[Cite as HSBC Bank USA, N.A. v. Ward, 2017-Ohio-7315.]


                Court of Appeals of Ohio
                              EIGHTH APPELLATE DISTRICT
                                 COUNTY OF CUYAHOGA

                              JOURNAL ENTRY AND OPINION
                                      No. 104104

HSBC BANK USA, N.A. AS TRUSTEE ON BEHALF OF ACE
SECURITIES CORP. HOME EQUITY LOAN TRUST AND FOR
THE REGISTERED HOLDERS OF ACE SECURITIES CORP.
HOME EQUITY LOAN TRUST, SERIES 2005-HE6, ASSET
BACKED PASS-THROUGH CERTIFICATES

                                                         PLAINTIFF-APPELLANT

                                                 vs.

                             ANTHONY WARD, ET AL.

                                                         DEFENDANTS-APPELLEES



                                        JUDGMENT:
                                         AFFIRMED


                                    Civil Appeal from the
                           Cuyahoga County Court of Common Pleas
                                  Case No. CV-12-778444

       BEFORE: Kilbane, P.J., S. Gallagher, J., and Laster Mays, J.

       RELEASED AND JOURNALIZED:                         August 24, 2017
ATTORNEYS FOR APPELLANT

Charles A. Nemer
Robert R. Kracht
McCarthy Lebit Crystal & Liffman Co.
101 West Prospect Avenue, Suite 1800
Cleveland, Ohio 44115

Chrissy M. Dunn Dutton
Blank Rome L.L.P.
1700 PNC Center
201 East Fifth Street
Cincinnati, Ohio 45202


ATTORNEYS FOR APPELLEES

For HSBC Bank USA, N.A. as Trustee for the Holders
of the Ellington Loan Acquisition Trust 2007-2 Mortgage
Pass-Through Certificates Series 2007-2

Bradley P. Toman
Carlisle, McNellie, Rini, Kramer,
& Ulrich Co., L.P.A.
24755 Chagrin Boulevard, Suite 200
Cleveland, Ohio 44122

John B. Kopf
Todd Seaman
Thompson Hine, L.L.P.
41 South High Street, Suite 1700
Columbus, Ohio 43215
For Cuyahoga County Treasurer

Michael C. O’Malley
Cuyahoga County Prosecutor
Gregory B. Rowinski
Judith Miles
Assistant County Prosecutors
310 West Lakeside Avenue, Suite 300
Cleveland, Ohio 44113



Also Listed:

Cynthia Turner
213 Ascot Parade, Suite 309
Alamogordo, NM 88310
MARY EILEEN KILBANE, P.J.:

      {¶1} Plaintiff-appellant, HSBC Bank USA, N.A., as trustee on behalf of Ace

Securities Corp. Home Equity Loan Trust, Series 2005-HE6, Asset Backed Pass-Through

Certificates (the “Ace Trust”), appeals the trial court’s adoption of the magistrate’s

decision granting summary judgment in favor of defendant-appellee HSBC Bank USA,

N.A., as trustee for the holders of the Ellington Loan Acquisition Trust 2007-2 Mortgage

Pass-Through Certificates Series 2007-2 (the “Ellington Trust”). This appeal involves a

priority dispute between these two lienholders. The Ace Trust and the Ellington Trust

were both granted residential mortgages on real property located at 33800 Harrow Court,

Solon, Ohio (“the property”). Each claims a superior lien on the property. For the

reasons set forth below, we affirm.

                                 The NovaStar Mortgage

      {¶2} In June 2005, defendants Anthony Ward (“Ward”) and Pamela Thomas-Ward

(collectively referred to as “the Wards”) entered into a real estate purchase agreement as

purchasers of the property from defendant Cynthia Turner (“Turner”).          In order to

finance the $324,000 purchase price, the Wards obtained a residential mortgage loan from

NovaStar Mortgage, Inc. (“NovaStar”) in the amount of $259,200. The balance of the

purchase price was paid to Turner by way of a promissory note (the “Turner note”) in the

amount of $64,800. As security for repayment of the Turner note, the Wards executed a
security agreement granting Turner a security interest in the property. Turner granted

title to the property to the Wards by a warranty deed (the “warranty deed”). Turner never

recorded her security agreement with the Cuyahoga County Recorder’s Office.

