Stock Growers’ Finance Corp. v. Hildreth, 30 Ariz. 505, 249 P. 71 (1926).
This seems to be the earliest Arizona case mentioning equitable subrogation. It involved a chattel mortgage, not any real estate secured obligation.
Arizona Cattle Company had given a $100,000 promissory note to Overstreet Cattle Company secured by a chattel mortgage. Overstreet endorsed the note over to Stock Grower’s Finance. Part of the $100,000 borrowed had been used to repay an approximate $50,000 loan of Arizona Cattle to Gammill to release its chattel mortgage. Approximately $46,000 was released to Kingsbury who was an officer of Arizona Cattle Company as well as some local bank. Kingsbury apparently had presented some forged documents to obtain the loan, and although the note was renewed, it eventually was defaulted upon and a receiver was appointed for Arizona Cattle Company.
The case was to resolve a dispute about the chattel mortgage. The trial court ruled that the mortgage was not enforceable, leaving the assets of Arizona Cattle Company unsecured and available to pay general creditors. The Arizona Supreme Court reversed.
Although not verified as required, the appellate court stated that the mortgage was still valid as between the parties and that its recordation afforded the same notice to others as if it had been properly verified. (This seems to make proper verification irrelevant.) In dicta, the court noted that an alternative ground could have been used to support a contrary result by “a doctrine closely akin to equitable subrogation.” 30 Ariz. at 73, 249 P. at 513. The court noted that one of the purposes of the $100,000 loan to substitute for the prior Gammill loan. Id. at 74, 249 P. at 513. It appears that Stock Grower’s Finance prevailed on a form of bona fide purchaser for value doctrine as it had no notice of the defects in the mortgage verification and paid value for the endorsement of the note and mortgage.
Mosher v. Conway, 45 Ariz. 463, 46 P.2d 110 (1935).
This is the case most often cited for the origin of equitable subrogation recognition in Arizona. A similarly entitled opinion issued later from an appeal following the remand in this case.
Certain lots were charged with liens for improvements made by paving the adjacent streets (different liens for different year improvements). Mosher owned the lots and later defaulted on the bond payments for the improvements. Hughes obtained certificates of sale (subject to rights of redemption) upon the default of the first assessment. Fox similarly purchased at the sale upon the default of the second assessment and then paid the redemption price to Hughes. Mosher later paid to Fox the redemption price with respect to the second assessment lien sale, but without paying the amount Fox had paid Hughes to redeem upon the first sale. (There also appears to have been a third sale as to one of the lots for another paving lien; that lien purchaser was Skousen.) Fox assigned all of his rights to Conway.
Conway sued to have the lots sold to repay the amounts paid by Fox to redeem from the Hughes and Skousen sales. Conway claimed to be subrogated to the rights of Hughes and Skousen.
Subrogation is the substitution of another person in the place of a creditor, so that the person in whose favor it is exercised succeeds to the rights of the creditor in relation to the debt. It is a creature of equity, and was adopted from the Roman and not from the common law. Its purpose is the prevention of injustice and is the mode which equity adopts to compel the ultimate payment of a debt by one who in justice, equity, and good conscience ought to pay it. It rests upon the principle that substantial justice should be attained, regardless of form. . . . This remedy has been applied much more extensively in American than in English jurisprudence, and the modern tendency is to extend its use rather than to restrict it. . . . The general rule of equity which is probably most often invoked in cases of subrogation is that he who seeks equity must do equity, and subrogation can only be granted when an equitable result will be reached. It involves three elements: (1) A valuable right; (2) a person who owns the right; and (3) a person who seeks to be substituted in that ownership. There must exist a claim or obligation against the debtor; an original right to that claim on the part of him in whose place substitution is sought, and some right belonging to him who seeks the substitution which will be protected thereby. So when one, being himself a creditor, pays another creditor, whose claim is preferable to his, it is held that the person so paying is subrogated to the rights of the other creditor.
