Southeastern Commercial Finance, LLC v. First Community Bank of America (In re United Tile & Stone, Inc.)

Summarized by Robert Peters , B/E Aerospace, Inc.
14 years 2 months ago

Citation:

Case No. 11-12021 (11th Cir., Dec. 30, 2011)

Tag(s):

Ruling:

The Eleventh Circuit Court of Appeals affirmed the District Court's judgment affirming the Bankruptcy Court's holding that Southeastern Commercial Finance LLC's ("Southeastern") mortgage interests in United Tile & Stone, Inc.'s ("Debtor") property, which Southeastern purchased from Dominion Business Finance LLC ("Dominion"), were junior to First Community Bank of America's ("First Community") mortgage interests in Debtor's property, notwithstanding the existence of a subordination agreement by and between Dominion and First Community expressly providing for complete subordination of all of First Community's liens in Debtor's property, including any mortgages on Debtor's real estate, to Dominion's liens in Debtor's property. After reviewing de novo the District Court's decision to affirm the Bankruptcy Court, the Eleventh Circuit concluded that substantial evidence existed to support the Bankruptcy Court's findings that (1) Dominion and First Community made a mutual mistake in their subordination agreement by providing for complete subordination of all of First Community's liens in Debtor's property, rather than subordinating only First Community's lien in Debtor's personal property and (2) Southeastern was not a bona fide purchaser without notice because Southeastern had "implied actual notice" of the mutual mistake.

Procedural context:

The United States Bankruptcy Court for the Middle District of Florida ruled that Southeastern's mortgage interests were junior to First Community's mortgage interests in Debtor's property. Southeastern and Dominion appealed to the District Court, which affirmed the Bankruptcy Court's decision. Southeastern then appealed to the Eleventh Circuit, which affirmed the District Court's ruling.

Facts:

In November 2006, Dominion provided Debtor a $600,000 line of credit, secured by a lien on Debtor's personal property as well as a mortgage on certain of Debtor's real property. In connection therewith, Dominion entered into a subordination agreement with First Community, which held a first-position lien on Debtor's personal property and first-position mortgage on Debtor's real property securing Dominion's loan, whereby First Community agreed to "complete subordination" of all of First Community's then- or thereafter-existing liens on Debtor's property, including any mortgages on Debtor's real property, to any liens held by Dominion on Debtor's property. In May 2008, Dominion sold a portfolio of loans to Southeastern, which included Debtor's loan. In October 2008, First Community sued Southeastern, Dominion and Debtor in Florida state court seeking, among other things, reformation of the Dominion-First Community subordination agreement to reflect that the parties made a mutual mistake by providing for complete subordination rather than subordinating only First Community's lien on Debtor's personal property. Debtor subsequently filed for chapter 11 relief and the Bankruptcy Court removed the state court litigation and docketed it as an adversary proceeding. After holding a trial, the Bankruptcy Court found that (1) Dominion and First Community made a mutual mistake in their subordination agreement by providing for complete subordination of all of First Community's liens and mortgage interests in Debtor's property and (2) Southeastern was not a bona fide purchaser without notice because Southeastern had "implied actual notice" of the mutual mistake. Accordingly, the Bankruptcy Court entered an order reforming the subordination agreement to reflect that First Community retained a first-position mortgage on Debtor's real property, which also secured Dominion's loan to Debtor. On appeal, the District Court held that substantial evidence existed to support the Bankruptcy Court's ruling and affirmed. The Eleventh Circuit affirmed the District Court's judgment and rejected Southeastern's contentions that (i) clear and convincing evidence did not establish that Dominion and First Community made a mutual mistake warranting reformation; (ii) First Community's gross negligence precluded reformation; and (iii) Southeastern was a bona fide purchaser without notice. The Eleventh Circuit emphasized Dominion and First Community's conduct before and after execution of the subordination agreement in support of it's holding. Specifically, the Eleventh Circuit noted that (A) discussions between Dominion and First Community, as well as documents prepared by the parties, prior to executing the subordination agreement indicated the parties did not intend to agree to complete subordination; (B) Southeastern's due diligence put Southeastern on notice of the mutual mistake; and (C) First Community's failure to review, or submit to counsel for review, the final subordination agreement prior to executing it did not amount to gross negligence because First Community reviewed prior drafts of the agreement, proposed revisions, and disagreed to complete subordination before executing the subordination agreement.

Judge(s):

Edmondson, Carnes and Fay (per curiam)

ABI Membership is required to access the full summary. Please Sign In using your ABI Member credentials. Not a Member yet? Join ABI now - it is absolutely worth it!