The Impact of Ohio HB 201

Ohio H.B. 201 is currently pending with the Ohio House's Financial Institutions, Housing and Urban Development Committee. If enacted, the bill would: (1) bring clarity to the requirements to establish a claim based on equitable subrogation, and (2) broaden the scope and impose more serious penalties for failure to record a release of a paid-off mortgage within 90 days of the final payment.

Equitable Subrogation
The common-law doctrine of equitable subrogation is an exception to the general rule that mortgages are entitled to priority based on the dates they are filed for record. This issue commonly arises when Lender A has a recorded mortgage, and Lender B has a subsequently recorded mortgage. Lender C then makes a loan which is used to pay off Lender A's mortgage. In event of a foreclosure, Lender C would invoke the doctrine of equitable subrogation in seeking an order that its mortgage is entitled to priority over Lender B's mortgage, at least to the extent that the proceeds of Lender C's loan were used to pay off Lender A's mortgage.

The courts in Ohio have not always applied the doctrine of equitable subrogation liberally. For example, in a 1980 case[1] , the Ohio Supreme Court rejected a claim based on equitable subrogation because "Lender C" intentionally delayed the filing of its mortgage by approximately 3 months, during which time an intervening lien was filed.  Because Lender C's position was the result of its own negligence, the court ruled against Lender C, stating that equity would not reward such negligence.

Despite a trend among some appellate courts to apply equitable subrogation more liberally, the Ohio Supreme Court, in a 2010 case[2] , re-established the more strict approach, stating that "equitable subrogation is an equitable remedy that is appropriate only when the equities clearly favor the party asserting it".  In this case, Lender C was not aware of Lender B's mortgage because Lender C's title searcher was negligent, and therefore, the court held that Lender C was not entitled to equitable subrogation.

Ohio H.B. 201 would eliminate such stringent standards.  By Statute, the bill would establish that Lender C will always prevail provided: (1) the parties to Lender C's mortgage intended that the mortgage would have the priority of Lender A's satisfied mortgage or lien; and (2) at the time Lender B received its mortgage, it expected its interest to be junior to Lender A's mortgage or lien. 

The bill would clearly provide that Lender C would not be denied subrogation regardless of the following factors, which various courts have relied on in denying subrogation:

• Lender C is engaged in the business of lending.
• Lender C had actual knowledge or constructive notice of Lender B's mortgage.
• Lender C, or a third-party, committed a mistake or was negligent.
• Lender A's mortgage was released.
• Lender C obtained a title insurance policy.

Hence, if the bill is enacted, Lender C will almost always be entitled to "step into the shoes" of Lender A, with regard to priority.

Prompt Release of Satisfied Mortgages
Under Ohio's current law, the mortgagee must record a release of a residential mortgage within 90 days after it has been paid in full, or be subject to potential damages in a civil action up to $250.  If enacted, H.B. 201 would make the following changes:

• The law would be applicable to all mortgages, not just residential mortgages.
• The potential damages would be up to $50 for each day of noncompliance, plus reasonable attorneys' fees and costs incurred in such a civil action or otherwise to obtain the recording of a release of the mortgage.
• The law would apply to mortgages that have been paid in full and the underlying obligation terminated, with no opportunities for future advancements. (This would provide clarification that the mortgagee under a line of credit would not be required to release the mortgage where the credit line has been paid down to zero, unless the line has been closed).
• With respect to an unreleased mortgage that has been satisfied but not recorded prior to the effective date of the bill, the bill would require the mortgagor to provide the mortgagee written notice of the failure to record the release. The mortgagee then would have 60 days from the delivery of the notice to record the release of the mortgage. The bill would require the mortgagee to pay any fees required for the recording within 180 days after the effective date of the bill and permits a mortgagor to institute a civil action and recover damages. However, the bill is silent regarding a time frame in which a mortgagor must send the notice to the mortgagee.