MEMORANDUM OF DECISION

DUNCAN W. KEIR, Bankruptcy Judge.

Before the court is the adversary proceeding by the plaintiff Chapter 7 Trustee (the "Trustee") against the two entities, Citi Mortgage, Inc. ("CitiMortgage") and Citi Bank, NA ("CitiBank") holding secured claims against the proceeds of the sale of Debtors' residential property (the "Property"). The Trustee's Amended Complaint seeks avoidance of CitiMortgage's lien in the Property and a determination of CitiBank's lien priority. The court held a trial on October 14, 2009, at which it made a preliminary finding that the deed of trust recorded by CitiMortgage shortly before the bankruptcy case was filed was avoidable as a preference pursuant to Section 547 of the Bankruptcy Code. The court left open the determination of whether CitiMortgage was entitled to invoke the doctrine of equitable subrogation to defeat the Trustee's ability to distribute the liquidated proceeds of the Property pro rata to all unsecured creditors. The parties filed post-trial briefs on the applicability of equitable subrogation.

The transactional facts relied upon by the Trustee at trial have never been the subject of dispute.1 The Debtors acquired their residence in February 1993. In August 2004, in connection with a refinance of their then-existing home loan, they executed a promissory note, secured by a deed of trust in favor of Principal Residential Mortgage, Inc. ("Principal"). Principal was merged into CitiMortgage in December 2004. At that time, CitiMortgage acquired the note and deed of trust that existed in favor of Principal (the "Principal Note" and the "Principal Deed of Trust").

On April 19, 2005, Debtors took out a home equity line of credit with CitiBank in the principal sum of $40,000 (the "Home Equity Loan"). CitiBank recorded the deed of trust in connection with the Home Equity Loan in the land records on May 3, 2005. The Debtors modified the Home Equity Loan on February 27, 2006 with an increase to $57,000 and the modification agreement was filed in the land records on April 4, 2006.

Thereafter, on February 11, 2008, Debtors refinanced the Principal Note and Deed of Trust. CitiMortgage was the lender.2 CitiMortgage filed a Certificate of Satisfaction in the land records on March 20, 2008 providing that the Principal Note had been satisfied and deed of trust released. CitiMortgage then filed the new deed of trust in the land records on April 11, 2008 (the "Refinanced Deed of Trust"). The Debtors filed this bankruptcy case on June 9, 2008, which date was 119 days after the promissory note to CitiMortgage was signed and 59 days after recordation of the Refinanced Deed of Trust.

Since the filing of the bankruptcy case, the Trustee (with the consent of Debtors, CitiMortgage and CitiBank) sold the Property and is holding in his trust account the $165,789.63 proceeds of the sale pending the resolution of this adversary proceeding.3

By this adversary proceeding, the Trustee is seeking to avoid the lien of CitiMortgage under the Refinance Deed of Trust, which would cause CitiBank to hold the first and only secured lien on the sale proceeds. The proceeds exceeding the value of CitiBank's secured claim would then be distributed to allowed priority and general unsecured creditors in accordance with the priority scheme of the Bankruptcy Code. See 11 U.S.C. § 507.

The Amended Complaint seeks avoidance under alternative theories. Count I alleges that the avoidance of CitiMortgage's lien is proper pursuant to the trustee's "strong arm" powers of Section 544 of the Bankruptcy Code.4 Count II requests avoidance of the lien as a preferential transfer. Count III is brought for recovery of property pursuant to Section 550 whereby the Trustee seeks to require CitiMortgage to turnover the value of the lien ($150,000 plus interest, according to the Trustee) to the estate.5 Count IV seeks declaratory relief establishing the validity, priority and extent of liens against the Property.

