Knowing When to Walk Away
The Kentucky Court of Appeals recently affirmed in Brooks v. J.P.Morgan Chase Bank, N.A. that an equitable mortgage established in litigation has priority over a pendente lite mortgage. The Lender filed an action to correct several deficiencies with its mortgage: (1) signed by husband but not wife; (2) unidentified preparer; (3) no scrivener's statement; (4) blank legal description; and (5) original not recorded and lost. The Lender sought to have a copy of the lost mortgage recorded. Upon filing its complaint, the Lender recorded a lis pendens in accordance with KRS 382.440. During the litigation, the borrower granted a Law Firm mortgage on the subject property. The trial court held that the Lender's resulting equitable mortgage had priority over the Law Firm's recorded mortgage. The appeal challenged the validity and priority of the respective liens.
While the Law Firm's mortgage secured a debt for services, it was not a lien governed by the attorney lien statute, KRS 376.460. The statutory attorney lien attaches to sums recovered, but a client can grant a mortgage as additional security. The Lender's unrecorded copy of the mortgage failed almost every requirement of KRS 382.335. While it could not be recorded, these defects did not invalidate the mortgage or the resulting equitable mortgage. The Law Firm also challenged the Lender's mortgage because it was granted to MERS. Despite the involvement of MERS being commonplace and permitted by prevailing Kentucky law, the Brooks court still labeled the use of MERS as "controversial." But since the Lender possessed the original note, it could enforce the resulting equitable mortgage.
For priority, the Law Firm argued its lien was the only "lawfully recorded" mortgage. But the Lender had recorded a lis pendens the month before the Law Firm had taken its mortgage. A prior equitable mortgage takes priority over a subsequent lien recorded with actual or inquiry notice. While the lis pendens did not create a lien, it did provide notice. As a pendente lite lienholder, the Law Firm could have no greater interest than the Lender. Since the Lender's predecessor had provided credit in exchange for a transfer of an interest in the property, it held an equitable mortgage despite the multitude of deficiencies in the mortgage itself. The Lender's equitable mortgage had priority over the Law Firm's lien as the lis pendens resulted in the Law Firm's lien being subject to the results of the litigation.
Brooks v. J.P. Morgan Chase Bank, N.A., 2017 Ky. App. Unpub. LEXIS 121 (Ky. Ct. App. Feb. 10, 2017).