IN THE SUPREME COURT OF FLORIDA

Case No. SC12-2588 0

Lower Tribunal Case No. 3D11-2709

DEUTSCHE BANK NATIONAL TRUST COMPANY,AS TRUSTEE FOR LONG BEACH MORTGAGE LOAN TRUST 2006-10,

Petitioner,

vs.

MARTIN R. SHERMAN and GRACE L. SHERMAN,

Respondents.

PETITIONER'S BRIEF ON JURISDICTION

ON DISCRETIONARY REVIEWFROM THE DISTRICT COURT OF

APPEAL OF FLORIDA, THIRD DISTRICT

Robert A. Cohen Rodolfo Sorondo, Jr.Mario M. Ruiz Ilene L. Pabian

COHEN IRUIZ P.A. HOLLAND & KNIGHT LLP201 S. Biscayne Blvd., Ste. 850 701 Brickell Avenue, Ste. 3000Miami, Florida 33131 Miami, Florida 33131(305) 702-0300 (305) 374-8500Counsel for Petitioner Counsel for Petitioner

TABLE OF CONTENTS

Page

TABLE OF AUTHORITIES.............................................0.......................................ii

SATTEMEN OFTTHE CASE AND FACTS.......................................................... 1

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TABLE OF AUTHORITIES

CASES Page

Aurora Loan Servs. LLC v. Senchuk,36 So. 3d 716 (Fla. 1st DCA 2010) .......................................................passim

Brannon v. Hills,149 So. 556 (Fla. 1933)................................................................................... 4

Federal Land Bank ofColumbia v. Godwin,145 So. 883 (Fla. 1933)......................................................................... 4, 5, 10

Palm Beach Sav. & Loan Ass'n v. Fishbein,619 So. 2d 267 (Fla. 1993).............................................................................. 4

Radison Props., Inc. v. Flamingo Groves, Inc.,767 So. 2d 587 (Fla. 4th DCA 2000)..............................................................5

Sherman v. Deutsche Bank Nat'l Trust Co.,100 So. 3d 95 (Fla. 3d DCA 2012)........................................................passim

Suntrust Bank v. Riverside Nat'l Bank ofFla.,792 So. 2d 1222 (Fla. 4th DCA 2001)........................................................ 4, 5

Tribeca Lending Corp. v. Real Estate Depot, Inc.,42 So. 3d 258 (Fla. 4th DCA 2010)................................................................4

Velazquez v. Serrano,43 So. 3d 82 (Fla. 3d DCA 2010).............................................................9, 10

STATUTES

Chapter 695, Florida Statutes .................................................................................... 5

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STATEMENT OF THE CASE AND FACTS

In 2005, the buyer of residential property in Miami-Dade County refinanced a

prior existing mortgage with Fremont Investment & Loan ("Fremont mortgage"), and

Fremont obtained a first-priority lien for the $688,000 principal amount of the loan

(Al-22).1 In 2006, the homeowner gave a $100,000 second-position balloon

mortgage on the residence to respondents Martin and Grace Sherman ("the

Shermans"), which expressly provided that it was a second mortgage "inferior" to the

Fremont mortgage "in the original principal amount of $688,000.00" (A23-27). The

homeowner refinanced with Washington Mutual Bank in September 2006 for the

principal sum of $900,000, which was sufficient to satisfy the $726,940 payoff of the

Fremont mortgage (including a $24,565 prepayment penalty), the $101,192 balance

on the Shermans' second mortgage (including accrued interest), and closing costs

(A28-51, 203, 259). Washington Mutual's closing agent disbursed $726,940 to pay

off the Fremont mortgage (A228, 232) but did not pay off the Shermans' second

mortgage; instead, the agent disbursed over $129,000 to the homeowner, who

similarly failed to pay off the Shermans' mortgage (A228, 233). Washington Mutual

recorded its mortgage in October 2006 (A28), but, as a matter of record priority, that

mortgage, ultimately acquired by petitioner Deutsche Bank National Trust Company,

I We refer to the record by page number ("R50"). The clerk's notes in the index to therecord on appeal indicate that the lower court file could not be located and thus therecord was prepared with only the pleadings that could be found. To supplement thesparse record on appeal, the parties each submitted an appendix to the Third Districtaccompanying their respective briefs. Deutsche Bank's appendix, containing all of therelevant documents, pleadings, and judgments, is in excess of 500 pages. Where arecord cite is unavailable, we refer to Deutsche Bank's appendix by page number("A10-15").

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as Trustee ("Deutsche Bank"), would be junior to the existing Sherman second

mortgage. Roughly two years after refinancing, the homeowner defaulted on both

mortgages and Deutsche Bank initiated a foreclosure action and sought an equitable

lien (A52-55, 56-119).

