GMAC Mortgage, LLC v. Summit Bank, N.A. et al
MEMORANDUM OPINION. Signed by Honorable Susan O. Hickey on February 28, 2013. (tg)
IN THE UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF ARKANSAS
HOT SPRINGS DIVISION
IN RE: CHARLES RAY FRANCIS; and
RHONDA KAY FRANCIS, Debtors
GMAC MORTGAGE, LLC
CASE NO. 6:12-CV-06104
SUMMIT BANK, N.A.; RHONDA KAY FRANCIS;
CHARLES RAY FRANCIS; and FARMERS BANK
& TRUST f/k/a SOUTHERN STATE BANK
Before the Court are the Bankruptcy Court’s Proposed Findings of Fact and Conclusions
of Law. (ECF No. 1). Plaintiff has objected (ECF No. 3), and Defendant Summit Bank has
responded to those objections. (ECF No. 5). The matter is ripe for the Court’s consideration.
After reviewing the bankruptcy court’s findings de novo, 28 U.S.C. § 157(c)(1), the Court agrees
with those findings and, for the reasons stated in this opinion, will enter judgment against
Plaintiff on its complaint in this adversary proceeding.
The Francises filed for chapter 7 bankruptcy in late 2007. The present dispute is over the
priority of various liens on the Francises’ home and property. Because the lien dispute is related
to a bankruptcy proceeding, but is not a core proceeding, see Stern v. Marshall, –—U.S.—–, 131
S. Ct. 2594, 2603–04 (2011), the bankruptcy court presided over the case through the post-trial
motions and submitted proposed findings of fact and conclusions of law for this Court to
consider before entering judgment. 28 U.S.C. § 157(c)(1). Those findings are as follows.
In January 2005, Francis Construction Company transferred 22.06 acres in Hot Spring
County to the Francises personally. Soon after that, the Francises mortgaged the property to
Southern State Bank, the predecessor of Defendant Farmers Bank & Trust. On October 14, 2005,
the Francises refinanced their Southern State Bank debt with ditech.com, a subsidiary of Plaintiff
That October 2005 refinancing caused the problem giving rise to this case. Somehow,
GMAC’s mortgage described the wrong parcel of land. The parties intended the mortgage to
describe—and thus to cover—the Francises’ 22.06 acres, but instead the mortgage described an
11.16-acre neighboring parcel. That error left GMAC essentially unprotected.
Mr. Francis says that he raised the acreage discrepancy at closing, but that the notary
claimed not to know why the mortgage described only half the intended acreage. When he
discovered that the mortgage’s description actually described his neighbor’s property, Mr.
Francis says he tried to get GMAC to correct the problem.1 When he heard nothing back, Mr.
Francis assumed GMAC was satisfied with an 11-acre collateral rather than a 22-acre one, so he
offered to, and later did, re-plat the single 22.06-acre tract into two parcels: one at 10.55 acres
including the Francises’ house (Parcel A); and another at 11.51 acres (Parcel B). Francis faxed
GMAC the survey and the legal description of Parcel A, and, at GMAC’s request, had the tax
assessor issue new parcel cards reflecting the division. Despite this, GMAC failed to correct its
GMAC reportedly has no record of Mr. Francis’s communications, but the bankruptcy court credited Mr. Francis’s
testimony. “[D]ue regard shall be given to the opportunity of the bankruptcy court to judge the credibility of
witnesses.” Fed. R. Bankr. P. 8013.
In February 2006 the Francises mortgaged Parcel A to Summit Bank to refinance some
old loans. Francis and Don Tackett, Summit’s representative, agree that Francis told Summit
about the misdescriptive GMAC mortgage. Based on that knowledge, Summit assumed GMAC
had a superior mortgage in Parcel A, but Summit was content to take a second mortgage behind
GMAC on the land. When Summit and the Francises modified their mortgage in May 2007,
however, the paperwork claimed a first mortgage for Summit, rather than a second one. Then, in
October 2007, the Francises mortgaged Parcel A to Southern State Bank. Francis told Southern
State too about the GMAC mix-up, and that he assumed GMAC either did not believe there was
a problem or did not care if there were. Southern State therefore took its mortgage as a second
mortgage behind Summit, figuring that GMAC was out of the picture.