       {¶3} The NovaStar mortgage and the warranty deed were also never recorded.

Unisource Information Services, L.L.C. (“Unisource”), is a title company that acted as

closing agent for the sale of the property from Turner to the Wards and the NovaStar loan

transaction.   NovaStar provided closing instructions to Unisource that required

Unisource to “follow these instructions exactly” and “record [the lien] in [first] position

on or prior to the disbursement date [of June 29, 2015]” and “return certified copies of

those documents that are to be recorded.”        The closing instructions provided that

“[f]ailure to comply with these instructions may delay funding.” Unisource failed to

record the NovaStar mortgage and the warranty deed. NovaStar received signed and

notarized closing documents from Unisource, but they were not certified. Nonetheless,

NovaStar funded the loan and authorized Unisource to disburse the loan proceeds to

satisfy Turner’s mortgage debts and real estate taxes as evidenced by the fully executed

HUD-1 Settlement Statement (“HUD-1”).

       {¶4} The NovaStar loan closed on June 29, 2005. Less than one month later, on

July 25, 2005, the Wards executed a quitclaim deed (the “quitclaim deed”) conveying title

in the property back to Turner. The quitclaim deed was recorded on August 29, 2005.

The NovaStar note and mortgage were ultimately negotiated and assigned to the Ace
Trust in August 2008.1

                                     The Fremont Mortgage

         {¶5} In December 2006, Turner obtained a loan from and granted a mortgage to

Fremont Investment and Loan (“Fremont”) in the amount of $283,000. The Fremont

mortgage was recorded on January 12, 2007. In the loan application documents Turner

submitted to Fremont, she identified the only mortgage on the property at that time as the

“Anthony Ward - private mortgage.” When a Fremont representative contacted Ward to

verify this mortgage, he disclosed the date the mortgage originated — June 29, 2005, the

7.3 percent interest rate, the original mortgage amount of $259,200, the then-current

mortgage balance of $227,214, and the monthly principal and interest payment of $1,777.

    Although this information is identical to the terms of the NovaStar mortgage, Ward

failed to clarify that these terms pertained to the NovaStar mortgage and not to a “private

mortgage” between him and Turner. Notably, he signed the request for loan verification

as Turner’s “creditor.”

         {¶6} The Fremont note and mortgage were assigned to the Ellington Trust in

November 2009.




1 Specifically, Mortgage Electronic Registration Systems, Inc., as nominee for NovaStar, assigned all
of its rights and interests in the NovaStar Mortgage and transferred the NovaStar Note to the Ace
Trust by assignment.
                                   The Foreclosure Action

       {¶7} As a result of the Wards’ nonpayment of the NovaStar loan, the Ace Trust

initiated a foreclosure proceeding in the instant matter. The Wards and Unisource were

found to be in default and the matter proceeded to summary judgment. The magistrate

granted summary judgment against Turner in favor of the Ace Trust. The magistrate also

granted the Ellington Trust’s motion for summary judgment on the Ace Trust’s amended

complaint, finding that the Fremont mortgage is valid and the first lien upon the property,

subject only to the lien of the Cuyahoga County Treasurer for taxes and the mortgage.

The Ace Trust had opposed this motion and later filed its objections to the magistrate’s

decision with the trial court. The trial court adopted the magistrate’s decision with

findings of fact and conclusions of law in its entirety and issued a foreclosure decree.

       {¶8} It is from this order that the Ace Trust appeals, presenting the following four

assignments of error for review:

                                   Assignment of Error One

       The trial court erred and abused its discretion in adopting the magistrate’s
       decision of January 16, 2016, where the Magistrate applied the wrong legal
       standard and relied on clearly erroneous findings of fact.