After conducting a bench trial, the trial court found that inasmuch as Deutsche

Bank had paid off the original first-priority Fremont mortgage, Deutsche Bank was

entitled to be equitably subrogated to Fremont's position, and granted it a first-priority

equitable lien of $998,552 (R35-41, 42-48). This amount included $726,940

disbursed to pay off the Fremont mortgage, plus $300,619 in accrued interest and

$56,300 in insurance and escrow disbursements, less $88,640 in payments already

received on the mortgage (R44). The Shermans remained in a second-priority lien

position.

In a two-to-one decision, the Third District reversed, concluding that Deutsche

Bank was not entitled to equitable subrogation in any amount because the Shermans

were "prejudiced" by the refinancing. Sherman v. Deutsche Bank Nat'l Trust Co.,

100 So. 3d 95 (Fla. 3d DCA 2012).2 The majority reasoned that the refinancing

harmed the Shermans by "altering the risks of non-payment accepted by the

Shermans when they extended credit in 2006." Id. at 98. The court compared the

homeowner's monthly expenses under the original first and second mortgages with

those under the refinanced loan, and observed that the refinancing resulted in a

monthly increase of $1,800 in cash obligations. Id. The majority also reasoned that, at

the time of the refinance loan, there were sufficient funds to pay off both the first and

2 The Third District's opinion is attached as the appendix to this brief.

2

second mortgages, and that the relief obtained by Deutsche Bank placed the

Shermans "in a worse, not equal, position as a result of the 2006 refinancing." Id.3

Senior Judge Schwartz dissented, concluding that the majority's blanket denial

of equitable subrogation and advancement of the junior lienors' priority ahead of

Deutsche Bank conflicted with Aurora Loan Services LLC v. Senchuk, 36 So. 3d 716

(Fla. 1st DCA 2010), and other Florida decisional law on this issue. Sherman, 100 So.

3d at 99. "I cannot agree that there is any principled basis for granting the appellant-

second mortgagee the ultimate windfall ofpriority over an established first mortgagee

which has, however foolishly, been fully paid by a new lender, the appellee Deutsche

Bank." Id. Judge Schwartz was also perplexed by the Shermans' theory that they were

somehow harmed as a consequence of equitable subrogation because the refinancing

loan exceeded the original loan amount:

I am nonplussed by the appellant's argument for doing so: that thebank somehow acted inequitably by lending the mortgagor an additionalamount at interest, apparently because he was, surprisingly enough,required to pay it back. But I had thought that the ability to secure a loanwas good for the borrower, and surely that it did not place him, much lessthe second mortgagee, at some kind of disadvantage. This is particularlythe case because Deutsche Bank admittedly has no superior interest tothe excess loan and now claims only the equitable right to succeed to theprevious, now discharged, first mortgage.

Id. (first italicized emphasis in original; bold and italicized emphasis added).

Because the Third District's decision here directly conflicts with established Florida

precedent and, if left intact, would substantially erode the equitable subrogation

doctrine, Deutsche Bank invokes the Court's discretionary conflict jurisdiction.

3 Inexplicably, the majority declined Deutsche Bank's request to remand the case toremove the prepayment penalty from the total subrogated lien amount. Id. at 98.

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SUMMARY OF ARGUMENT

The Third District's decision expressly and directly conflicts with long-

standing Florida law as to what constitutes "prejudice" to a junior lienor sufficient to

deny a refinancing lender its subrogated rights. The majority's conclusion that

Deutsche Bank is not entitled to equitable subrogation in any amount conflicts with

prior decisional law where subrogation limited to the extent of the payoff of a first

mortgage was deemed not prejudicial.

ARGUMENT

With respect to mortgage loans, the doctrine of equitable subrogation generally

provides that when loan proceeds from a new loan are used to satisfy a prior lien, the

new lender stands in the shoes of the prior lienholder and takes the position, rights

and remedies of the prior lienholder-including its priority over junior creditors and

liens-even if there is a negligent failure to discover a prior recorded junior lien. The

Florida Supreme Court explicitly applied this doctrine in the context of a refinancing

mortgage lender eighty years ago in Federal Land Bank ofColumbia v. Godwin, 145

So. 883, 885-86 (Fla. 1933), and Florida appellate courts have been consistently

invoking this doctrine to protect the priority of refinancing lenders ever since.4 The

refinancing lender, who justifiably expects a first mortgage position when it pays off

the prior loan, is permitted to assume the lien priority of the loan it satisfies,

notwithstanding its failure to gain de jure priority pursuant to the strict recording

* See, e.g., Palm Beach Sav. & Loan Ass'n v. Fishbein, 619 So. 2d 267, 269-71 (Fla.1993); Brannon v. Hills, 149 So. 556, 557 (Fla. 1933); Tribeca Lending Corp. v. RealEstate Depot, Inc., 42 So. 3d 258, 262 (Fla. 4th DCA 2010); Suntrust Bank v.Riverside Nat'l Bank ofFla., 792 So. 2d 1222, 1225, 1227 (Fla. 4th DCA 2001).

