915 Indian Trail, LLC v. State Bank & Trust Co.

Citations: 328 Ga. App. 524; 759 S.E.2d 654; 2014 Ga. App. LEXIS 439; 2014 WL 2975940Docket: A14A0415

Court: Court of Appeals of Georgia; July 3, 2014; Georgia; State Appellate Court

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The LLC appeals the trial court's decision to deny its motion for summary judgment and to grant summary judgment to the Bank, which sought to establish a priority lien on the Property under equitable subrogation. The appellate court affirms the trial court's decision, emphasizing that summary judgment is appropriate when there are no genuine material facts in dispute and the movant is entitled to judgment as a matter of law. 

The evidence indicates that Aziz Dhanani is a principal in the LLC, Premier Petroleum, and Al-Madinah Petroleum. Al-Madinah originally purchased the Property in 1993 and later sold it to the Borrowers in 2001, who executed a deed to secure a $694,500 loan from BB&T. In 2007, the Borrowers executed a second deed to secure a $150,000 loan to Al-Madinah, which was recorded as subordinate to the BB&T lien. The Borrowers later sought to refinance with Buckhead Community Bank (BCB), which required the cancellation of the Al-Madinah lien. Dhanani signed a Satisfaction stating that the Al-Madinah loan was "paid in full." However, on the same day, the Borrowers executed a new Promissory Note and security deed in favor of Premier for $125,000, which was recorded but not indexed until days later, likely making it undiscoverable during a title examination.

On December 6, 2007, the Borrowers closed on the refinancing with BCB, securing an $840,000 loan, a portion of which paid off the BB&T loan. During the closing, the Borrowers affirmed there were no undisclosed liens on the Property, despite the existence of the Premier lien, which was not mentioned in the relevant documents.

The BCB lien and related documents for the Closing, including a Satisfaction signed by Dhanani, were recorded on December 19, 2007. The title insurance policy from BCB, also dated December 19, does not include the Premier lien, and there is no evidence of a title check during the 13 days between the Closing and the document filings. BB&T's satisfaction of its lien was executed on December 24, 2007, but was recorded nearly a year later, on December 16, 2008. Subsequently, on December 4, 2009, the FDIC was appointed receiver for BCB after its closure. On December 15, 2009, the Borrowers and Premier executed a "First Modification" increasing the Premier lien to $935,000, linked to a separate Supply Agreement. In October 2010, the BCB loan was assigned to the Bank, which initially opted to collect the debt instead of foreclosing. The Borrowers defaulted on both the BCB and Premier loans. In February 2011, Premier discovered the BCB lien during a title review and subsequently filed the First Modification. Premier held a nonjudicial foreclosure sale on March 1, 2011, winning the bid at $350,000, and executed a quitclaim deed to the LLC on March 18, 2011. Although the LLC was to pay Premier $350,000, no payment was made by February 2013, and no transfer tax was documented. The Bank became aware of the Premier lien and foreclosure only in May or June 2011 during its own title search while seeking a default judgment against the Borrowers. On January 3, 2012, the Bank notified the LLC of its intent to assert a priority lien on the Property and filed a lawsuit on August 14, 2012. The trial court ruled that the Bank had a first priority lien, superior to the LLC's claims. The LLC contends that the trial court erred in granting summary judgment to the Bank regarding its equitable subrogation claim, arguing that the Bank acted with culpable neglect and that the rights of the LLC and others would be harmed. Equitable subrogation allows a lender who pays off a senior lien to assume that lien's priority if not charged with neglect, provided it does not prejudice the rights of others.

Knowledge of an intervening encumbrance does not automatically preclude a party from seeking equitable subrogation after paying off a senior encumbrance, provided that the intervening encumbrancer’s rights are not substantially prejudiced. Equity typically allows for the revival of the original security for the benefit of the party who paid it off. The principle of subrogation aims to achieve complete justice among the parties involved and is generally favored by the courts. In this case, BB&T was acknowledged as the senior lienholder when the Premier lien was filed, and funds from the BCB loan were used to satisfy the BB&T loan. As the assignee of the BCB loan, the Bank satisfies the prima facie criteria for equitable subrogation. To succeed, the Bank must demonstrate it did not engage in culpable or inexcusable neglect, that no superior equity would be prejudiced, and that its rights would not substantially harm the LLC’s interests. The court has defined inexcusable neglect as the failure to pursue a legal remedy when available. The LLC argues that the Bank exhibited inexcusable neglect due to its constructive notice of the Premier lien and failure to conduct a title search at appropriate times. While the Bank and BCB lacked actual notice of the Premier lien or foreclosure, they were on constructive notice due to prior filings and publications. However, constructive notice does not negate the possibility of equitable subrogation. The LLC failed to cite any legal obligation for BCB or the Bank to conduct further title examinations after closing or to monitor deed records, which would be necessary for equitable subrogation.