                                   Assignment of Error Two

       The trial court erred and abused its discretion when it adopted the
       magistrate’s decision which failed to comply with [R.C. 5301.25(A)] where
       there existed substantial evidence that Fremont had actual or constructive
       knowledge of the preexisting NovaStar mortgage.

                                Assignment of Error Three

       The trial court erred and abused its discretion when it adopted the
      magistrate’s decision which improperly denied appellant’s claim for
      equitable relief under the doctrine of equitable subrogation by imputing the
      negligence of Unisource based on an incorrect finding or assumption that
      Unisource was the agent of NovaStar.

                                Assignment of Error Four

      The trial court erred and abused its discretion when it adopted the
      magistrate’s decision which improperly granted [the Ellington Trust’s]
      motion for summary judgment where genuine issues of material fact were in
      dispute and [the Ellington Trust] was not entitled to judgment as a matter
      of law.


                            Motion for Summary Judgment

      {¶9} For ease of analysis, we will consider these four assignments of error

together. The Ace Trust argues that the trial court erred in adopting the magistrate’s

decision granting summary judgment to the Ellington Trust.         It contends that the

magistrate misapplied the law, made incorrect factual assumptions, and ignored genuine

issues of material fact that should have precluded summary judgment in favor of the

Ellington Trust. We disagree.

      {¶10} We review an appeal from a grant of summary judgment under a de novo

standard of review. Grafton v. Ohio Edison Co., 77 Ohio St.3d 102, 105, 671 N.E.2d

241 (1996). The Ohio Supreme Court stated the appropriate test in Zivich v. Mentor

Soccer Club, 82 Ohio St. 367, 369-370, 696 N.E.2d 201 (1998).

      Pursuant to Civ.R. 56, summary judgment is appropriate when (1) there is
      no genuine issue of material fact, (2) the moving party is entitled to
      judgment as a matter of law, and (3) reasonable minds can come to but one
      conclusion and that conclusion is adverse to the nonmoving party, said party
      being entitled to have the evidence construed most strongly in his favor.
      The party moving for summary judgment bears the burden of showing that
       there is no genuine issue of material fact and that it is entitled to judgment
       as a matter of law.

       {¶11} Once the moving party satisfies its burden, the nonmoving party “may not

rest upon the mere allegations or denials of the party’s pleadings, but the party’s response,

by affidavit or as otherwise provided in this rule, must set forth specific facts showing

that there is a genuine issue for trial.” Civ.R. 56(D); Mootispaw v. Eckstein, 76 Ohio

St.3d 383, 385, 667 N.E.2d 1197 (1996). Doubts must be resolved in favor of the

nonmoving party. Murphy v. Reynoldsburg, 65 Ohio St.3d 356, 358-359, 604 N.E.2d

138 (1992).

                                     Statutory Priority

       {¶12} It is undisputed that the NovaStar mortgage was never recorded and the

Fremont mortgage was recorded in January 2007. R.C. 5301.23(A) governs the priority

of mortgages, providing in relevant part:

       All properly executed mortgages shall be recorded in the office of the
       county recorder of the county in which the mortgaged premises are situated
       and shall take effect at the time they are delivered to the recorder for
       record. If two or more mortgages pertaining to the same premises are
       presented for record on the same day, they shall take effect in the order of
       their presentation. The first mortgage presented shall be the first recorded,
       and the first mortgage recorded shall have preference.

(Emphasis added.)

       {¶13} The Ace Trust argues that the trial court erred in finding that the Fremont

mortgage was the best and first lien against the property over the unrecorded NovaStar

mortgage under R.C. 5301.23(A). It contends that R.C. 5301.25(A) should be applied

here as an exception to the general rule of R.C. 5301.23(A). R.C. 5301.25(A) states:
       All deeds, land contracts referred to in division (A)(21) of section 317.08 of
       the Revised Code, and instruments of writing properly executed for the
       conveyance or encumbrance of lands, tenements, or hereditaments, other
       than as provided in division (C) of this section and section 5301.23 of the
       Revised Code, shall be recorded in the office of the county recorder of the
       county in which the premises are situated. Until so recorded or filed for
       record, they are fraudulent insofar as they relate to a subsequent bona fide
       purchaser having, at the time of purchase, no knowledge of the existence of
       that former deed, land contract, or instrument.

