Firm Wins Summary Judgment On Claim For Equitable Subrogation
The lender was at the end of its rope. The court had approved the debtor’s disclosure statement for a plan that would pay the lender only pennies on the dollar. Even worse: a recent title search showed the lender’s lien in a distant third position on the property, not the second position that the lender had bargained for.
The problem was that the debtor had borrowed two loans at virtually the same time, secured by his home. One loan was a refinance of an $85,000 home equity line of credit; the other was a million dollar SBA loan. The refinance was supposed to be in second position on the home, the SBA loan was supposed to be in third. Unfortunately, the refinance was recorded after the SBA loan, so the priorities became reversed: the SBA moved up to second position. The debtor’s plan reflected this and the refinancing lender (who had bought the loan at auction) was completely unsecured in the property.
The lender hired Ron Drescher and Drescher & Associates desperate to find a solution to the problem. The firm filed a Complaint in the Bankruptcy Court seeking equitable subrogation for the refinancing lender. Drescher & Associates argued that even though the refinancing lender recorded after the SBA loan, the lender had paid an existing lien that was supposed to be in second position, ahead of the SBA. It was fair to allow the firm’s client to step into the shoes of the $85,000 home equity line of credit because everyone involved – the debtor and both lenders – expected that result. The SBA strongly resisted the Complaint, but the Court granted summary judgment in favor of the client. The Court ruled that allowing the SBA to move into second position on the property when it had expected to be third position would grant that lender an unfair windfall. However, even though the new refinancing loan was for over $100,000, the doctrine of equitable subrogation only allowed this lender to step into the shoes of the loan it had paid, in this case $85,000. Still, the $85,000 was may times more than the amount the debtor was proposing to pay in the plan.
The court specifically ruled that even though the complaint was filed after approval of the disclosure statement it was timely filed. Drescher & Associates had asserted the new lender’s equitable subrogation rights just in time.
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