## Facts

- Tod and Pamela Owens conveyed residential property to Stephen H. and Jennifer R. Nally by warranty deed dated and delivered December 16, 1996.
- On the same day, the Nallys executed (1) a first mortgage to Amtrust Financial Services, Inc. for $204,000 and (2) a second mortgage to the Owenses for part of the purchase price.
- The Owens mortgage stated it was subordinate to the Amtrust mortgage and was recorded on December 26, 1996 in the mortgagor-mortgagee index.
- The warranty deed to the Nallys was not recorded until January 21, 1997 in the grantor-grantee index.
- EquiVantage later refinanced the Amtrust first mortgage and paid it off in full; its replacement mortgage was assigned to Bank of New York.
- After default, the Bank sued to foreclose; the Owenses intervened claiming priority based on earlier recording of their mortgage.
- The trial court granted summary judgment for the Owenses, and the intermediate appellate court affirmed, denying equitable subrogation based on the Bank’s failure to discover the Owens mortgage.

## Issues

1. Whether a mortgage recorded after a deed is delivered but before the deed is recorded is within the mortgagor’s chain of title so as to give constructive notice to a later mortgagee.
2. Whether a refinancing mortgagee that pays off a senior mortgage in full may obtain equitable subrogation to the discharged senior mortgage’s priority despite failing to discover an intervening mortgage.

## Decision

- The court held the Owens mortgage was within the Nallys’ chain of title when recorded because the deed had been delivered, making the Nallys equitable owners at that time.
- The Bank was charged with constructive notice of the Owens mortgage and therefore was not a bona fide mortgagee without notice.
- The court held equitable subrogation may be available to a subsequent mortgagee that pays off a senior mortgage in full.
- The case was remanded for further proceedings to determine the proper application and extent of equitable subrogation given the equities.

## Legal Principles

- A mortgage recorded after a deed is delivered but before the deed is recorded is in the mortgagor’s chain of title as of the time of the mortgage’s recording.
- A subsequent purchaser or mortgagee is charged with constructive notice of properly recorded and indexed instruments within the chain of title, including instruments appearing in the separate mortgage index.
- Constructive notice defeats bona fide purchaser (or mortgagee) status.
- Equitable subrogation can place a refinancing lender in the priority position of a fully satisfied senior mortgage to prevent unjust enrichment, so long as intervening lienholders are not unfairly prejudiced beyond the position they would have occupied had the senior mortgage remained.

## Conclusion

The court confirmed that an intervening mortgage recorded after delivery of the deed (but before the deed’s recording) provides constructive notice and can take priority over a later refinancing mortgage, while also recognizing that the refinancing lender may, in equity, be subrogated to the discharged senior mortgage’s priority to the extent of its payoff, subject to further fact-specific determinations on remand.


Bank of N.Y. v. Nally, 820 N.E.2d 644 (Ind. 2005)