Parcel B was mortgaged to Elk Horn Bank in May 2007, and then to Southern State Bank
in November 2007. The Southern State mortgage was to refinance the Elk Horn Bank loan, so
Southern State took Elk Horn Bank’s place as first-mortgage-holder to Parcel B.
GMAC filed this adversary proceeding in July 2009 seeking to determine the priority of
the mortgages on the Francises’ land. It claims the priority mortgage under two theories:
equitable subrogation and mortgage reformation. Summit and Farmers (Southern State’s
successor) object to GMAC’s arguments. Summit further raises laches as an affirmative defense
to GMAC’s mortgage-reformation argument.
The bankruptcy court held a one-day trial on these issues on October 20, 2011 and, after
considering the parties’ post-trial briefs, presented this Court with its proposed findings of fact
and conclusions of law. (ECF No. 1). Based on the facts above, the bankruptcy court came to the
following legal conclusions: (1) equitable subrogation is unavailable to GMAC because two
elements were not proved—an intervening event making the new security not a first lien; and a
lack of culpable neglect on GMAC’s part; and (2) GMAC’s mortgage-reformation request is
barred by laches. The bankruptcy court also found that, despite GMAC’s urgings to the contrary,
Summit and Southern State were protected bona-fide creditors.
GMAC objects to the bankruptcy court’s findings, arguing that: (1) the intervening-event
element that the court applied is not an element of equitable subrogation; (2) GMAC’s conduct
after the original October 2005 closing is immaterial to whether GMAC was culpably neglectful;
(3) Summit and Southern State had actual knowledge of GMAC’s lien interest, so they would not
be prejudiced by GMAC being equitably subrogated to Southern State’s original October 2005
priority; (4) laches does not apply, because reforming GMAC’s mortgage would not prejudice
Summit or Southern State and because GMAC filed its adversary proceeding within the statute
of limitations for actions on notes.
The Court will address GMAC’s objections in turn.
The first two of GMAC’s objections concern equitable subrogation. Often a new creditor
will pay off another party’s debt in a refinancing deal with the intention of stepping into the old
creditor’s shoes. By stepping into the old creditor’s shoes, the new creditor hopes to maintain the
priority of the old creditor’s security interest, usually a mortgage. Sometimes, however, an
intervening event, such as a third party’s judgment lien being filed on the underlying security,
causes the new creditor’s interest to fall behind another interest. When that happens through no
fault of the new creditor (for example, when the new creditor hires a title company that
negligently fails to spot the intervening encumbrance), courts apply equitable subrogation to
effectuate the parties intent and put the new creditor in the old creditor’s shoes. Newberry v.
Scruggs, 336 Ark. 570, 577, 986 S.W.2d 853, 857 (Ark. 1999) (citing and quoting S. Cotton Oil
Co. v. Napoleon Hill Cotton Co., 108 Ark. 555, 158 S.W. 1082, 1083–84 (Ark. 1913)).
The purpose underlying equitable subrogation is, like any equitable rule, to do justice
among the parties “without regard to form.” United States v. Gregory-Beaumont Equip. Co., 243
F.2d 591, 592 (8th Cir. 1957). The elements, as the bankruptcy court stated them, are: (1) the
party seeking subrogation paid off an encumbrance with the understanding that it would be
secured by a first lien on the property; (2) the new security was, for any reason, not in fact a first
lien; and (3) the party seeking subrogation is not chargeable with culpable and inexcusable
neglect. (ECF No. 1, at 5) (citing Newberry, 986 S.W.2d at 857–58 (internal citations omitted)).
GMAC contends that the bankruptcy court wrongly applied elements two and three.
Whether an “intervening event” is required
The bankruptcy court found an unstated requirement in element two: that the first lien
fail, not just for any reason, but specifically because of an “intervening event.” (ECF No. 1, at 5–
6). In other words, the failure to be a first lien must be based on an intervening filing rather than
an invalid filing. The court based that conclusion on the fact that every equitable-subrogation
case it could find occurred where the new creditor’s priority was thwarted by an intervening
record filing. Because GMAC’s priority was thwarted not by an intervening filing, but rather by
its own non-filing, the bankruptcy court found that GMAC failed to prove the second element.