45 Ariz. at 468-69, 46 P.2d at 112 (emphasis added). Fox was held to be subrogated to the rights of Hughes and Skousen.
The general rule is that a person having an interest in property who pays off an encumbrance in order to protect his interest is subrogated to the rights and limitations of the person paid. . . . Upon the general principles of equity he should have every right to enforce his claim which the original party had, but upon the same principles he is not entitled to any new or additional rights. He merely steps into the shoes of the person to whose rights he is subrogated so far as a remedy is concerned. . . . When Hughes purchased the property at the first sale, the bonds issued against it for the assessment were extinguished, and the rights which he acquired by the purchase are clearly and explicitly set forth in subdivisions (f) and (i), paragraph 1973, supra. He acquired a lien upon the property which could only be divested by payment of the assessment and the penalties. But the statute gave him one and only one method of affirmatively enforcing such lien, being by an application for a deed in accordance with the terms of the statute, . . . .
Id. at 472-73, 46 P.2d at 114 (emphasis added).
Although Conway prevailed in the trial court, the supreme court reversed on appeal. The statutory procedure for enforcing the lien obtained by Hughes/Fox was to apply for a deed, not bring a lawsuit as if a foreclosure.
[T]he doctrine of subrogation taken in its most liberal sense cannot give any greater rights to the subrogee than are held by the person to whose rights he is subrogated. Since the only rights of Hughes and Skousen were to secure a deed to the property in question by complying with the statute, we think equity should intervene only so far as it may be necessary to establish plaintiff’s rights to the deed as the subrogee of the former. As the present action is based entirely on the theory that plaintiff was foreclosing a statutory lien in the ordinary manner provided for the foreclosure of general liens, and not on an attempt to secure a deed in the statutory manner, the court lacked jurisdiction to consider the case at all.
Id. at 474-75, 46 P.2d at 114-15 (emphasis added). So, notwithstanding the court’s recognition of Conway’s right to assert subrogation to the rights of Hughes and Fox, he was not entitled to skip the statutory procedure and use an equitable principle to obtain title as if foreclosing a lien.
Mosher v. Conway, 51 Ariz. 275, 76 P.2d 231 (1938).
It appears that after the 1935 opinion, Conway applied for the deeds as the court suggested in that opinion. Mosher continued to deny Conway’s title, resulting in another trial and another ruling in favor of Conway. This time the judgment was affirmed, Conway’s deeds having been acquired in compliance with the statutory procedure.
Smith v. Mangels, 73 Ariz. 203, 240 P.2d 168 (1952).
The Smiths bought a restaurant giving back a note and chattel mortgage to their seller, Bellios. Unbeknownst to Smith, that mortgage was never recorded. Later, Smith traded that restaurant to Foster for a different restaurant, with the Fosters agreeing to assume responsibility for the indebtedness to Bellios. Mangels was the broker on the latter transaction and was aware that the Bellios mortgage was unrecorded.
After the Fosters defaulted, Bellios sued the Smiths who were forced to pay the resulting judgment against them. The Smiths then sued Mangels (who had received a chattel mortgage from the Fosters for their part of his commission) for failing to disclose that the Bellios mortgage was unrecorded. The trial court ruling in favor of Mangels was affirmed on appeal.
The supreme court held that it did not need to reach the breach of fiduciary duty claim against Mangels because the Smiths could not proved they were damaged by the alleged non-disclosure. According to the court:
It is a universally recognized rule that a mortgagor, who after having conveyed his interest is compelled to pay the principal debt, is equitably subrogated to the mortgagee’s interests and succeeds to the mortgagee’s rights. Some courts state this to be an equitable subrogation and some an equitable assignment. Notwithstanding the distinction, all courts agree that whatever rights the mortgagee had, payment by the mortgagor substitutes the mortgagor to the rights of the mortgagee. This is true both as to real and chattel mortgages.
73 Ariz. at 206, 240 P.2d at 169-70.
In the instant case, the appellants as the mortgagors, traded the mortgaged property to the Fosters. The Fosters, who are not parties to this action, did not repay the principal sum as they assumed and agreed to do. Appellants did so under legal compulsion. Hence, the appellants were equitably subrogated to the rights of the mortgagee. They could have foreclosed the mortgage and subjected the chattels to payment of the debt. The security for the debt was, therefore, not lost to appellants unless appellees are mortgagees in good faith.
Id. at 206, 240 P.2d at 170.
Peterman-Donnelly Engr’s & Contractors Corp. v. First Nat. Bank, 2 Ariz. App. 321, 408 P.2d 841 (1965).
