Levenson v. G.E. Capital Mortgage Services, Inc.

WENNER, Judge. In a case of first impression, we are asked to determine the effect of the doctrine of equitable subrogation on the relative rights of a judgment lienholder and a lender who refinanced an existing first lien without knowledge of the intervening judgment liens, when the new loan exceeded the balance of the refinanced loan, and the refinancing lender’s right to equitable subrogation was not asserted until after it had foreclosed on the new loan. On appeal, appellant, Steven A. Levenson (Levenson), the judgment lienholder, asks: Whether the Circuit Court erroneously upheld appellee’s equitable subrogation claim asserted for the first time after a foreclosure sale, thereby precluding the satisfaction of appellant’s prior judgment liens consistent with the full payment of appellee’s derivative subrogation entitlements. We will rephrase and address Levenson’s question in two parts: I. Whether the circuit court erred in determining that appellee, G.E. Capital Mortgage Services, Inc. (G.E.) was entitled to be equitably subrogated to the rights of the prior first deed of trust holder. ¹²⁶ II.

If equitable subrogation was appropriate, whether the circuit court erred in determining that foreclosure of the G.E. deed of trust extinguished Levenson’s liens. Although the trial court did not abuse its discretion in granting appellee, G.E. Capital Mortgage Services, Inc. (G.E.), equitable subrogation, it erred in holding that G.E.’s foreclosure of its deed of trust extinguished Levenson’s liens. Facts On April 15, 1980, an undivided one-half interest in Baltimore County property, known as 11 Gatespring Court, Cockeysville, Maryland (the property), was conveyed to Miguel Better and Yolanda Better, his wife, and the remaining undivided one-half interest in the property was conveyed to Jaime Salcedo and Yolanda Salcedo, his wife. The Salcedos were the daughter and son-in-law of the Betters.

On the same day, the Betters and the Salcedos executed a deed of trust in favor of First Federal Savings and Loan Association of Annapolis (First Federal), in the amount of $60,000. On April 23, 1986, Jaime and Yolanda Salcedo conveyed an undivided one-half interest in the property to Yolanda Salcedo, individually. On March 21, 1990, Miguel and Yolanda Better conveyed an undivided one-half interest in the property to their daughter. By that time, Yolanda Salcedo had been divorced and remarried, and the Betters’ deed identified her as “Y. Maria Benson (also known as Yolanda M. Benson).” The younger Yolanda was now the sole owner of the property.

From this point on, we shall refer to her as Yolanda. On April 6, 1990, Yolanda, using the name Yolanda M. Benson, refinanced the property with Travelers Mortgages Services, Inc. (Travelers). The settlement sheet from the loan closing shows that, of the loan amount of $131,200, $7,707.97 was applied to settlement charges, the First Federal loan balance of $56,283.14 was paid off, and Yolanda received the remaining $67,208.89. G.E. is Travelers successor in interest, and we shall refer to the Travelers’ loan as the G.E. loan and the G.E. deed of trust. ¹²⁷ On June 23, 1988, three judgments, totalling $108,422.99, were entered by confession in the Circuit Court for Baltimore County against Yolanda M. Better, 11 Gatespring Court, Cockeysville, MD 21030, in favor of Levenson.

Levenson’s judgments were not discovered during an examination of the title to the property performed just prior to the G.E. loan. By early 1991, Yolanda had defaulted on the G.E. loan and G.E. began foreclosure proceedings. Beginning February 14, 1991, foreclosure sale of Yolanda’s property was advertised in The Jeffersonian, a Towson newspaper of general circulation. The advertisement announced: By virtue of the power and authority contained in a Deed of Trust from YOLANDA M. BENSON, dated APRIL 6, 1990, and recorded in Liber 8470, Folio 795 among the land records of the COUNTY OF BALTIMORE, in the original principal balance of $131,200.00 with an interest rate of 10.0% upon default and request for sale, the undersigned trustees will offer for sale at public auction at the front of the Courthouse for the COUNTY OF BALTIMORE, 401 BOSLEY AVENUE, TOWSON, MARYLAND ON FRIDAY, MARCH 1, 1991 AT 3:06 P.M. all that property described in said Deed of Trust....