4

rules in Chapter 695, Florida Statutes. The equitable subrogation doctrine is designed

to prevent an unjust forfeiture, on the one hand, and a windfall amounting to unjust

enrichment in favor of an intervening junior lienor, on the other. Godwin, 145 So. at

885-86; Suntrust Bank. v. Riverside Nat'l Bank ofFla., 792 So. 2d 1222, 1226 (Fla.

4th DCA 2001) (citations omitted); Radison Props., Inc. v. Flamingo Groves, Inc.,

767 So. 2d 587, 591 (Fla. 4th DCA 2000) (citations omitted).

A logical corollary to preventing unjust enrichment to the junior lienor is the

limitation that equitable subrogation will be granted only to the extent that the junior

lienor is not prejudiced. Godwin, 145 So. at 885, 886. Until recently, however, the

only real guidance as to what amounted to such "prejudice" was the Florida Supreme

Court's pronouncement in Godwin that prejudice, which it called "injury," to a junior

lienor existed only if subrogation of the refinancing lender to the first-lien position

placed the junior lienor "in any worse position than if the prior lien had not been

discharged." 145 So. at 885, 886 (emphasis added).5'' Here, in ascertaining whether

the junior mortgage holders were prejudiced, the Sherman majority employed an

analysis in conflict with this established precedent. That is, the majority erroneously

In Godwin, a homeowner, who already had two mortgages on his property,refinanced with another bank. The homeowner fraudulently misrepresented that therewas only a first mortgage on the property, and the bank failed to find the secondmortgage in its title search. The refinance loan paid off the first mortgage and wasintended to be a first mortgage. The Supreme Court permitted equitable subrogation,reasoning that it would be "grossly inequitable" under such circumstances to hold thatthe refinancing lender was not entitled to be treated as the assignee of the firstmortgage, and "thus by chance or fortune raise the second mortgagee to the dignity ofthe first, contrary to the intention of the parties." Id. at 885.

6 Reiterating this position, the Fourth District in Suntrust later observed that noprejudice occurs "where the position of the original junior lienors will be no worsethan before the first mortgage was satisfied." 792 So. 2d at 1224-25 (citing Godwin).

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evaluated whether equitable subrogation would place the junior lienors in a worse

financial position-as opposed to lien position-than they would have occupied had

the refinancing closing been executed without any mistake and their junior mortgage

had been paid off. That could never be the appropriate test for ascertaining

"prejudice." If it were, equitable subrogation would almost never be permitted.

Indeed, the doctrine of equitable subrogation is invoked to mitigate losses to lenders

where a closing does not occur in the manner it should have. In nearly every

subrogation case involving mortgages, a junior mortgage or lien has been overlooked

and left unpaid as a result of mistake, negligence, or fraud. And in nearly every such

case, a junior creditor undoubtedly would have been in a better financial position had

its lien been satisfied. But the object of equitable subrogation is to prevent unjust

enrichment to the junior lienholder and to place the parties in the position they

occupied before the mistake or negligence occurred, not to correct the mistake or

negligence.

The majority's decision here also directly and expressly conflicts with the First

District's recent pronouncement on this issue in Aurora. Recognizing the dearth of

authority regarding what amounts to prejudice sufficient to deny a refinancing lender

its subrogated rights, the Aurora court explicitly stated:

As no prior cases offer guidance as to what constitutes prejudicepursuant to Godwin and Suntrust, this court must address the issue forthe first time. It is axiomatic that the position of a lien holder has nomeaning unless and until a foreclosure action is initiated. Thus, itfollows [that] the determination of what constitutes prejudice to a secondlien holder must be confined to what would constitute prejudice in theevent of a foreclosure.

6

36 So. 3d at 721. In that case, like here, the homeowners obtained a refinancing loan

of $507,900, which was used to pay off their $419,460 first mortgage. The balance of

the loan proceeds was paid to the homeowners, who-as in this case-failed to satisfy

their existing $70,000 second mortgage. Id. at 717. The refinancing lender sought to

foreclose after the homeowners defaulted on both mortgages, and the trial court

denied equitable subrogation, placing the junior lienor's mortgage first in priority. Id.

