A junior lien jumps to first after a refi misstep – see how Capital Bank fought back

Capital Bank’s win in a Washington, DC lien‑priority fight offers insight into how courts may treat refinances where recording and title steps go wrong.

In April 2017, Matthew Edward Shkor bought 1738 R Street, N.W., Washington, DC, and borrowed $4,050,000 from Capital Bank, N.A., secured by a first-position deed of trust recorded on May 1, 2017. A month later, he borrowed $1,262,500 from Cornerstone Capital, LLC, secured by a second-position deed of trust recorded on June 23, 2017.

In early 2018, Shkor sought to refinance his Capital Bank loan. Capital Bank retained Standard Title Group, LLC as the settlement agent. Standard Title requested an ALTA Commitment for Title Insurance from Old Republic National Title Insurance Company. The commitment required that Cornerstone’s lien on the property be satisfied and/or released before closing, and Standard Title was responsible for making sure that happened.

Standard Title did not obtain a written release from Cornerstone. Its agent, Kevin Anderson, claimed that Cornerstone co‑manager Mark Schuman orally agreed to release the lien. Schuman denied that, and the bankruptcy court credited his testimony. Shkor also emailed Schuman, asking to complete the Capital Bank refinance with 100% of the proceeds paying down Cornerstone’s line and saying Cornerstone would still be significantly secured and its line reduced by $400,000. Cornerstone did not accept this proposal.

Despite the absence of a release, Standard Title allowed the refinancing to proceed without telling Capital Bank that Cornerstone’s lien remained. Capital Bank did not independently verify the release. It believed it retained first position based on the title commitment and the title insurance policy issued after closing, which did not list Cornerstone’s lien as an exception.

After the refinance, Capital Bank’s loan became a $2,000,000 home equity line of credit, secured by a deed of trust recorded on April 24, 2018. The new loan paid off the outstanding balance of the original Capital Bank loan, and the original lien was released. The transaction produced $394,948.58 in net proceeds, which were assigned to Cornerstone, reducing Cornerstone’s loan balance to $408,884.89. Cornerstone’s lien, however, remained of record. Because its deed of trust predated the deed securing the refinanced Capital Bank loan, District of Columbia land records showed Cornerstone’s lien in first position.

Relying on that apparent first position, Cornerstone made additional loans to Shkor totaling $1,756,000, bringing the total he owed Cornerstone to $2,193,882.88. In December 2020, Cornerstone began foreclosure proceedings on the property. That prompted Capital Bank to discover that Cornerstone’s lien had never been released.

Capital Bank sued in DC Superior Court and sought a temporary restraining order to halt the foreclosure. After Shkor filed for bankruptcy, the case was removed to the United States Bankruptcy Court for the District of Columbia. Capital Bank then pursued a declaratory judgment on lien priority.

On cross‑motions for summary judgment, the bankruptcy court addressed whether District of Columbia law would recognize the equitable doctrine of replacement of mortgages. Drawing on the Restatement (Third) of Property: Mortgages and DC precedent on equitable subrogation, the court concluded that DC courts would adopt that doctrine. It provides that when a senior mortgage is released and, as part of the same transaction, replaced with a new mortgage by the same lender, the new mortgage can keep the original priority unless changes in terms materially prejudice a junior interest.