The trial court concluded that there was no factual issue regarding inexcusable neglect by the Bank. The LLC argued that the Bank's and BCB’s inaction led to significant foreclosure expenses incurred by Premier and that both the LLC and a third-party tenant would suffer if the Bank foreclosed. However, for estoppel to apply against equitable subrogation, the prejudice must exceed mere expenses related to foreclosure. It was established that Premier was aware it was not the senior lienholder, as indicated by its "Second Deed to Secure Debt," and thus could not claim prejudice from the Bank's subrogation. The senior BB&T lien was recorded at the time Premier established its security deed, which was expressly subject to it, further negating any claim of prejudice. Dhanani, a principal in both the LLC and Premier, had knowledge of the lien priority that could be imputed to the LLC. The LLC's claims regarding incurred expenses under a management agreement were unsupported by evidence, and mere speculation could not defeat summary judgment. Consequently, the evidence did not establish any factual dispute regarding the potential prejudice to the LLC or third parties from the Bank's equitable subrogation. The court affirmed that the Bank, as BCB’s assignee, holds a first priority security interest in the Property for $621,746.03 plus interest. The LLC also claimed the Bank should be estopped from asserting its subrogation claim due to laches for waiting over 17 months after foreclosure, reiterating earlier arguments related to neglect and prejudice.

To successfully assert the affirmative defense of laches, the LLC needed to demonstrate both an inexcusable delay and resulting prejudice. The burden of proof rested on the LLC to provide evidence that the Bank was guilty of laches, which requires showing that the delay was unreasonable and caused harm. Although the complaint was filed 17 months after the foreclosure, the Bank was unaware of the Premier lien until several months post-foreclosure and took timely action, including initiating collection proceedings and filing suit shortly after being assigned the loan. The Bank's actions, including seeking equitable subrogation, suggested that the delay was not inexcusable under the circumstances. Furthermore, the LLC failed to prove any prejudice stemming from the Bank's actions, leading to a conclusion that the LLC did not meet its burden regarding laches.

Additionally, the LLC claimed the trial court erred by not requiring the Bank to produce its Loan Policy and Procedures Manual before the ruling on summary judgment motions. The court has broad discretion in managing discovery matters, and its decisions will not be reversed without evidence of clear abuse of discretion. The LLC served discovery requests on March 1, 2013, but the Bank did not respond before filing for summary judgment on April 26. The LLC proceeded with its own motion for summary judgment without addressing the outstanding requests. Just before the scheduled hearing, the LLC requested the Manuals again, but the Bank did not produce them. The LLC's counsel noted the importance of the Manuals to the case during the hearing and requested that the court delay the ruling until the Manuals could be produced and considered.

The Bank opposed the LLC’s request for documents, arguing that it was not aware of the March discovery request, that a notice to produce was improper for a summary judgment hearing, and that the request for the Manuals was overly broad. The trial court noted that only two summary judgment motions were on the calendar and did not rule on the LLC’s oral motion. Subsequently, the LLC filed a motion to compel the production of the Bank’s "Loan Policy and Procedures Manuals," but the trial court issued a summary judgment order without addressing this motion. The court found no abuse of discretion, emphasizing that under OCGA § 9-11-56 (a), a plaintiff can move for summary judgment at any time, making it normal for discovery to be ongoing during such motions. The court stated that if a party cannot present essential evidence to oppose a summary judgment, they must seek relief under OCGA § 9-11-56 (f). The LLC did not file a proper motion under this statute but tried to interpret its oral request and post-hearing motion to compel as such. The court concluded that the LLC failed to demonstrate the necessity for a delay in the ruling on summary judgment, as its affidavit did not assert that relevant evidence would be uncovered if more time was granted. The LLC's claims regarding the importance of the Manuals were deemed insufficient, lacking legal authority linking the Bank's internal procedures to the issues at hand, particularly in relation to equitable subrogation or laches. The court reaffirmed these findings on July 3, 2014, and denied reconsideration on July 24, 2014.

The court affirmed the trial court's decision, rejecting the LLC's argument against summary judgment while a motion to compel discovery was pending. The established rule prohibits such actions unless the disallowed discovery would not substantively impact the case. The LLC's cited cases demonstrated that the parties had previously argued the relevance of the evidence sought; however, in this instance, the court found that the requested discovery would not add substance to the case. The court ruled that it could not find a clear abuse of discretion in the trial court’s decision. 

Regarding the Bank's complaint, although styled as a quiet title action, it solely sought a declaration of priority lienholder status under equitable subrogation, permitting the court to consider the appeal. The record revealed potential additional borrowers related to the loan, including Oshima Corporation and Golden Convenience, Inc., along with a deed securing a loan guarantee from Mairaj, Inc. The validity of the First Modification was not addressed. A Supply Agreement between Premier and the Borrowers, amended to include capital improvements and subordinate to the BB&T lien, was also noted, along with a restrictive covenant on petroleum sales at the property. The Bank's representative mentioned a customary title review process for substantial loans but did not clarify the BCB loan's status.

Industry practice necessitates that a review occurs prior to foreclosure; however, the LLC did not present any legal authority indicating that such practice would bar a claim for equitable subrogation. The management agreement was executed by Premier, even though it had quitclaimed its interest in the property to the LLC a month prior. An undated amendment later substituted the LLC for Premier in the management agreement. Testimony from Dhanani indicated Premier received no revenue from this agreement. The LLC's motion addressed issues including equitable subrogation, inexcusable neglect, prejudice, and laches. The notice to produce filed by the LLC under OCGA § 24-13-27, associated with the summary judgment hearing, does not influence the analysis. It remains unclear if a notice to produce is appropriate at a non-evidentiary hearing, but such a notice does not necessitate postponement of the summary judgment. Notices to produce are enforceable under OCGA § 24-13-26, with the discretion for continuance resting with the trial court as indicated in Barker v. Barker.