As previously stated, at the conclusion of the trial, the court made a preliminary finding in favor of the Trustee on Count II, stating that CitiMortgage's recordation of its lien on April 11, 2008 constituted a preferential transfer as intended by Section 547. A preferential transfer is defined in the Bankruptcy Code as follows:

11 U.S.C. § 547(b). The court concluded, based upon the facts presented, that the recordation of the deed of trust creating the lien to secure the refinancing of the original note, was a transfer to or for the benefit of a creditor ((b)(1)) and on account of an antecedent debt (as the recordation occurred more than 30 days after the money was advanced to pay off the original note)((b)(2)).6 CitiMortgage did not dispute or introduce evidence to rebut the presumption that the Debtors were insolvent at the time of the transfer ((b)(3)) and it was demonstrated that the recordation occurred within 90 days prior to the petition date ((b)(4)). Finally, the evidence demonstrated that the transfer allowed CitiMortgage to receive more than it would receive as a distribution than if the estate were liquidated and CitiMortgage shared in the proceeds as an unsecured creditor ((b)(5)).

In light of the court's finding that the recordation of CitiMortgage's Refinanced Deed of Trust constituted a preferential transfer, the court must determine whether such transfer is avoidable pursuant to Section 547(b). While there exist statutory exceptions7 to the ability of a trustee to avoid a preferential transfer, none of those apply herein. By perfecting its lien in the Property more than 30 days after the note was signed and the loan was made to Debtors, CitiMortgage is unable to avail itself of the "enabling loan"8 exception to avoidance specifically provided to exempt from avoidance real estate transactions merely because of the routine lapse in time between the execution of the note and the deed of trust and the recordation of that deed of trust.

CitiMortgage asserts that notwithstanding the Trustee's entitlement to avoid the preferential transfer and remove CitiMortgage's lien from the proceeds of the Property, the doctrine of equitable subrogation should be applied and it should be awarded the proceeds of the sale of the Property to the extent of its outstanding balance on the Refinanced Note. Equitable subrogation would place CitiMortgage in the lien priority position it held prior to the refinancing of the Principal Note. The Trustee opposes the defense of equitable subrogation and avers that its application to the instant facts is improper because (1) the doctrine cannot be invoked where the refinancing party is the same party who held the original deed of trust, (2) that equitable subrogation is inapposite where the prior lien was released prior to recordation of the subsequent lien; or (3) that there is no evidence that CitiMortgage intended to maintain its priority at the closing of the refinance. The Trustee does not provide evidence of harm visited upon other creditors of the estate by application of equitable subrogation, but merely seeks to take advantage of the rights provided by Section 547.

The doctrine of equitable subrogation is an established principle in Maryland jurisprudence and applicable in a bankruptcy case.9 "That doctrine was declared by this court [in earlier caselaw] to be a peculiar feature of equity not founded on contract but having its origin in a sense of natural justice." Wallace v. Jones, 110 Md. 143, 72 A. 769, 769-70 (1909). "`So soon as a surety pays the debt of a principal debtor, equity subrogates him to the place of the creditor and gives him every right, lien, and security to which the creditor could have resorted for the payment of his debt.'" Id. at 770 (citing Orem v. Wrightson, 51 Md. 34, 34 Am. Rep. 286 (1879)).

The general parameters of equitable subrogation are set forth in one treatise as follows:

73 Am.Jur.2d, Subrogation § 5 (2001).

Equitable subrogation has often been applied in cases in which lenders have refinanced mortgages. In such cases, the court applies equitable subrogation under its equity power to correct technical document errors to honor evidence of a lender's intent to refinance a loan while equitably subrogated to the original loan date; and importantly because intervening creditors had notice of the earlier loan, and so are not prejudiced by equitable subrogation, but otherwise would be unjustly enriched. See, e.g., Bennett v. Westfall, 186 Md. 148, 152, 46 A.2d 358, 360 (1946)(mortgagee who released prior mortgage on property and thereafter recorded a new mortgage under mistake of fact that there was no mortgagee subsequent in priority to the first, was entitled to be subrogated to the date of recordation of his original mortgage). In short, subrogation "is designed to promote and to accomplish justice, and is the mode which equity adopts to compel the ultimate payment of a debt by one, who injustice, equity and good conscience, should pay it. It is an appropriate means of preventing unjust enrichment." Hill v. Cross Country Settlements, 402 Md. 281, 312, 936 A.2d 343, 362 (2007) (citations omitted). Accordingly, the Bankruptcy Court, as a court of equity, favors the liberal application of such principle where the facts support it and such application causes no harm to an intervening creditor.10