(Emphasis added.)

       {¶14} The Ace Trust argues that the magistrate “incorrectly emphasized the

application of [R.C.] 5301.23 over 5301.25 and merely glossed over whether Fremont, the

Ellington Trust’s predecessor, had actual constructive knowledge or notice of the

NovaStar mortgage.”

       {¶15} R.C. 5301.25, however, is not relevant to a determination of lien priority

under these facts and any notice or knowledge on the part of Fremont of the unrecorded

NovaStar mortgage, is immaterial because “[u]nder Ohio law, a mortgage becomes

operative as to third parties only upon its recording.” GMAC Mtge. Corp. v. McElroy,

5th Dist. Stark No. 2004-CA-00380, 2005-Ohio-2837, ¶ 13, citing Sidle v. Maxwell, 4

Ohio St. 236 (1854). See also R.C. 5301.23 (“All properly executed mortgages * * *

shall take effect at the time they are delivered to the recorder for record.”).

       {¶16} “In Ohio, equitable mortgage liens * * * are limited in application to the

parties involved in the transaction when a recording statute otherwise mandates that the

mortgage be recorded before it takes effect.” Stubbins v. Wells Fargo Bank, N.A. (In re

Gibson), 395 B.R. 49, 57 (Bankr.S.D.Ohio 2008). The unrecorded NovaStar mortgage is
therefore only operative between the parties to the mortgage, the Ace Trust, as assignee of

NovaStar, and the Wards.

       {¶17} The Ace Trust correctly asserts that Ohio courts, including this court, have

held that R.C. 5301.25 applies to mortgages, but confuses the statutory language and

relevant case law in asking us to apply R.C. 5301.25 to the facts of the instant case. In

support of the proposition that these statutes should be “construed in tandem, not

separately,” the Ace Trust cites to Rhiel v. Huntington Natl. Bank (In re Phalen), 445

B.R. 830 (Bankr.S.D.Ohio 2011). In Rhiel, the United States Bankruptcy Court for the

Southern District of Ohio explained the relationship of R.C. 5301.23 and 5301.25(A) as

applied to mortgages:

       Rather than reading [R.C.] 5301.23 as excluding mortgages from [R.C.]
       5301.25(A), the language in the text stating “other than as provided in * * *
       [R.C.] 5301.23 of the Revised Code” provides a rule for determining the
       priority of properly executed mortgages against one another (with the
       first-recorded properly executed mortgage having priority), whereas [R.C.]
       5301.25(A) applies in the context of a priority dispute between the holder of
       a mortgage and a subsequent bona fide purchaser.

(Emphasis added.) Id. at 862-863.

     {¶18}    In support of its argument that R.C. 5301.25 applies here, the Ace Trust

attempts to rely on our holding in Acacia on the Green Condo. Assn. v. Jefferson,

2016-Ohio-386, 47 N.E.3d 207 (8th Dist.). In Jefferson, we applied R.C. 5301.25 to a

mortgage lien priority dispute in finding that a subsequent mortgagee had actual notice of

a prior lien created by a properly filed and executed mortgage that lacked a land

description. Id. at ¶ 26. Jefferson is distinguishable from the instant case because both
mortgages involved in the priority dispute in Jefferson had been recorded. Id. at ¶ 15.

R.C. 5301.25 cannot apply here because, as we discuss above, an unrecorded mortgage is

ineffectual as to third parties under Ohio law.         See Holliday v. Franklin Bank of

Columbus, 16 Ohio 533 (1847); Stubbins; McElroy, 5th Dist. Stark No. 2004-CA-00380,

2005-Ohio-2837.

       {¶19} Accordingly, R.C. 5301.25 is not applicable to the instant case, and the

magistrate properly held that the “first in time” Fremont mortgage has priority over the

unrecorded NovaStar mortgage.