Recognizing the incongruity of this decision, the First District reversed, cogently

observing that the determination of "prejudice" to a second lien holder must be

confined to what would constitute prejudice "in the event of a foreclosure" because

"the position of a lien holder has no meaning unless and until a foreclosure action is

initiated." Id. at 721. The appellate court observed that equitable subrogation would

not place the junior lienors "in a worse position than they bargained for" because,

regardless of the amount of the refinancing mortgage, the refinancing lender was

stepping into the shoes of the first lienholder only to the extent of the amount due and

owing on the first mortgage. Id. at 722. Thus, the appellate court concluded that no

prejudice to the junior lienor occurred because, at the time of foreclosure, the

lienholder was in the same lien position it would have been in had the refinancing

lender not satisfied the superior debt. Id.

Here, under parallel facts, the Sherman majority concluded that refinancing

lender Deutsche Bank was not entitled to equitable subrogation in any amount

because the junior lienors were "prejudiced" as a result of the refinancing. 100 So.

3d at 98. This conflicts with Aurora and creates a blanket rule severely restricting

lenders from being equitably subrogated. In this case, like Aurora, the refinancing

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loan was sufficient to pay off the Fremont first mortgage and the Shermans' second

mortgage. Id. at 96. Also as in Aurora, a portion of the refinancing proceeds was used

to pay off the first mortgage and the balance was paid to the homeowners, who failed

to pay off their junior mortgage. Id. The trial court determined that Deutsche Bank

was entitled to be equitably subrogated to the first-lien priority position held by

Fremont, ahead of the Shermans' earlier-recorded junior mortgage. Id. at 97. Ignoring

Aurora, the Third District reversed by a two-to-one margin, holding that the "new

[refinancing] loan harmed the Shermans by altering the risks of non-payment

accepted by the Shermans when they extended credit in 2006." Id. at 98 (emphasis

added). This holding clashes directly with Aurora's holding that "the determination of

what constitutes prejudice to a second lien holder must be confined to what would

constitute prejudice in the event of a foreclosure." 36 So. 3d at 721 (emphasis

added).7 In deciding that the Shermans were "prejudiced" merely because the

refinancing altered the risks of repayment and because the Shermans' second-position

mortgage was not paid off with the "net refinancing proceeds," Sherman, 100 So. 3d

at 98, the majority significantly expanded the circumstances amounting to "prejudice"

to a junior mortgagee and substantially eroded the equitable subrogation doctrine.

By erroneously focusing on the time of the refinancing transaction instead of

the decisive time when the foreclosure action was initiated, which crystallized the

Shermans' right to accelerate and pursue the principal, the majority reached an

7 As noted by Judge Schwartz's dissent, Deutsche Bank's error at closing enriched thehomeowner by delivering $129,000 to the homeowner instead of the juniormortgagee. 100 So. 3d at 99. Logically, the only alteration to the risk of non-payment was a positive, not prejudicial, one.

8

erroneous result. Had the correct analysis been used, the majority would have

determined that-at the time of the foreclosure-the Shermans would not have been

any worse off if subrogation were granted than if the first mortgage had not been paid

off. Either way, the Shermans would occupy the same lien position-a position junior

to another lien. Deutsche Bank would have lien priority only up to the amount paid

off on the first mortgage, accrued interest, and taxes, and the Shermans would be

ahead of Deutsche Bank as to the excess balance of the refinanced mortgage,

retaining the priority rights and position they had immediately before the first

mortgage was satisfied.8 The majority's sweeping conclusion that Deutsche Bank was

not entitled to equitable subrogation in any amount ignores well-established

precedent and unduly limits the doctrine of equitable subrogation."

" Any questions regarding the amount or extent of equitable subrogation that DeutscheBank would be entitled to have no impact on the Court's jurisdiction to hear thisappeal to resolve the conflict created by the majority's decision; such questions willbe addressed in the briefing on the merits.

9 In reaching its erroneous conclusion that the Shermans were "prejudiced," themajority ignored the First District's analysis in Aurora and instead highlighted theborrower's receipt of funds from the refinancing lender, relying on its earlier decisionin Velazquez v. Serrano, 43 So. 3d 82 (Fla. 3d DCA 2010), where the borrowerreceived funds following a sale of real property that left the junior lender withoutrecourse. Sherman, 100 So. 3d at 97-98. Velazquez, however, is factuallydistinguishable and should be limited to its unique facts. Velazquez involved a sale-as opposed to a refmancing like here-of property and a note in favor of a juniormortgagee containing a "due-on-sale" provision. Because, quite distinct from here,the due-on-sale clause entitled the junior mortgagee to be paid "immediately" whenthe property was sold, the appellate court concluded that the release of funds to theborrower at the time of sale constituted "prejudice" to the junior mortgagee. 43 So. 3dat 84. Dismissing the argument that the junior mortgagee was in no worse positionthan before Deutsche Bank paid off the first and second mortgages, the Third Districtreasoned that Deutsche Bank's failure to pay off the junior mortgagee's properlyrecorded mortgage when the property was sold resulted in harm to the junior lienor.