The Apache Junction Chamber of Commerce received a parcel of land and decided to build a baseball park on it. It formed a corporation to be formed to accomplish that. Although the facts contain some discrepancies in when certain contracts and conveyances were made, those do not appear to be relevant to the equitable subrogation application by the court.
First there was a loan of $10,000 to finance the project for which Eyre received a first position mortgage. Then a contract was entered into with Peterman-Donnelly for construction and some work performed. Following that $35,000 was borrowed from First National Bank. Part of those funds were used to pay for a release of the Eyre mortgage and the bank received a mortgage securing its loan.
Work stopped when payments to Peterman-Donnelly stopped and it filed a notice and claim of lien, then obtained a judgment to foreclose on the lien. Execution of that foreclosure was stayed to determine the competing priorities between Peterman-Donnelly and the bank. 2 Ariz. App. At 322, 408 P.2d at 842. Upon cross-motions for summary judgment, the trial court determined that the bank was entitled to a first priority to the extent of the $11,600 it had paid to satisfy the Eyre mortgage, then Peterman-Donnelly was entitled to a second position lien for amounts due on its contract, and finally the bank was entitled to a third priority lien for the remainder for the money owed to it on its mortgage. Id. at 324, 408 P.2d at844.
On appeal, the court of appeals relied Mosher (and C.J.S.).
The evidence supporting the motions revealed that at the time the property in question was conveyed to the Association from the Chamber, it was understood that a part of the loan forwarded by the appellee to the Association was to be used to satisfy the debt to Eyre. It is likewise evident . . . that appellee-bank regarded itself as stepping into the shoes of Eyre. However, no formal assignment of the prior mortgage to appellee was executed, but it is implicit that the parties intended the appellee to have the security attached to the prior mortgage. Where such an understanding, express or implied, exists, the law generally allows a subsequent mortgagee to be subrogated to the rights of a prior mortgagee where the subsequent mortgagee has advanced money to the debtor to satisfy the prior mortgage, and where the subsequent mortgagee is not a mere volunteer. . . .
. . .
Subrogation is, however, a doctrine of equity, and its application may be defeated by intervening rights which would be prejudiced by the substitution. In the instant case, however, the rights of appellant are unaffected by the substitution of appellee for Eyre. Appellant remains with a lien prior to all claims save that for a mortgage given before appellant commenced any work on the project.
Id. at 326, 408 P.2d at 846. The summary judgment was affirmed.
But see Weitz Co. v. Heth, No. 1 CA-CV 11-0788, filed Nov. 26, 2013, which disapproved Peterman-Donnelly and Lamb to the extent they failed to recognize A.R.S. § 33-992 precludes an equitable subrogation exception for statutory mechanics’ liens.
D.W. Jaquays & Co. v. First Security Bank, 101 Ariz. 301, 419 P.2d 85 (1966).
This is another case cited in support of equitable subrogation, although it merely refers to subrogation. D.W. Jaquays made a conditional sale of a compressor to Mesa Steel and assigned the contract to VNB. Upon Mesa Steel requesting that assignment instead be to First Security Bank, Jaquays agreed, but instead prepared a duplicate contract and assigned it accompanied by a guaranty of performance by Jaquays. Around the same time, Mesa Steel purchased an air drill and hoist, also by conditional sales contract from Jaquays. Jaquays assigned that to First Security Bank with a guaranty in identical form. Subsequently, Mesa Steel became bankrupt and the bank sued Jaquays upon the guarantees.
The trial court granted summary judgment for the bank. Jaquays argued that it should have been permitted a setoff as a result of the bank’s failure to have recorded the conditional sales contracts which would have allowed recovery of the goods sold out of the bankruptcy. The supreme court agreed and reversed the summary judgment for resolution of that setoff claim.
The court stated that a guarantor has a right of subrogation. 101 Ariz. at 304, 419 P.2d at 88. Although the guarantees at issue were characterized as unconditional, and consented to any extension or forbearance, the court did not agree that such language eliminated the subrogation right. “The doctrine of subrogation arises not from contract but from principles of equity.” Id. Absent “unequivocal language” in the guarantee waiving the right, the court found it was not impaired. From that it concluded that the bank had an implied duty to record the conditional sales contracts and having failed that, Jaquays could argue for release of liability to the extent of loss due to that failure to record. Determining the fair market value of the lost chattels remained for remand.