GMAC counters that such a requirement is found nowhere in the law, and that the reason for the
failure needn’t be an intervening filing, but instead may be “for any reason.”
The Court agrees with GMAC. First, the equitable roots of equitable subrogation keep
form from standing in the way of justice. Gregory-Beaumont Equip Co., 243 F.2d at 592.
Experience alone does not create an element where justice sees no distinction. Second, the
requirement that the failed security not be “a first lien” does not logically demand that it must
therefore be a second, third, or fourth lien as opposed to no lien at all. One old Arkansas case
quotes approvingly an even older New Jersey case stating that equitable subrogation arises
“where, through fraud or mistake, the new security turns out to be defective….” Cooper v. Home
Owners’ Loan Corp., 197 Ark. 839, 126 S.W.2d 112, 115 (Ark. 1939) (quoting Home Owners’
Loan Corp. v. Collins, 184 A. 621, 622 (N.J. 1936)). Thus, the defect’s existence, rather than its
nature, is what counts.
Finally, taking a step back from technicalities, the point of equitable subrogation is
simply that “equity, to save an injustice being done[,] will subrogate the one discharging the
mortgage or lien to the rights the mortgagee or lien holder would have had if he, the payor, had
not discharged the mortgage or lien.” Spurlock v. Spurlock, 80 Ark. 37, 96 S.W. 753, 754 (Ark.
1906). The doctrine thus cares not for technical hang-ups; it simply seeks to put an unsecured or
undersecured creditor in the place of the creditor he and the debtor intended him to replace. The
Court is thus not able to say with confidence that GMAC is required to prove that an intervening
event, rather than a non-event, caused its security to be defective.
Whether neglect may arise from events after closing
The bankruptcy court found that GMAC was culpably neglectful in failing to heed the
Francises’ notices that the mortgage described the wrong property. GMAC does not object to the
bankruptcy court’s finding that it was neglectful. Rather, it argues that the bankruptcy court
wrongly looked at events that happened after the refinancing deal was closed. GMAC argues that
“any evidence of conduct after the loan closing is immaterial to the application of equitable
subrogation.” (ECF No. 4, at 4). The Court is not persuaded by GMAC’s objection.
Here, unlike in element two, there is a material difference between intervening and
invalid filings. GMAC is right that ordinarily, events beyond the loan closing are irrelevant to
whether the party seeking subrogation was neglectful. That is because, ordinarily, the party
seeking subrogation has lost its lien priority based on an event—an intervening filing—that
happened before closing, and therefore the priority is set at closing. But GMAC here commits
the same error it accuses the bankruptcy court of committing on element two: taking what
ordinarily happens to establish what must happen in this case.
Events after GMAC’s closing are relevant because, unlike in the ordinary case, GMAC’s
priority was not indelibly subverted at closing—GMAC had, by its own admission, over four
months to correct its mortgage and protect its first-lien status. GMAC’s failure to heed the
Francises’ multiple warnings was culpable neglect. If it had heeded the warnings, its priority
could have been established as the parties intended. Therefore, GMAC’s negligence after closing
disentitles it to equitable subrogation.
The bankruptcy court rejected GMAC’s argument that equitable subrogation should
apply notwithstanding GMAC’s neglect because Summit and Southern State had notice of
GMAC’s interest and therefore were not bona fide creditors. The bankruptcy court found that
even if Summit and Southern State had “undisputed actual notice” of GMAC’s interest, they
would still merely be charged with what knowledge “they would have thus obtained had they
made [an] inquiry” into the record. (ECF No. 1, at 8) (quoting Neas v. Whitener-London Realty
Co., 178 S.W. 390, 394 (Ark. 1915)). Because an inquiry into the lien record for the Francises’
land would have revealed no prior liens, the bankruptcy court reasoned, Summit and Southern
State could have had no knowledge of GMAC’s prior interest. GMAC argues that the bankruptcy
court conflated actual notice and constructive notice, and that Summit and Southern State in fact
had actual notice. GMAC is right, but its notice argument fails nevertheless.
The law is unfortunately unclear in distinguishing actual versus constructive notice. The
difference is this: a party may truly have actual notice, or it may be deemed to have actual notice.