In the instant case, the court must decide whether CitiMortgage should be, by equitable subrogation, placed in the position it held prior to the refinance transaction. Were CitiMortgage to have timely recorded its Refinanced Deed of Trust in the land records within 30 days of the execution of the note and deed of trust or done so in addition to documenting the transaction in accordance with MD.CODE ANN. REAL PROP. § 7-111, it would not be subject to preference avoidance. Trustee herein alludes to CitiMortgage's failure to avail itself of this opportunity to timely perfect its lien as grounds for defeating equitable subrogation. This insinuation, of course, is inaccurate because if CitiMortgage had timely recorded its lien, there would be no preference and no need for CitiMortgage to be raising the defense. Clearly, equitable subrogation was intended to bridge the gap when negligence or mistake of the party seeking subrogation prevents their rights from being otherwise asserted.

The Trustee's post-trial brief primarily focuses on three points raised in opposition to equitable subrogation. The first theory is that where the lender in the refinance transaction is the same entity as the existing deed of trust holder, equitable subrogation is unavailable. In support of this argument, the Trustee first cites to G.E. Capital Mortgage Services, Inc. v. Levenson, 338 Md. 227, 657 A.2d 1170 (1995). In G.E. Capital, the issue arose after foreclosure of real property where the holder of judgment liens sought a declaration that the judgment liens held priority over the lien created during the refinancing of the property and the interest held by the purchaser at foreclosure on the refinanced deed of trust. The Court held that equitable subrogation would operate to protect the refinancing lender in the refinance transaction where it was unaware of judgment liens that had attached to the borrower's real property after the first mortgage was recorded and prior to the refinance transaction (during which the new lender was unaware of the judgment liens).11 Therefore, the purchasing party (which was the same entity as the refinancing lender) held those same rights and would hold the priority lien on the property with the other junior liens having been extinguished at foreclosure.

The Trustee contends that the body of law on equitable subrogation and the Maryland Court of Appeals' discussion and application of the equitable subrogation in G.E. Capital limits the doctrine of equitable subrogation in refinancing transactions to the instances where the refinancing lender is a distinct entity from the original noteholder. The Trustee directs this court to specific paragraphs in G.E. Capital such as the following wherein the Court of Appeals wrote: "The great majority of case law holds that one who pays the mortgage of another and takes a new mortgage as security will be subrogated to the rights of the first mortgage as against any intervening lienholder." Id. at 237-38, 657 A.2d at 1175 (emphasis added). The Trustee then argues, without support, that the reason the doctrine is so limited is because a party refinancing its own note is less in need of protection than a third party. Trustee writes: "[H]ad CitiMortgage not filed its termination, it would have maintained its original lien position. In doing so, it may not have exercised its control to its benefit, but there is no dispute that it exercised control. The fact that it possessed such control demonstrates why it did not need the protection of the doctrine of equitable subrogation." Trustee's Post Trial Brief, at p. 6.