Kilpatrick v. Superior Court, 105 Ariz. 413, 466 P.2d 18 (1970).
This was a special action from denial of summary judgment. Plaintiffs’ decedents had allegedly died from on-the-job injuries caused by a fellow employee. The defendant fellow employees sought summary judgment that the claim was barred by virtue of the workers compensation relief provided by the mutual employer. The supreme court held that summary judgment was properly denied.
In dicta addressing petitioners’ argument that a double recovery was possible, the court suggested equitable subrogation could be applied in a negligence case to prevent that.
In Arizona the doctrine of equitable subrogation has been repeatedly recognized and applied. It is founded upon principles of equity and its purpose is the prevention of injustice adopted by equity to compel the ultimate payment of a debt by one who in justice and good conscience ought to pay it. . . .
. . .
We think that equity would be effective here to prevent a double recovery by allowing subrogation of the proceeds from any judgment obtained either on the application of the employer if a self-insurer, his insurer, or the Compensation Fund, in the amount actually paid to the employee as required by Arizona’s Act.
105 Ariz. at 422-23, 466 P.2d at 27-28.
Liberty Mutual Ins. Co. v. Thunderbird Bank, 25 Ariz. App. 201, 542 P.2d 39 (1975), vacated, 113 Ariz. 375, 555 P.2d 333 (1976).
Employee Coffelt took checks made payable to his employer Bruning, improperly signed them on behalf of Bruning, endorsing them to Gene’s Market, and then Gene’s Market deposited the checks to its account with Thunderbird Bank. The checks aggregated over $175,000. When scheme was discovered, Bruning made claim upon it employee fidelity policy with Liberty Mutual.
Liberty Mutual had a provision in its fidelity policy stating that it became subrogated to its insured upon any payment and in this matter additionally had obtained a written assignment from Bruning of its claims against all parties, including Thunderbird. Liberty sued Coffelt, Ong (of Gene’s Market), and Thunderbird. Upon cross-motions for summary judgment, the trial court granted judgment in favor of Thunderbird and against Liberty.
The court of appeals affirmed the trial court ruling in favor of Thunderbird Bank. Thunderbird argued that Liberty was a compensated surety, that Thunderbird did not engage in any wrongful conduct perpetrating the fraud, and that in balancing the equities the outcome had to be in favor of the bank. The court of appeals agreed with an opinion from another jurisdiction that even the subrogation from a conventional assignment was founded upon equitable principles so Liberty was precluded from recovering because it could never show that its equities were superior. 25 Ariz. App. At 205, 542 P.2d at 43.
The supreme court instead agreed with the dissenting opinion that the compensated surety doctrine should not penalize one who obtained a contractual assignment. Since it was conceded that Bruning had a valid cause of action against Thunderbird (for paying upon the forged endorsement), “the existence of an equitable right of subrogation is logically irrelevant to the question of whether a party may transfer, by assignment, an otherwise assignable claim.” 113 Ariz. at 378, 555 P.2d at 336. “In allowing the claim to be assigned, it necessarily follows that Liberty’s rights are measured by the law of contract and not by the equitable doctrine of subrogation.” Id. at 379, 555 P.2d at 337. The compensated surety defense was thus inapplicable as Liberty did not need to demonstrate a superior equity. The matter was then remanded to the trial court for proceedings consistent with the opinion.
General Acrylics v. U.S. Fidelity & Guaranty Co., 128 Ariz. 50, 623 P.2d 839 (Ct. App. 1980).
Slavens was general contractor for construction of lockers and athletic fields for Tuba City Unified School District. Slavens obtained payment and performance bonds from USF&G. All American and General Acrylics were subcontractors to Slavens and were not paid. Slavens, All American, and General Acrylics all made claims to funds held by the school district as unpaid funds.
Tuba City interpleaded the funds (and was discharged from the case). All American filed a complaint against Slavens, USF&G, and General Acrylics that it should be paid out of those remaining funds. General Acrylics asserted that it was owed a certain amount by Slavens, but did not make any claim against USF&G.
All American sought summary judgment against Slavens upon their contract and also against the USF&G payment bond. That was granted; USF&G paid; USF&G obtained a satisfaction of the judgment against Slavens and an assignment of the judgment (which seems inconsistent; if satisfied, then arguably that judgment should no longer be subject to execution). That left the interpleaded money in the custody of the court and a portion of the surety bond not paid out upon any claim.
