted Shelby Bank by paying off prior loans, which led to the release of competing liens, thus elevating Shelby Bank's Deed of Trust without action from Shelby Bank. Citicorp argues for subrogation of the Shelby Bank Deed of Trust to its lien position. However, this claim is weak. Citicorp was aware of the Shelby Bank Deed of Trust before funding its loan to Johns but chose to proceed regardless. Under equitable principles, Citicorp cannot seek judicial remedy for a situation it could have avoided by either not lending to Johns or by paying off the Shelby Bank debt to secure a first lien. The trial court's order is affirmed, with costs assigned to Citicorp Mortgage, Inc. and its surety. The text cites principles of equity stating that those who act vigilantly are favored, while those who neglect their rights bear the loss.
