## Facts

- In 1977, Phyllis Ranier loaned $200,000 to Algin and Doris Nolan, secured by a first mortgage on their Montgomery County, Kentucky residence.
- In 1983, Mount Sterling National Bank agreed to make a $125,000 home-improvement loan to repair fire damage, conditioned on Ranier subordinating her mortgage to the Bank’s mortgage.
- Ranier and the Bank executed a written subordination agreement stating the Nolans would borrow “the total sum of $125,000.00,” secured by a “new first” mortgage, and that Ranier’s lien would become junior to that mortgage.
- The Nolans executed a $125,000 note and first mortgage to the Bank; the mortgage included a future-advance clause capping total indebtedness outstanding at $125,000.
- In 1985, without notice to Ranier, the Bank advanced an additional $75,000 and took a new $200,000 note; the original $125,000 note was stamped “renewed” and returned to the Nolans.
- The Nolans made payments totaling $95,269.04; the Bank internally applied payments to the portion of the debt it treated as unsecured (amounts above $125,000).
- After default, the Bank foreclosed; the sale yielded about $181,000, and the trial court awarded the Bank more than $140,000 from the proceeds for the unpaid balance of the $125,000 loan plus interest, fees, and costs.
- The Court of Appeals affirmed; Ranier obtained discretionary review.

## Issues

1. Whether the subordination agreement subordinated Ranier’s lien only to a first-priority mortgage securing the $125,000 loan described in the agreement, or also to later additional advances reflected in a $200,000 renewal note.
2. Whether the Bank could preserve full priority to foreclosure proceeds for the $125,000 secured amount by unilaterally applying borrower payments to the allegedly unsecured portion of the debt.
3. How the mortgage’s future-advance clause (with a $125,000 cap) affected the scope of priority created by the subordination agreement.

## Decision

- The Kentucky Supreme Court reversed and remanded.
- The Court held the subordination agreement granted the Bank priority over Ranier only up to the $125,000 indebtedness specifically described in the 1983 subordination and mortgage documents (with permissible related charges), not for later undisclosed advances.
- The Court rejected the Bank’s attempt to expand priority through renewal documentation and internal payment-allocation practices.
- The case was remanded for recalculation of foreclosure proceeds consistent with the limited scope of subordination.

## Legal Principles

- A subordination agreement is a contract construed by its terms; priority obtained by subordination will not be extended by implication beyond the indebtedness the agreement describes.
- A future-advance clause does not enlarge a third party’s subordination beyond the subordination agreement’s express scope, particularly where the mortgage language caps secured indebtedness.
- A senior creditor cannot, through unilateral renewal practices or unilateral application of payments, increase its priority position against a subordinated lienholder beyond what the subordination agreement authorizes, especially where later advances were made without notice to the subordinating creditor.

## Conclusion

The court limited the Bank’s first-priority status to the defined $125,000 loan contemplated by the subordination agreement and refused to allow later undisclosed advances or the Bank’s internal accounting choices to dilute the subordinated creditor’s rights in foreclosure proceeds.


Ranier v. Mount Sterling Nat’l Bank, 812 S.W.2d 154 (Ky. 1991)