General Acrylics and USF&G both sought to receive the interpleaded funds. It was undisputed that General Acrylics had missed the deadline to make any claim against the payment bond. It argued that case law imposed an equitable obligation upon public bodies (which are not subject to the liens private landowners endure) to apply remaining funds either unpaid or held in retention to compensate those improving the public property. General Acrylics further argued that in balancing the equities as to claimants against the interpleaded funds, it was significant that USF&G was a compensated surety and that the equities favored it.
The court of appeals noted that equitable subrogation is a right of a surety. 128 Ariz. at 53, 623 P.2d at 842. So USF&G had a claim against the funds of Slaven interpleaded by Tuba City. The court held that the Little Miller Act requirement of the payment and performance bonds limited a subcontractor such as General Acrylics to making its claim against the bond, which meant being foreclosed from its claim if it did not do so within the time afforded. The bond was held to stand in the place of the property that would have been subject to a lien if a private owner had been involved. Since General Acrylics failed to make a timely claim, it lost any equitable lien it might have had. (It seems like the analysis ought to be that it either had such a lien or not.) The ruling was affirmed that USF&G was entitled to the interpleaded funds.
Traveler Insurance Co. v. Breese, 138 Ariz. 508, 675 P.2d 1327 (Ct. App. 1983).
Breese was injured on the job, received workers compensation benefits, and hired attorney Broadwell for a claim against the driver (a Union Oil employee) causing his injuries. Travelers had a statutory workers compensation lien upon any such tort recovery. Broadwell missed the shorter California statute of limitations to Union Oil so that claim was lost. Travelers sued Breese for failing to timely sue Union Oil and the resulting loss of lien rights. Breese then sued Broadwell for malpractice. Travelers sought to intervene in that malpractice claim on the eve of its settlement and argued that its lien should apply to any recovery via equitable subrogation.
Upon cross-motions for summary judgment, judgment was granted for Breese against Travelers. The appellate court affirmed.
A.R.S. § 23-1023 allowed the injured workman to bring a claim against the party causing the injury, but did not require it. The carrier’s lien thus only arose if the employee chose to bring such a suit. The carrier’s right to bring such a suit arose only after that initial year expired (under the Arizona statute, the court noting that Travelers did not attempt to bring suit in California itself and argue that its law applied). Based on statutory construction, the court did not agree that the lien which would have applied against a recovery from Union Oil applied to the recovery against attorney Broadwell, distinguishing Kilpatrick where equitable subrogation had been described as available to prevent a double recovery. “The legislature has determined the extent to which subrogation will apply under these circumstances and that does not include factual situations other than those described in A.R.S. § 23-1023(A). . . . Thus, we find that appellant’s subrogation rights are limited by statute and may not be modified by equitable principles.” 138 Ariz. at 513, 675 P.2d at 1332 (emphasis added).
First National Bank v. Bennett Venture, Ltd., 130 Ariz. 562, 637 P.2d 1065 (Ct. App. 1981).
The bank sued Bennett upon its guarantee of a loan to Tupper Tree Farms which was in default and had filed a bankruptcy petition. The case concerns an attempted defense based upon the alleged failure of the bank to disclose to Bennett information about the financial instability of the farm and another guarantor. That defense was unsuccessful in the trial court and on appeal. In a footnote, in a portion of the opinion discussing the alternative argument that the bank had failed to first establish its rights in the collateral, the court cited the D.W. Jaquays opinion and noted that no equitable subrogation argument had been made. 130 Ariz. at 565 n.1, 637 P.2d at 1068 n.1. The inference may be that Bennett could argue it should be subrogated to the bank and permitted to foreclose on the collateral or that it could defend with an offset claim based on the allegation that the bank failed to collect from the collateral.
National Idemnity Co. v. St. Paul Ins. Cos., 150 Ariz. 458, 724 P.2d 544 (1986).
