Equitable Subrogation Takes Hit From Kentucky Supreme Court

In another post that may be for title professionals only (also for real estate legal professionals involved in undoing/voiding mortgages on homes arising as a result of a home equity ripoff), Lexology reports:

• Lenders, title insurance companies and their agents should be aware that on April 21, 2011, the Supreme Court of Kentucky issued a decision that could have a significant effect on Kentucky courts’ application of the doctrine of equitable subrogation in Kentucky. Wells Fargo Bank, Minnesota, N.A. v. Commonwealth, --- S.W.3d ---, 2011 WL 1620578 (Ky. Apr. 21, 2011).

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• [T]he Court reached a number of conclusions that should give lenders, title agents and title insurers pause:
  
  “[P]rofessional mortgage lenders should be held to a higher standard for purposes of determining whether the lender acted under a justifiable or excusable mistake of fact in failing to duly investigate prior liens.” Id. at 13-14.
  
  “Equity also demands that the responsibility for a defective title examination be allocated to the party who is most culpable.” Id. at 14.
  
  Equitable subrogation must not be used to “bail out a negligent title insurer.” Id. at 15.
  
  “Those title insurers are engaged in the very profitable business of assuring that their lending institution customers receive a clear title by insuring such.” Id. at 15.
  
  Describing a lender’s decision not to make a loan if it must first satisfy a tax lien as “the sound lending practices that our society deserves, especially in the aftermath of this nation’s 2008 financial meltdown.” Id. at 19.
  



• The Wells Fargo Court’s holding was narrowly limited to a conclusion that “a professional lender who has actual or constructive knowledge of an earlier recorded general tax lien may not benefit from an equitable reordering of the liens.” Wells Fargo at 19.



• The holding does not expressly affect equitable subrogation in the context of competing “professional lenders,” for example, so the ramifications of the decision could be limited. But the above-quoted language could easily lead to further erosion of equitable subrogation, something that would significantly affect lenders, title insurers and their agents.

For more, see Wells Fargo v. Commonwealth: the death knell for equitable subrogation? (requires subscription; if no subscription, GO HERE; or TRY HERE - then click the appropriate link for the story).