The Court disagrees with the Trustee's argument. Equitable subrogation was not intended to apply only to parties who are injured by another entities' error or omission, or themselves without negligence. See e.g., Finance Co. of America v. U.S. Fidelity & Guaranty Co., 277 Md. 177, 180-87, 353 A.2d 249, 250-255 (holding that a bonding company that pays for completion of a contract because the contractor defaults, under the doctrine of equitable subrogation stands in the contractors' place as of the date of the contract notwithstanding that a bonding company did or did not conform to UCC requirements). These statements that exist in various Maryland cases wherein a reference is made to the subrogor being a different entity than the subrogee are all cases in which those parties were separate entities and therefore the courts were not addressing the issue in the same framework. The language should be interpreted as being inclusive—that a transaction between unrelated parties can lead to application of equitable subrogation—rather than exclusive—that a single entity is excluded from invoking the equitable remedy. Such reading of the law is consistent with findings of justice and fairness that led to the development of the doctrine. See Bennett v. Westfall, 186 Md. at 148, 46 A.2d at 358 (the party seeking subrogation was the same party as held the original lien).12

The court next turns to the Trustee's argument as to whether the filing by CitiMortgage of the certificate of satisfaction in the land records prior to the recordation of the new lien defeats its entitlement to equitable subrogation. The Trustee argues that it does because CitiMortgage cannot step into its own shoes if it has already released the lien to which it seeks to be subrogated in priority.

This issue was recently addressed in a memorandum issued by this Court (Catliota, J.) Taylor v. Furnace Assocs., Inc., et al (In re Taylor), 2008 WL 4225761 (Bankr.D.Md.). To the argument that equitable subrogation should be denied because of the gap in time between the release of the first lien and the recordation of the refinancing lien, the Court responded: "It is clear, however, that in Maryland equitable subrogation occurs at the time when the second mortgagee pays off the first lien.... The definition does not require that the new lien must be filed before the prior lien is released." Id. at *8 (citing G.E. Capital, 657 A.2d at 1175).

The case of Rinn v. First Union Nat'l Bank of Maryland, 176 B.R. 401 (D.Md. 1995) case is instructive on this point as well, not only because of the lengthy analysis it gives to the evolution of the doctrine in Maryland, but because the Court focused on the concept of when equitable subrogation arises and the intent of the parties at the time of the transaction which created the right.

In Rinn, the United States District Court faced the issue on appeal from the bankruptcy court which had granted equitable subrogation to the bank. The bank did not achieve perfection of its lien on debtors' inventory and receivables until a period within 90 days prior to the filing of the petition. The bank sought to be equitably subrogated and to step into the shoes of the prior lender which had held a properly perfected interest in the assets prior to the refinance. The bank had a letter of intent from the borrowers stating that it would be granted a first priority security interest in the security and receivables, but the proper documents had not been timely executed prior to the filing of the bankruptcy cases. The District Court affirmed the bankruptcy court in finding that the bank was entitled to subrogation based on the parties' agreement that it would hold a first priority perfected interest in the assets and that the trustee had failed to establish such gross negligence or intervening equities that would prevent such application.

Equitable subrogation is intended to permit the lender to occupy the same lien position as the one that secured the satisfied obligation. The court should focus on the transaction and intent of the parties at the time of the transaction and then whether allowing equitable subrogation to overcome the deficiencies in the subsequent performance would cause harm to other parties with rights in the property in question.13 Provided that no other creditors' interests were prejudiced by the errors, the Certificate of Satisfaction filed 22 days prior to recordation of the Refinanced Deed of Trust is the precise type of negligence which equitable subrogation is intended to remedy, and does not defeat equitable subrogation. CitiMortgage is not requesting to be subrogated to the position it held after the second loan and prior to the recordation of the refinanced deed of trust. It is requesting to be equitably subrogated to the position it held immediately prior to payment of its first note. The transactional fact of the filing of the Certificate of Satisfaction which occurred after that point in time is inconsequential to this analysis unless there had been another party who had relied on that release to its detriment.