National and St. Paul each insured Long’s which was sued in two suits for damages resulting from its provision of portable horse stalls. National provided a defense and settled both cases. St. Paul paid one-half of the settlements, but refused to contribute to the defense costs. National sued; the trial court and court of appeals held for National; the supreme court affirmed. “Under the principle of equitable subrogation, the insurer which has performed the duty to provide a defense to its insured should be able to compel contribution for a share of the cost of defense from another insurer who had a similar obligation to the same insured but failed to perform it.” 150 Ariz. at 459, 724 P.2d at 545.
In the Memorandum Decision in Owners Ins. Co. v. Illinois Union Ins. Co., No. 1 CA-CV 07-0115, 2007 WL 5471953 (filed Dec. 24, 2007), the above opinion (at ¶¶12-14) is referred to as National Indemnity II, and the court of appeals opinion it vacated is referred to as National Indemnity I.
Brandler v. Manuel Trevizo Hay Co., 154 Ariz. 96, 740 P.2d 958 (Ct. App. 1987).
This case concerns whether to apply an Arizona or California statute of limitations. In distinguishing a California case, that opinion is quoted in a reference that appears to hold that equitable subrogation would permit a California employer to sue a third party whose negligence caused it to pay workers compensation benefits, even if such a right had not been created by statute.
Hartford Accident & Indemnity Co. v. Aetna Casualty & Surety Co., 164 Ariz. 286, 792 P.2d 749 (1990).
Hart carried an auto policy from Aetna ($25,000 limit) and was additionally insured by Hartford via his employer’s policy as excess coverage. Hart was the defendant in an accident claim by Harris. Aetna provided a defense. Aetna rejected an early settlement offer of about $10,500, but made some low counteroffers. As the matter proceeded toward trial, additional information prompted defense counsel to re-evaluate the exposure to the $10,000 to $20,000 range and a settlement judge recommended $15,000 which Harris approved, but not Aetna.
After trial, a jury awarded $140,000. The matter settled for $100,000 on appeal. Aetna paid $62,500 and Hartford paid $37,500. Hartford sued Aetna for bad faith failure to settle within policy limits. The trial court granted summary judgment for Aetna. The matter was transferred to the supreme court from the court of appeals.
The court acknowledged that, although equitable subrogation was not specifically mentioned in Universal Underwriters Ins. Co. v. Dairyland Mut. Ins. Co., 102 Ariz. 518, 433 P.2d 966 (1967), the opinion had implicitly there rejected its application as between a primary and excess insurance carrier. 164 Ariz. at 291, 792 P.2d at 754. In this opinion, however, the supreme court overruled Universal in that implicit rejection and reversed the summary judgment for the trial court to try the issue of whether there had been a bad faith refusal to settle.
When a primary insurance carrier acts in bad faith in refusing to settle, an excess insurance carrier should not have to pay for the primary carrier’s unwillingness to take responsibility. Accordingly, we hold that, under the theory of equitable subrogation, an excess carrier has the right to sue a primary carrier for bad faith failure to settle within policy limits.
164 Ariz. at 294, 792 P.2d at 757.
Twin City Fire Ins. Co. v. Superior Court, 164 Ariz. 295, 792 P.2d 758 (1990).
This special action case was decided along with Hartford. Camargo sued Tanner for personal injuries. Tanner was insured by Wausau (primary) and Twin City (excess). After trial, Camargo obtained a verdict and the judgment against Tanner was settled with Wausau paying $596,569.27 and Twin City paying $238,817.81.
Twin City sued Wausau under a direct duty and equitable subrogation theory for breach of the duty of good faith and fair dealing. The supreme court held that equitable subrogation provided adequate protection for the excess insurer and declined to recognize any direct duty of the primary insurer to the excess insurer with respect to settlement negotiations.
Herberman v. Bergstrom, 168 Ariz. 587, 816 P.2d 244 (Ct. App. 1991).
The Herbermans owned a home subject to a deed of trust and two judgments. They recorded a homestead declaration in 1979. In 1985 they obtained a loan from entities (Lemon) for which Bergstrom became the bankruptcy trustee. The funds from Lemon were used to pay the prior deed of trust and the judgments and a new, first position deed of trust was provided to Lemons. When the Herbermans defaulted, Lemons held a deed of trust sale and obtained title to the home. The Hebermans sued for quiet title, arguing that the homestead declaration invalidated the sale. The trial court summary judgment for the Hebermans was affirmed by the court of appeals.