9

Under the majority's reasoning, equitable subrogation would almost never be

permitted in the event of a refinancing because the risks of non-payment are almost

always altered when a mortgage is refinanced. The majority misapprehended the

equitable subrogation doctrine by invalidating Deutsche Bank's lien position entirely

and elevating the Shermans from a second to a first-lien position-a position they

would not have occupied unless they had personally satisfied the entire original

mortgage in the amount of $726,940. This is precisely the type of inequitable

windfall to a junior lienor at the refinancing lender's expense that the doctrine of

equitable subrogation is intended to protect against. The purpose of subrogation is to

leave the junior lienor in its original position, neither to harm nor to promote it.

Given that the majority's holding in Sherman expressly and directly conflicts

with this Court's holding in Godwin and the First District's holding in Aurora on the

same legal issue, Deutsche Bank requests that this Court exercise its discretion to

hear this appeal and correct the Sherman majority's erroneous legal decision.

CONCLUSION

For the reasons stated and upon the authorities cited, this Court should exercise

its discretionary jurisdiction to clarify and unify the law.

Id. While we believe that Velazquez was incorrectly decided because the decisionignores well-established Supreme Court precedent that there is no prejudice when thejunior lienholder is left in no worse position than if the first mortgage had not beendischarged, we are not, of course, in a posture to assert conflict on the basis of thatdecision. Nevertheless, the majority in this case closely followed its earlier decisionin Velazquez in wrongly concluding that the doctrine of equitable subrogation couldnot be used to place Deutsche Bank's lien in a first position, further illustrating thepressing need for this Court to clarify and straighten out the law on this subject.Sherman, 100 So. 3d at 97-98.

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Respectfully submitted,

HOLLAND & KNIGHT LLPCounsel for Petitioner701 Brickell Avenue, Suite 3000Miami, FL 33131Tel. (305) 374-8500Fax (305) 789-7799e-mail: rodolfo.sorondo@hklaw.com

ilen abian@hklaw.com

R olfo Sorondo, Jr., FB 87301ene L. Pabian, FBN 00 99

and

GRAY I ROBINSON, P.A. COHEN I RUIZ P.A.Counsel for Petitioner Counsel for PetitionerJeffrey T. Kuntz401 East Las Olas Blvd., Suite 1850Fort Lauderdale, FL 33301Tel: (954)761-8111Fax: (954) 761-8112e-mail: jeffrey.kuntz@gray-robinson.com

Robert A. CohenMario M. Ruiz201 South Biscayne Blvd., Suite 850Miami, FL 33131Tel: (305) 702-3000Fax: (305) 702-3030e-mail: rac@cohenruiz.commmr@cohenruiz.com

CERTIFICATE OF SERVICE

We certify that on January , , 2013 we mailed a copy of this Petitioner's

Brief on Jurisdiction to Martin and Grace Sherman (pro-se appellants), 3484 Chase

Avenue, Miami Beach, FL 33140 (nightowl88@ao .

Odolfo Sorondo, Jr.

11

CERTIFICATE OF COMPLIANCE

We certify that this brief complies with the font requirements set forth in Rule

9.210 of the Florida Rules of Appellate Procedure because it has been prepared in

Times New Roman 14-point font.

Rodolfo Sorondo, Jr.

#11920788 v5

12

Wèstlaw.Page 1

100 So.3d 95, 37 Fla. L. Weekly D2025(Cite as: 100 So.3d 95)

H

District Court of Appeal ofFlorida,Third District.

Martin R. SHERMAN and Grace L. Sherman, Ap-pellants,

v.DEUTSCHE BANK NATIONAL TRUST COM-PANY, as Trustee for Long Beach Mortgage Loan

Trust 2006-10, Appellee.

No. 3D11-2707.Aug. 22, 2012.

Rehearing Denied Nov. 13, 2012.

Background: After homeowner defaulted on mort-gages, trustee for a securitized pool ofmortgage loanscommenced a foreclosure action. After bench trial, theCircuit Court, Miami-Dade County, Gill S. Freeman,J., ruled that bank, who, as a matter of record priority,was junior to the existing mortgage held by mortga-gee, was entitled to a priority lien (by virtue ofequitable subrogation) ahead of the lien of mortgagee,and mortgagee appealed.

