The Supreme Court of South Carolina recently held that a lienholder’s ability to obtain equitable subordination of a prior mortgage was not precluded by its agent’s knowledge that the prior mortgage had not been satisfied.

In the case, a bank paid off a first mortgage on the borrower’s property, believing that it had put itself in first lien position. The borrower’s principal, however, held a prior second mortgage on the property that the bank’s agent—who also represented the borrower in the transaction—neglected to have satisfied. The bank did not discover this title defect until the borrower defaulted and the bank began foreclosure proceedings.

The master in the foreclosure proceeding corrected the error by equitably subordinating the borrower’s principal’s prior second mortgage to the bank’s first mortgage. The intermediate appellate court reversed, reasoning that the agent’s actual knowledge of the prior second mortgage constituted actual knowledge on the part of the bank, defeating the bank’s claim for equitable subordination.

The South Carolina Supreme Court granted certiorari, and then reversed the intermediate appellate court and reinstated the foreclosure master’s judgment. The Supreme Court reasoned that, under state law, a principal has only constructive—not actual—knowledge of material facts about which the principal’s agent receives notice. The principal’s constructive knowledge of a prior mortgage, the Supreme Court continued, does not defeat a claim for equitable subrogation under state law.