Kentucky Court of Appeals Rejects Mortgage’s Subordination Clause

The Kentucky Court of Appeals recently held that the subrogation clause in one mortgage was ineffective to give priority to a subsequently-recorded mortgage.  See Police & Fire Ret. Sys. of City of Detroit v. Midwest Bus. Credit, LLC, 2015 WL 1880788 (Ky. Ct. App. Apr. 24, 2015).  In the case, a borrower executed a mortgage to a first mortgagee in 2008, which the prior mortgagee immediately recorded.  Included in the mortgage was language that “Mortgagee has agreed to subordinate, at Mortgagor’s election, this Mortgage to the interest of a subsequent mortgage to be determined.”  In 2009, the borrower executed a mortgage to a second mortgagee.  When the borrower defaulted on this second mortgage, the second mortgagee initiated a foreclosure action and claimed priority over the first mortgagee due to the subordination language.  The trial court agreed and granted priority to the second mortgage.  The Court of Appeals, however, reversed the lower court’s decision.  Citing to the Restatement of Property, it held that, though a prior mortgage may be subordinated to a subsequent mortgage, the subordination language must describe the mortgage gaining priority with “reasonable specificity.”  If the mortgage gaining priority is not in existence at the time the first mortgage is executed, the language must include the “maximum amount of the debt, maximum interest rate, and maximum term of the debt underlying a future mortgage.”  Because the subordination language was general and did not include these necessary terms, it was ineffective and the prior mortgage retained priority.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com.