Holding: The District Court ofAppeal, Salter, J., heldthat bank was not entitled to a priority lien by virtue ofequitable subrogation ahead of the lien ofmortgagee.

Reversed and remanded.

Schwartz, Senior Judge, filed dissenting opinion.

West Headnotes

Mortgages 266 @l81

266 Mortgages2661II Construction and Operation

266III(D) Lien and Priority266kl77 Circumstances and Transactions

Subsequent to Mortgage Affecting Priority266k181 k. Release, satisfaction, or

discharge of mortgage. Most Cited Cases

Subrogation 366 Þ31(4)

366 Subrogation366k31 Assignment or Benefit of Security or

Incumbrance366k31(4) k. Assignment or benefit of mort-

gage, judgment, or lien. Most Cited Cases

Bank, whose mortgage, as a matter of recordpriority, was junior to the existing second mortgageheld by mortgagee, was not entitled to a priority lienby virtue of equitable subrogation ahead of the lien ofmortgagee; bank's new loan harmed mortgagee byaltering the risks of non-payment accepted by mort-gagee when it extended credit to homeowner, bankturned over all the net proceeds of the loan closing tothe homeowner, rather than mortgagee, and thehomeowner defaulted on both loans thereafter, andbank failed to demonstrate that equitable subrogationdid not and would not harm mortgagee'srecord-prioritylien.

*96 Martin R. Sherman and Grace L. Sherman, inproper person.

John R. Bello, Jr. and Rod B. Neuman, Tampa; Ter-rance W. Anderson, Jr., Miami, for appellee.

Before CORTIÑAS and SALTER, JJ., andSCHWARTZ, Senior Judge.

SALTER, J.The Shermans appeal a final circuit court judg-

ment ruling that the appellee, mortgage holderDeutsche Bank National Trust Company, was entitledto a priority lien (by virtue of equitable subrogation)ahead of the lien of the Shermans' duly- and pre-viously-recorded mortgage. Finding insufficientrecord support for the application of the doctrine ofequitable subrogation-as in the case of Velazquez v.Serrano, 43 So.3d 82 (Fla. 3d DCA 2010), also in-volving Deutsche Bank-we reverse and remand thecase for further proceedings.

Facts and Procedural BackgroundIn 2005, the owner of a residential property in

Miami-Dade County refinanced it with a thirty-yearadjustable-rate loan from Fremont Investment &Loan. The mortgage was duly recorded in September

©2013 Thomson Reuters. No Claim to Orig. US Gov. Works.

Page 2

100 So.3d 95, 37 Fla. L. Weekly D2025(Cite as: 100 So.3d 95)

2005. Fremont obtained a first-priority mortgage lienfor the $688,000 principal amount of the loan.

In 2006, the homeowner gave a two-yearsecond-position balloon mortgage on the residence tothe Shermans to secure a loan of $100,000. Thatmortgage was duly recorded in May 2006 and ex-pressly provided that it was a second mortgage, infe-rior to the Fremont mortgage "in the original principalamount of $688,000." The second mortgage includeda "due-on-sale" provision and a prohibition on as-sumption of the mortgage debt by others, but it did notprovide for an acceleration of maturity in the event ofa refinancing (a so-called "due-on-refinancing" pro-vision).

In September 2006, the homeowner refinancedwith Washington Mutual Bank (WaMu), predecessorin interest to Deutsche Bank. The new note andmortgage were for the principal sum of $900,000, anamount sufficient to satisfy the $726,940 first mort-gage payoff amount claimed by Fremont (this figureincluded a prepayment penalty of $24,565), the$101,192 second mortgage payoff claimed by theShermans ($100,000 in principal plus accrued inter-est), and the closing costs. WaMu's closing agent paidoff the Fremont first mortgage loan (and thereafterFremont recorded a satisfaction ofthat first mortgage),but did not pay off the Shermans' second mortgageloan. Instead, the closing agent disbursed over$129,000 in closing proceeds to the homeowner, andthe homeowner did not pay off the Shermans' loan.WaMu recorded its mortgage in early October 2006,but as a matter of record priority, the new WaMumortgage was junior to the existing Sherman secondmortgage.M The WaMu mortgage ultimately wasacquired by Deutsche Bank.

FNI. In lieu of a payoff of the Shermans'mortgage, WaMu could have required, as atypical condition of such loan closings (butapparently did not), a recordable subordina-tion of the Sherman's mortgage to the new,larger, and otherwise junior in priority Wa-Mu mortgage,

for an equitable lien to the extent of funds advanced in2006 to pay off the 2005 Fremont loan and to paycertain insurance and property tax obligations on theproperty. The Shermans also cross-claimed for fo-reclosure of their mortgage against the homeownerand counterclaimed to enforce the record priority oftheir mortgage over the Deutsche Bank mortgage.