The “deemed” variety is commonly known as constructive notice. See Killam v. Tex. Oil & Gas
Corp., 303 Ark. 547, 553, 789 S.W.2d 419, 422 (Ark. 1990) (talking of “constructive notice,
meaning they were aware of enough facts that they were obligated to pursue and inquire into the
possibility of [prior interests].”). It is the “deemed” variety that involves an obligation to inquire,
and charges one with the knowledge that an inquiry would have revealed. True actual notice does
not entail any inquiry, because an inquiry is unnecessary when one already knows something.
Whatever notice exists in this case arises from the parties’ admission that the Francises
told both Summit and Southern State about GMAC’s misdescriptive mortgage. Summit and
Southern State, then, had actual knowledge; they did not need to be deemed to have it. Because
they had actual knowledge, the Court need not consider what an inquiry would have revealed to
GMAC’s notice argument, however, still fails. Even assuming Summit and Southern
State had knowledge of GMAC’s outstanding interest, that fact at most makes the equities equal,
given GMAC’s own culpable neglect in not securing its interest. “A court of equity will not
intervene, ‘where there are equal equities or where there are no equities.’” Heifetz Metal Crafts,
Inc. v. Peter Kiewit Sons’ Co., 264 F.2d 435, 439 (8th Cir. 1959) (quoting Pac. Royalty Co. v.
In this case, conflating actual and constructive notice creates the odd result of Summit and Southern State being
deemed to have less knowledge than they actually did have. This result is at odds with the purpose of the recording
statute, which is to protect innocent purchasers. Moreover, Summit and Southern State could not discharge their
obligation to inquire about prior interests by searching records they knew would not contain the prior interests for
which they searched. In other words, it would not be enough for them to look where they knew they would not find
Williams, 227 F.2d 49, 58 (10th Cir. 1955)). “The equities being equal,” then, “the law must
prevail.” Judson v. Corcoran, 58 U.S. 612, 614 (1854).3 GMAC’s own culpable neglect therefore
makes the equitable-subrogation remedy unavailable even if Summit and Southern Statute had
In its complaint, GMAC asks to have its mortgage reformed according to the parties’
intent. The bankruptcy court found that, even if GMAC showed a mutual mistake warranting
reformation, Summit’s affirmative defense of laches applies to preclude reformation. GMAC
argues that laches is inapplicable because Summit and Southern State were not prejudiced by
Laches is an equitable defense that arises when the relief-seeking party unreasonably
delays filing its claim and the circumstances make it therefore inequitable for that party to obtain
relief. Royal Oaks Vista, L.L.C. v. Maddox, 372 Ark. 119, 123–24, 271 S.W.3d 479, 483 (Ark.
On top of the equities being equal, there remain the questions whether (1) GMAC’s mortgage was void for
misdescription; and (2) even if Summit and Southern State had actual notice, such notice could endure for years
even while GMAC failed to correct its misdescriptive mortgage.
GMAC also argues that, unless laches is supported by an intervening equity, a period of inaction shorter than the
statute-of-limitations period will not support the application of the doctrine, citing Earle Improvement Co. v.
Charfield, 81 Ark. 296, 302, 99 S.W. 84, 85 (1907). Because the bankruptcy court failed to find an intervening
equity in this case, GMAC argues, laches does not apply. Therefore, according to GMAC, “[b]y analogy to the
statute of limitations, laches should not bar any action for reformation….” (ECF No. 4, at 10).
This argument is not really different from GMAC’s argument that inaction alone is not enough for laches to
apply. The cases GMAC cites for its statute-of-limitations argument merely state—albeit in dated language, in the
case of Earle Improvement Co.—that laches does not apply when there is no prejudice. In other words, when
prejudice is not shown, laches does not apply, and so the statute of limitations does apply. See Boyd v. Meador, 10
Ark. App. 5, 12, 660 S.W.2d 943, 947 (Ark. Ct. App. 1983) (“Laches in legal significance is not mere delay, but
delay that works a disadvantage to another.”). The “intervening equity” mentioned in Earle Improvement Co. and in
Boyd, then, is merely another way of referring to the requirement of prejudice.