                                   Equitable Subrogation

       {¶20} The Ace Trust further argues that the magistrate erred in denying its claim

of equitable subrogation by imputing the negligence of Unisource, the closing agent, to

NovaStar “despite the absence of any evidence demonstrating that Unisource was

NovaStar’s agent.” The doctrine of equitable subrogation cannot apply here because the

unrecorded NovaStar mortgage is ineffectual as to third parties in both law and equity.

Holliday at 536-37.      “Unrecorded instruments are good and effectual between the

parties[,] but entirely nugatory as to third parties, both at law and in equity, until they are

recorded.” (Emphasis sic.) Stubbins at 58, citing Fosdick v. Barr, 3 Ohio St. 471, 475

(1854).

       {¶21} The Ohio Supreme Court addressed the doctrine of equitable subrogation in

State v. Jones, 61 Ohio St.2d 99, 399 N.E.2d 1215 (1980), noting that:

“[E]quity in the granting of relief by subrogation is largely concerned with * * * the
prevention of frauds and relief against mistakes, and it is correctly stated that the right to
it depends upon the facts and circumstances of each particular case.”

Id. at 102, quoting Canton Morris Plan Bank v. Most, 44 Ohio App. 180, 184 N.E. 765

(5th Dist.1932).     The Jones court further explained that “[i]n order to entitle one to

subrogation, his equity must be strong and his case clear.”       (Emphasis added.) Id.,

citing Harshman v. Harshman, 35 Ohio Law Abs. 633, 42 N.E.2d 447 (2d Dist.1941).

      {¶22} Equitable subrogation will not be used to benefit parties who were negligent

in their business transactions and who were obviously in the best position to protect their

own interests.     Keybank Natl. Assn. v. Adams, 10th Dist. Franklin No. 02AP-1293,

2003-Ohio-6651, ¶ 20.

       {¶23} NovaStar was in the best position to protect its own interest. The general

closing instructions that NovaStar issued to Unisource provided that Unisource was to

“return certified copies of those documents that are to be recorded [to NovaStar]. Failure

to comply with these instructions may delay funding.” The record reflects that NovaStar

authorized Unisource to distribute the loan proceeds when it was fully aware that the

warranty deed and its mortgage had not yet been recorded — NovaStar had not received

certified copies of these documents prior to the disbursement date. As time passed,

NovaStar failed to take any action when it still had not received recorded copies of the

warranty deed and its mortgage despite knowing to expect recorded copies.

       {¶24} Moreover, the Ace Trust asserted valid legal claims and obtained a default

judgment against Unisource, negating its need for equitable subrogation.         See ABN

AMRO Mtge. Group, Inc. v. Kangah, 126 Ohio St.3d 425, 2010-Ohio-3779, 934 N.E.2d
924, ¶ 14 (“If the title insurance company was negligent, [the lender] may have a claim

against it for its loss, negating its need for equitable subrogation.”).

       {¶25} As a matter of law, the unrecorded NovaStar mortgage is not effectual as to

the Ellington Trust.      We therefore find that the Ace Trust’s claim for equitable

subrogation fails as a matter of law.

       {¶26} Based on the foregoing, we find that no genuine issue of material fact exists

and the Fremont mortgage is the first and best lien on the property. Therefore, the trial

court did not err in adopting the magistrate’s decision granting summary judgment in

favor of the Ellington Trust as assignee of Fremont.

       {¶27} Accordingly, we overrule all four assignments of error.

       {¶28} Judgment affirmed.

       It is ordered that appellee recover of appellant costs herein taxed.

       The court finds there were reasonable grounds for this appeal.

       It is ordered that a special mandate issue out of this court directing the common

pleas court to carry this judgment into execution.

       A certified copy of this entry shall constitute the mandate pursuant to Rule 27 of

the Rules of Appellate Procedure.




MARY EILEEN KILBANE, PRESIDING JUDGE
SEAN C. GALLAGHER, J., and
ANITA LASTER MAYS, J., CONCUR