The case proceeded to non-jury trial in April2011. The homeowner stipulated to a final judgmentof foreclosure regarding the Deutsche Bank mortgage.In June 2011, the trial court entered a final judgmentgranting Deutsche Bank a first-priority equitable lien,senior in dignity to that of the Shermans, for $726,940disbursed by WaMu to pay off the 2005 Fremont loan,approximately $300,618 in accrued interest on thatamount, plus over $56,300 in insurance and escrowdisbursements, and less $88,640 in payments receivedon the mortgage. The adjusted Deutsche Bank equit-able lien amount was $998,552. © The Shermans'mortgage lien was to be junior to the equitably sub-rogated, leapfrogged Deutsche Bank lien. This appealensued.

FN2. Deutsche Bank's lien included the sub-stantial prepayment penalty disbursed toFremont by WaMu, a lien increase neverconsented to by the Shermans.

AnalysisIn Velazquez v. Serrano, 43 So.3d 82 (Fla. 3d

DCA 2010), we summarized the limitations applicableto equitable subrogation:

Subrogation "is not allowed if it works any injusticeto the rights ofothers." Fed. LandBank ofColumbiav. Godwin, 107 Fla. 537, 145 So. 883, 885 (1933);see also Brannon v. Hills, 11 1 Fla. 491, 149 So. 556,557 (1933); Eastern Nat'l Bank v. Glendale Fed.Sav. & Loan Ass'n, 508 So.2d 1323 (Fla. 3d DCA1987). A party's entitlement to subrogation there-fore "depends upon the equities and attending factsof each case." Nat'l Union Fire Ins. Co. of Pitts-burgh, Pa. v. KPMG Peat Marwick, 742 So.2d 328,332 (Fla. 3d DCA 1999).

*97 Thereafter, the homeowner defaulted on both We also addressed in Velazquez the type ofmortgages, and Deutsche Bank (as trustee for a secu- "harm" to a junior mortgagee that will preclude theritized pool of mortgage loans) commenced a forec- application of the equitable subrogation doctrine. Inlosure action. The Shermans denied, and asserted that case, as here, Deutsche Bank's predecessoraffirmative defenses against, Deutsche Bank's claim mortgagee provided purchase money financing for a

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100 So.3d 95, 37 Fla. L. Weekly D2025(Cite as: 100 So.3d 95)

purchase of the property in 2006. The new loan paidoff two senior mortgage loans, but the new lenderfailed to satisfy the third-position mortgage held byMs. Velazquez from the available proceeds. Instead,the new lender paid those net proceeds directly to theseller. We reversed a summary judgment in favor ofDeutsche Bank granting priority to the extent of thesenior loans that were paid off in the refinancing,because "the surplus should have been paid to Ve-lazquez to satisfy her properly recorded mortgage." Id.at 84. "In addition," we noted, the Velazquez mort-gage contained a "due-on-sale" provision establishingthat Ms. Velazquez would be paid when the propertywas sold. Id.

zard insurance and flood insurance," and the sum of$726,940.39, an amount which included the prepay-ment penalty.® At the time Deutsche Bank assertedthat claim, the Shermans' mortgage had already ma-tured and the entire loan was due and payable. In thetwo years which passed between the filing ofDeutscheBank's claim and the entry of the final judgment al-lowing equitable subrogation, additional interest ac-crued and was claimed on the penalty amount, furthereroding the Shermans' ability to recover their loan inforeclosure. By seeking and obtaining more than amere return to the status quo ante in Count III,Deutsche Bank improved not only the priority of itslien, but also the extent of that subrogated lien.

In the present case, the Shermans' mortgage didnot have a due-on-refinancing clause, and DeutscheBank's predecessor provided refinancing rather than anew mortgage loan facilitating a sale of the encum-bered property. Deutsche Bank argues that the Sher-mans have not shown that they have been harmed ordeprived of *98 a legal right by virtue of the doctrineof equitable subrogation. We disagree.

WaMu's new loan harmed the Shermans by al-tering the risks of non-payment accepted by theShermans when they extended credit in 2006. At thattime, the homeowner had monthly payments of$5,530.85 per month on the Fremont loan. The WaMurefinancing resulted in a monthly increase of $1800per month, a total of over $36,000 in additional cashobligations imposed upon the homeowner before theShermans' mortgage became due. WaMu turned overall the net proceeds of the 2006 loan closing to thehomeowner rather than the Shermans, and thehomeowner defaulted on both loans thereafter.

