Opinion ID: 2547975
Heading Depth: 1
Heading Rank: 2

Heading: Commonwealth v. Central Bank of Jeff, Co., Inc., et al.

Text: This case arises out of the refinancing of a mortgage. On or about August 17, 1998, Shannon and Steve Foster executed a promissory note and mortgage in favor of Commonwealth Bank 85 Trust Company (CB & T) as security for the purchase of the subject property (the Foster Property). Almost three years later, the Commonwealth of Kentucky's Department of Revenue (the Commonwealth) filed a tax lien against Steve Foster in the Jefferson County Clerk's Office, pursuant to KRS 134.420(2), on or about July 11, 2001. On or about July 26, 2001, the Fosters executed a promissory note (Note I) in the amount of $116,250.00 in favor of Central Bank of Jefferson County, Inc. f/k/a First Bank, Inc. (Central Bank). Note I was secured by a Mortgage (Mortgage I) on the Property, which was recorded on August 17, 2001 in the Jefferson County Clerk's Office. CB & T's mortgage was released on August 20, 2001. According to Central Bank, the Fosters used $110,738.48 of the proceeds from Note I to satisfy a mortgage on the Property held by CB & T. The Fosters also used $5,704.03 of the proceeds to extinguish certain ad valorem tax liens on the Property consisting of: (1) a 1998 delinquent tax bill in the amount of $1,771.14; (2) a delinquent tax lien for the City of Louisville in the amount of $323.21; and (3) a delinquent tax lien from 1999 and 2000 in the amount of $3,609.68. No proceeds were used to pay the Commonwealth's KRS 134.420(2) lien against the Foster property. On or about July 26, 2001, the Fosters also executed and delivered a second note to Central Bank evidencing a $15,000.00 revolving line of credit (Note II). Note II was secured by a mortgage (Mortgage II) on the Property and was recorded on August 17, 2001 in the Jefferson County Clerk's Office. According to the Settlement Statement, proceeds were used to satisfy closing costs, title insurance, prepaid taxes and hazard insurance. Additionally, the proceeds of Note II were used to satisfy the Fosters' debts to various credit card companies. On September 6, 2001, the Commonwealth filed a tax lien against Shannon Foster in the Jefferson County Clerk's Office. On January 12, 2006, Central Bank initiated a foreclosure action against the Foster Property in Jefferson Circuit Court. Central Bank moved for summary judgment, arguing that the Mortgage I lien should be granted priority over all other liens on the property because the proceeds were used to extinguish CB & T's purchase money mortgage and the ad valorem tax liens filed against the Fosters. On June 19, 2006, the Jefferson County Master Commissioner issued his recommendation and finding that Mortgage I would be granted priority to the extent the proceeds were used to satisfy the purchase money mortgage and the ad valorem tax liens. The Master Commissioner based his findings on the doctrine of equitable subrogation. Both parties filed exceptions to the Master Commissioner's report. Notably, the Commonwealth argued that KRS 134.420 granted liens created pursuant to that section a super priority and that the doctrine of equitable subrogation was no longer viable under Kentucky law. The Master Commissioner issued a new report on August 28, 2006 recommending denial of the exceptions. Thereafter, on November 30, 2006, the Jefferson Circuit Court entered a judgment and order of sale granting Central Bank's Mortgage I and II liens priority over the other liens. The Commonwealth appealed the Jefferson Circuit Court's ruling. The Kentucky Court of Appeals resolved that the Jefferson Circuit Court had erred in reordering the priorities and reversed the judgment.