Finally, the Trustee avers that CitiMortgage did not intend the refinance transaction as a modification or assignment of the original note, and as such cannot avail itself of an equitable subrogation argument. Essentially this is another version of the Trustee's second argument regarding the significance of the Certificate of Satisfaction, with a new point that the release was not a mistake, but intended because Citi Mortgage never intended to hold a first position deed of trust after the refinance. The Trustee argues that if it had, it would have done so by availing itself of the provisions of the Maryland Code which provide for assignment or modification of a note. The Trustee focuses on a discussion of earlier cases set forth in the opinion in Rinn and from that states that "the principle gleaned from the Rinn opinion is that equitable subrogation will not protect a refinancing lender from third parties that perfect security in the collateral during the time subsequent to the release of the original lender's security and before the refinancing lender perfects."

Despite the Trustee's averment that applying equitable subrogation "when CitiMortgage has been thwarted by its own actions is in no way equitable,"14 the caselaw is well supported that negligence of a party is in no way a prohibition to application of equitable subrogation. Indeed in the Rinn decision, the Court is clear that only "gross or `inexcusable' negligence" will rise to the level of defeating the right to equitable subrogation where the act does not prejudice another person. Id. at 411.

After factual analysis, the equities here lie with CitiMortgage and not with the Trustee. CitiMortgage is entitled to equitable subrogation and therefore for purposes of determining right to proceeds of the Sale of Property, the date of recordation of the Refinanced Deed of Trust will be considered to be that of the Principal Loan. CitiBank was aware that its lien securing the Home Equity Loan was subordinate to the deed of trust securing the primary mortgage deed of trust and the filing of the Certificate of Satisfaction and subsequent recordation of the Refinanced Deed of Trust did not worsen CitiBank's position with respect to its security interest.

Furthermore, the avoidance of the preferential transfer under Sections 547 and 550 to the extent the lien is avoided, does not erase the original recordation and the notice it provided to other creditors. The court rejects any argument that because avoidance of the preferential transfer, CitiMortgage would hold an unrecorded lien which the Trustee is entitled to avoid under the strong-arm powers of Section 544 which essentially serve to cut off unperfected liens and security interests at the time of the bankruptcy petition. The existence of CitiMortgage's interest in the Property would still be apparent from the land records despite avoidance and therefore provides notice15 sufficient to defeat the right to avoid arising under Section 544.16

Upon a determination that a creditor situated as is CitiMortgage in this case, is entitled to equitable subrogation, some courts have expressed the outcome as a denial of avoidance of the refinanced security interest. See Rinn, 176 B.R. at 416. Where, as in the case now before this court, the Refinanced Deed of Trust sought to be avoided did not exceed in amount the lien debt to which CitiMortgage is equitably subrogated, that is maybe a correct analytical result. Due to the equitable subrogation, CitiMortgage holds the first priority lien in the Property proceeds and the preferential Refinanced Deed of Trust did not enable CitiMortgage to receive more than would have been received in a hypothetical chapter 7 in which the refinanced transfer had not been made. 11 U.S.C. § 547(b)(5).

Another theoretical construct leading to the same practical result in this case would be to hold that the Refinanced Deed of Trust is avoided, but CitiMortgage holds the rights of the Principal Deed of Trust to which it is equitably subrogated. Perhaps the latter explanation would be the better theoretical construct if the refinance loan exceeded the amount owed under the Principal Note and Deed of Trust to which CitiMortgage is subrogated. In that instance, CitiMortgage would only have the interest of the Principal Deed of Trust and would lose the deed of trust lien under the avoided Refinanced Deed of Trust that was for a larger amount of debt.

Upon finding that Defendant CitiMortgage is equitably subrogated to the original lien under the Refinanced Deed of Trust, employing either theoretical approach, the Trustee's demands in the Amended Complaint to receive a turnover from CitiMortgage are denied. Further as to the Trustee's prayer in Count IV of the Amended Complaint seeking declaratory judgment, the Court declares that CitiMortgage holds the first priority lien upon the proceeds of the sale, subject to the subordination agreement it has consensually made as to the Home Equity Loan, and that the estate holds a title to the proceeds subordinate to the liens imposed by the original Principal Deed of Trust and the lien securing the Home Equity Loan.

The court will enter an order in conformity with this Memorandum.