Additionally, the payoff of the senior Fremontmortgage by Deutsche Bank's predecessor included aprepayment penalty in excess of $24,000. DeutscheBank then sought (and the trial court granted) equita-ble subrogation in a total amount which exceeded theFremont loan balance and lien had the WaMu refi-nancing not occurred. On this point, Deutsche Bankinvites us to remand so that the final Deutsche Bankequitable lien can simply be reduced by the amount ofthe prepayment penalty. This, however, would notundo the harm. Paragraphs 25 and 26, Count III ofDeutsche Bank's operative complaint filed in May2009, sought a priority equitable lien for "all amountspaid by WaMu to satisfy the Fremont Mortgage, ha-

FN3. This was the principal amount givenpriority as an equitable lien and set forth inthe f'mal judgment under review, versus the$684,104 principal balance of the Fremontloan at the time of the 2006 refinancing.

ConclusionDeutsche Bank failed to demonstrate that equita-

ble subrogation did not and would not harm theShermans' record-priority lien. Instead, DeutscheBank sought and obtained relief that placed theShermans in a worse, not equal, position as a result ofthe 2006 refinancing. In this case, as in Velazquez, thenet refinancing proceeds were sufficient to pay off theShermans' loan, but the lender instead paid the fundsto the homeowner. The new loan acquired byDeutsche Bank also required more ofthe homeowner'savailable cash flow for loan payments (to the detri-ment of the Shermans) and was followed by thehomeowner's default on both loans.

The judgment below is reversed and remanded forthe entry of a final judgment granting foreclosure ofthe Shermans' mortgage lien according to its recordpriority, senior to that of the Deutsche Bank mortgage,and denying Deutsche Bank equitable subrogationunder Count III of its amended complaint.

CORTIÑAS, J., concurs.

*99 SCHWARTZ, Senior Judge (dissenting).I cannot agree that there is any principled basis for

granting the appellant-second mortgagee the ultimatewindfall of priority over an established first mortgagewhich has, however foolishly, been fully paid by anew lender, the appellee Deutsche Bank. I am non-

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100 So.3d 95, 37 Fla. L. Weekly D2025(Cite as: 100 So.3d 95)

plussed by the appellant's argument for doing so: thatthe bank somehow acted inequitably by lending themortgagor an additional amount at interest, apparentlybecause he was, surprisingly enough, required to pay itback. But I had thought that the ability to secure a loanwas good for the borrower, and surely that it did notplace him, much less the second mortgagee, at somekind of disadvantage. This is particularly the casebecause Deutsche Bank admittedly has no superiorinterest to the excess loan and now claims only theequitable right to succeed to the previous, now dis-charged, first mortgage.

While the appellant invokes the rule that one mustdo equity to receive equity, Deutsche Bank's actions,while unwise, to say the least, were in no way "ine-quitable." I think it is wrong to give the secondmortgagee an unearned advantage over a distressedparty, even if it is a bank, whose actions harmed onlyitself. I would therefore affirm on the authority ofPalm Beach Sav. & Loan Ass'n, F.S.A. v. Fishbein,619 So.2d 267 (Fla.1993); Eastern Nat'l Bank v.Glendale Fed. Sav. & Loan Ass'n, 508 So.2d 1323(Fla. 3d DCA 1987); Suntrust Bank v. Riverside Nat'lBank of Florida, 792 So.2d 1222 (Fla. 4th DCA2001); and, Aurora Loan Servs., LLC v. Senchuk, 36So.3d 716 (Fla. 1st DCA 2010), all of which I thinkrequire affirmance.

Fla.App. 3 Dist.,2012.Sherman v. Deutsche Bank Nat. Trust Co.100 So.3d 95, 37 Fla. L. Weekly D2025

END OF DOCUMENT

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January 30, 2013

By Federal Express

Tom Hall, ClerkSupreme Court of FloridaSupreme Court Building500 So. Duval StreetTallahassee, FL 32399-1926

RODOLFO SORONDO, JR.305-789-7596

Re: Deutsche Bank National Trust Co. v. ShermanCase No. SCl2-2588Third DCA Case No. 3D11-2707

Dear Mr. Hall:

Enclosed for filing is Petitioner's Brief on Jurisdiction. Thank you for yourassistance in this matter.

Sincerely,

HOLLAND & KNIGHT LLP

olfo Sorondo, Jr.Encl.cc: Martin and Grace Sherman (by mail and email with encl.)

Robert A. Cohen, Esq. and Mario Ruiz, Esq. (by mail and email with encl.)Jeffrey T. Kuntz, Esq. (by mail and email with encl.)

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