## Facts

- A homeowner obtained a first mortgage on residential property from Fremont Investment & Loan.
- The homeowner later gave Martin and Grace Sherman a second mortgage that was junior to Fremont’s mortgage.
- The homeowner refinanced with Washington Mutual Bank (WaMu) in a transaction intended to pay off existing liens and give WaMu a first-priority mortgage.
- WaMu’s funds satisfied the Fremont first mortgage, but WaMu did not pay off the Shermans’ junior mortgage; remaining proceeds were disbursed to the homeowner.
- WaMu’s mortgage was later assigned to Deutsche Bank National Trust Company.
- The homeowner defaulted, and Deutsche sought foreclosure and a ruling that its mortgage had priority over the Shermans’ mortgage under equitable subrogation.
- The trial court ruled Deutsche had priority via equitable subrogation; the Shermans appealed.

## Issues

1. Whether a refinancing lender (and its assignee) that paid off a prior first mortgage is equitably subrogated to that mortgage’s priority when a junior mortgage was not paid off due to a disbursement mistake.
2. Whether applying equitable subrogation is improper when the junior mortgagee’s lien remains of record and the senior mortgage was satisfied of record.

## Decision

- The appellate court affirmed the trial court.
- Deutsche was equitably subrogated to the priority position of the discharged Fremont first mortgage to the extent WaMu’s funds paid it off.
- Deutsche’s mortgage retained priority over the Shermans’ mortgage notwithstanding the failure to satisfy the Shermans’ lien in the refinance.

## Legal Principles

- Equitable subrogation permits a party that pays off an existing lien, intending to obtain security with the same priority, to step into the paid lien’s rights and priority to prevent unjust enrichment.
- A refinancing lender may obtain the discharged senior mortgage’s priority even if a junior lien was not paid, when the refinance was intended to replace the senior lien and preserve first priority.
- Equitable subrogation is generally denied if it would materially prejudice an intervening lienholder; loss of a fortuitous improvement in priority is not material prejudice.
- Satisfaction of the prior senior mortgage in the public records does not bar a court from restoring that priority in equity in favor of the refinance lender.

## Conclusion

The court held that equity required treating the refinance mortgage as the functional replacement of the paid-off first mortgage, so Deutsche received first-lien priority by equitable subrogation because the Shermans were not materially harmed beyond losing an unintended windfall in priority.


Sherman v. Deutsche Bank Nat'l Tr. Co., 100 So. 3d 95 (Fla. Dist. Ct. App. 4th Dist. 2012)