GMAC also disputes the bankruptcy court’s finding that it demonstrated inaction, but GMAC does not say
precisely what theory this dispute is pointed at. However, the Court notes that contrary to GMAC’s view, 136 days,
even subtracting the days before Mr. Francis told GMAC about the misdescription, is not an “extremely narrow
window within which it could have corrected the parties’ mutual mistake.” (ECF No. 4, at 10). Even if Mr. Francis
did not mention the error until a month after signing, that still left GMAC with around three months to correct the
mistake. Moreover, GMAC did not merely have until Summit’s February 2006 mortgage deal to fix its mistake;
Summit’s intention to take a first mortgage was not apparent until May 2007, when Summit modified the Francises’
mortgage. GMAC therefore had well over a year to fix its mistake.
2008) (quoting Summit Mall Co. v. Lemond, 355 Ark. 190, 206, 132 S.W.3d 725, 735 (Ark.
2003)). The doctrine is “based on the assumption that the party to whom laches is imputed has
knowledge of his rights and the opportunity to assert them, [and] that by reason of his delay
some adverse party has good reason to believe those rights are worthless or have been
abandoned….” Cochran v. Bentley, 369 Ark. 159, 170, 251 S.W.3d 253, 263 (Ark. 2007). A
successful laches defense requires proving: (1) a detrimental change in position by the party
asserting laches; and (2) unreasonable delay by the one opposing laches. Royal Oaks Vista, 372
Ark. at 123–24; 271 S.W.3d at 483.
The bankruptcy court appears not to have discussed whether Summit and Southern State
detrimentally changed their positions in reliance on GMAC’s failure to correct its mortgage;
instead it focused mostly on GMAC’s lack of action by itself. “Laches,” however, “requires a
demonstration of prejudice,” Id. at 126; 271 S.W.3d at 484, which is another way of saying
detrimental reliance. GMAC argues that Summit and Southern State would not be prejudiced by
a mortgage reformation because they had notice of GMAC’s claim to priority. The Court
Summit, in its February 26, 2006 deal with the Francises, was the only creditor to
expressly acknowledge its intent to take a mortgage second to GMAC. By May 21, 2007,
however, when Summit and the Francises modified the mortgage, Summit’s title work reflected
a first mortgage. Southern State’s mortgage on Parcel A did claim to be a second mortgage, but
one in favor of Summit, not GMAC. Southern State’s mortgage on Parcel B also claimed to be a
Summit could not have suffered any prejudice as of its February 26, 2006 deal, because it
fully intended to take second to GMAC’s mortgage interest. But by the time it modified the
mortgage over a year later, in May 2007, and claimed a first mortgage, Summit had changed its
position plausibly assuming that GMAC had abandoned its claim to priority. All the transactions
following Summit’s position as of May 2007 assumed that Summit had a first mortgage in Parcel
A—that is why Southern State took a second mortgage to Summit on Parcel A, and a first
mortgage on Parcel B.
Although the Francises told Summit and Southern State about GMAC’s alleged interest,
the two banks were not required to act contrary to the facts and ignore GMAC’s obvious failure
to assert its rights. Accordingly, the Court finds that Summit and Southern State have shown
sufficient prejudicial reliance on GMAC’s unreasonable delay for laches to apply.
For the reasons above, the Court agrees with the bankruptcy court that GMAC is not
entitled to a first or second mortgage on the Francises’ 22 acres through either equitable
subrogation or mortgage reformation. GMAC’s culpable neglect precludes equitable
subrogation. While Summit and Southern State likely had notice of GMAC’s claimed prior
interest, that merely makes the equities—or rather, the inequities—equal, and so the parties are
left to the law. Finally, Summit and Southern State’s prejudicial reliance on GMAC’s
unreasonable delay makes laches an appropriate bar to reforming GMAC’s mortgage.
Accordingly, the Court ADOPTS IN PART the Bankruptcy Court’s proposed findings
of fact and conclusions of law. (ECF No. 1). The Court finds that GMAC’s Amended Complaint,
Case No. 6:09-AP-7119, ECF No. 36, (Bankr. W.D. Ark. Dec. 8, 2010), should be and hereby is
DISMISSED WITH PREJUDICE. GMAC is not declared to have a first or second mortgage
on the property and residence at 19781 Hwy. 67, Malvern, Arkansas. A separate order consistent
with this opinion will be filed today.
IT IS SO ORDERED, this 28th day of February, 2013.
/s/ Susan O. Hickey
Susan O. Hickey
United States District Judge