Several days prior to the sale, an attorney representing Levenson notified G.E. of the Levenson judgments. 1 Although G.E. promptly filed a claim against its title insurance, it proceeded to foreclosure rather than wait for the title insurance company to determine the priority status of the Levenson judgments. On the day of sale, Levenson’s attorney reiterated to G.E. his belief that the Levenson judgments were superior liens to the G.E. deed of trust. Due to its uncertainty regarding the status of Levenson’s judgment liens, G.E. bid $45,000 for the property, instead of the customary lender’s bid of the full amount of its indebtedness. Levenson did not bid, and the property was sold to G.E. for the amount of its bid. ¹²⁸ On April 10, 1991, Levenson filed a petition in the Circuit Court for Baltimore County for allowance of a priority claim in G.E.’s foreclosure action against Yolanda.

Levenson’s petition asserted that the liens of its judgments were superior to the G.E. deed of trust and asked the court to direct that the proceeds of the sale be paid to him as partial satisfaction of his judgments and, to the extent the judgments remained unsatisfied, that their lien continue to attach to the property. G.E. responded, asserting that, as its deed of trust secured refinancing of the First Federal loan, and it intended its deed of trust to be a first priority lien on Yolanda’s property, under the doctrine of equitable subrogation it was entitled to hold first position as to the $56,283.14 used to satisfy the First Federal deed of trust. Thus, G.E. contended, its foreclosure discharged all subordinate liens, including Levenson’s judgment liens. Under G.E.’s theory, Levenson would be entitled only to the proceeds of the foreclosure sale in excess of the amounts secured by G.E.’s first priority deed of trust, and, as the foreclosure sale fetched only $45,000, there were no such proceeds.

After thoroughly reviewing the application of the doctrine of equitable subrogation, the trial court concluded that it was applicable and that neither laches, waiver, nor estoppel precluded G.E. from asserting that it was entitled to equitable subrogation. The trial court then held that “Levenson’s liens are, in effect, extinguished since the amount the property sold for at the foreclosure sale was $45,000,” thus adopting G.E.’s position concerning the effect of equitable subrogation. Discussion I. On July 13, 1993, the day that Levenson noted this appeal, he also filed a motion to vacate the order ratifying the foreclosure sale, which had been entered on April 25, 1991. By order of August 11, 1993, a different judge of the trial court granted Levenson’s motion, vacated the order ratifying the foreclosure sale, and ordered receipt of Levenson’s Excep ¹²⁹ tions to Sale as if timely filed.

G.E. cross-appealed the trial court’s order of August 11. Although, in the absence of a stay required by law or obtained from an appellate court, a trial court retains the authority to exercise its fundamental jurisdiction during the pendency of an appeal, State v. Peterson, 315 Md. 73, 81 , 553 A.2d 672 (1989) (quoting Pulley v. State, 287 Md. 406, 419 , 412 A.2d 1244 (1980)), it is not always proper for the trial court to exercise that jurisdiction. Id, 315 Md. at 81 , 82 n. 3, 553 A.2d 672 . We believe that this is such a case.

The very right of Levenson to file exceptions to the ratification of sale depends upon our determination of this appeal, as “[ojrdinarily, the holder of a prior mortgage has no standing in court to file exceptions to the ratification of a sale made under a junior mortgage; because, generally, such a sale is made subject to the prior mortgage and does not affect the rights of the prior mortgagee.” Plaza Corp. v. Alban Tractor Co., 219 Md. 570, 576-77 , 151 A.2d 170 (1958); Scott & Wimbrow, Inc. v. Calwell, 31 Md.App. 1, 5 , 354 A.2d 463 (1976). For Levenson both to proceed with this appeal and proceed before the trial court as a subordinate lien-holder could potentially lead to inconsistent results. The trial court should have stayed its consideration of Levenson’s motion to vacate during the pendency of this appeal. As our resolution of the remaining issues in this appeal will deprive Levenson of standing to file exceptions, we shall reverse rather than vacate the trial court’s order of August 11 vacating ratification of the sale.

II

We next note a point raised by G.E. in a footnote to its brief and at oral argument. G.E. draws our attention to the fact that the Levenson judgments were confessed against Yolanda M. Better, a name not used to identify Yolanda in any of the records of title. In Frederick Ward Associates v. Venture, Inc., 99 Md.App. 251 , 636 A.2d 496 (1994), we held that a judgment in the name of Chris Walker did not constitute a lien against property held by Walker as John C. Walker. In ¹³⁰ so holding, we said that “[njotice will be found ... where the facts and circumstances are such as would lead a reasonably careful title searcher to conclude either that the name of the judgment debtor and the name of the property owner designate the same person or that further inquiry is required to ascertain this fact.” Id. at 257-58 , 636 A.2d 496 .

Levenson’s judgments were confessed against Yolanda M. Better, residing at the address of the property, on June 23, 1988. On that date, by virtue of the deeds of April 15, 1980 and April 23, 1986, an undivided one-half interest in the property was vested in Miguel Better and Yolanda Better, his wife, and the remaining undivided one-half interest was vested in Yolanda Salcedo. Hence, at that time, Levenson’s judgments would have appeared to involve Mrs. Better. Although, because Miguel and Yolanda Better held title to the property as tenants by the entirety, a judgment against Mrs. Better would not have attached to the property prior to the Betters transferring their interest to Yolanda by deed of March 21, 1990, see State v. Friedman, 283 Md. 701, 705 , 393 A.2d 1356 (1978), that deed identified Yolanda as the Better’s daughter and disclosed that she had divorced and remarried between 1986 and 1990.

Whether this information should have placed a reasonably careful title examiner on inquiry notice that the judgment debtor was Yolanda M. Better Salcedo Benson rather than her mother is not before us, however, because at no time during the proceedings in the trial court did G.E. contend that Levenson’s judgments did not constitute valid liens against the property. G.E. has therefore waived the issue, and we will assume, without deciding, that the Levenson judgments constituted liens against the property at the time of the G.E. loan. Maryland Rule 8-131(a); County Council of Prince George’s County v. Offen, 334 Md. 499, 508-10 , 639 A.2d 1070 (1994).

III

We turn next to whether the trial court erred in holding that G.E. was equitably subrogated to the rights contained in the First Federal deed of trust. ■ The Court of ¹³¹ Appeals reviewed the doctrine of equitable subrogation in Bachmann v. Glazer, 316 Md. 405, 412-13 , 559 A.2d 365 (1989). Resting upon the Court’s equitable powers, the doctrine of equitable subrogation is a legal fiction under which an obligation extinguished by a payment made by a third person is treated as still subsisting for the benefit of the third person, with the third person succeeding to the rights of the initial creditor in relation to the debt. Id. at 412 , 559 A.2d 365 . Bennett v. Westfall, 186 Md. 148 , 46 A.2d 358 (1946), established the operation of the doctrine of equitable subrogation in the context of mortgage priority.

On June 13, 1944, Hunter and Ethel Shinholt executed a second mortgage to Frank Westfall for $773.60, due October 16, 1944. On August 30, 1944, Frank Bennett obtained a judgment for $1000 against the Shinholts. In consideration for extending their debt for another year, the Shinholts executed a new mortgage in favor of Westfall for $1000 on October 16, 1944. Unaware of the Bennett judgment, Westfall released the June 13 mortgage on recording the October 16 mortgage.

Upon learning of the Bennett judgment, Westfall filed a bill in equity seeking restoration of his prior lien. The trial court restored West-fall’s prior lien, declaring release of the June 13 mortgage to be a mistake in fact and null and void, and declaring the October 16 mortgage to be null and void. On appeal, Bennett contended that there was no mistake, only Westfall’s carelessness in not examining the property records. Westfall contended that he had no intention of replacing a senior lien with a junior lien and would not have accepted the October 16 mortgage had he known of Bennett’s lien.

Westfall claimed that this matter was a mistake that the trial court had equitable power to correct. Agreeing with Westfall, the Court of Appeals affirmed the decision of the trial court. Several