The appellate court held that the lender was able to tell from a record title search of the existence of the homestead declaration and failed to record any waiver of it. The court also rejected an equitable subrogation argument that the Lemons should have been substituted for the prior lienholder paid off with part of the loan proceeds. The court of appeals held there was no evidence of an express or implied agreement (rejecting the escrow instruction that the lender was to get a first position deed of trust) and also stated that equitable subrogation is an affirmative defense and should have been raised in the lender’s answer to the quiet title complaint.
The result seems better supported by rationalizing that the legislature’s intended protection for the homestead declaration should not be overcome by the equitable subrogation doctrine – that would be inequitable. The reasons the court gave for rejecting the doctrine seem weak.
Hartford Acc. & Indemnity Co. v. Arizona Dep’t of Transp., 172 Ariz. 564, 838 P.2d 1325 (Ct. App. 1992).
ADOT entered into a road construction contract with Rainbow with Hartford providing the performance bond. After Rainbow defaulted, Hartford caused the contract performance to be completed. At the time of default, $8,796.70 remained unpaid under the contract. Hartford incurred a net loss of $312,817.71 in completing the contract.
When Rainbow defaulted, it had not paid unemployment insurance taxes to DES amounting to $6,043.61 (plus penalties and interest which together would approximate the unpaid contract amount). Hartford conceded such taxes in the amount of $1,410.80 for the period when it completed the contract could be deducted, but sought the rest of the contract funds for itself and sued ADOT to obtain it.
Part of the opinion addresses equitable subrogation because apparently Hartford relied upon some federal cases holding that a performance bond surety is subrogated to both the defaulting contractor’s rights and those of the government to use retained funds to complete the contract. 172 Ariz. at 568, 838 P.2d at 1329. The appellate court held that Hartford was not entitled to the benefit of that doctrine because the cases relied upon did not contain a contractual clause found in Rainbow’s contract obligating it to pay taxes and because Hartford had not completely fulfilled Rainbow’s duties under the contract. Id.
Home Indemnity Co. v. Employee Benefits Ins. Co., 173 Ariz. 24, 839 P.2d 444 (Ct. App. 1992).
Curfman was injured operating a crane owned by Sierra. Home was Sierra’s liability insurer and Orion (Employee Benefits) was its workers compensation insurer. Sierra filed a declaratory action seeking to have Curfman declared an employee and limited to workers compensation coverage. Curfman counterclaimed that he was an independent contractor. With cross-motions for summary judgment pending, Home settled and paid Curfman $1,250.000.
Home then sued urging that equitable subrogation entitled it to recover the settlement amount from Orion. The dismissal was affirmed by the court of appeals.
The court noted that the risks insured were different, as well as the insurers’ obligations. With respect to the claim by Curfman as an independent contractor against Sierra, only Home had a duty to defend. Had Curfman made a workers compensation claim, only Orion had the duty to defend. The court also noted that Home had voluntarily paid the settlement without getting a ruling on the competing summary judgment motions. “There is no equity or justice in requiring the workers’ compensation carrier to pay common law tort damages voluntarily paid by the general liability insurance carrier to satisfy its own contractual obligation.” 173 Ariz. at 26, 839 P.2d at 446.
Fobes v. Blue Cross & Clue Shield, Inc., 176 Ariz. 407, 861 P.2d 692 (Ct. App. 1993).
This is not an equitable subrogation case. The phrase is quoted in a parenthetical to a citation to Twin City. Wife sued Blue Cross asserting bad faith with respect to husband’s Medicare supplement policy. To the extent the complaint sought to allege claims on behalf of wife, rather than husband, it was dismissed and that was affirmed on appeal on the basis that wife had no rights to assert under husband’s policy.
Fire Insurance Exchange v. Thunderbird Masonry, Inc., 177 Ariz. 365, 868 P.2d 948 (Ct. App. 1993).
Northview hired Marvin Gardens Development as general contractor for a condominium project. Marvin Gardens hired Thunderbird as the masonry subcontractor. The general contractor contract and subcontractor contracts contained waiver of subrogation clauses and the fire insurance policy issued by Fire Insurance Exchange to Northview permitted such waivers. Northview named First Commercial, its lender, a loss payee under the policy.
A fire destroyed much of the project and was attributed to Thunderbird. Fire Insurance paid the claim to First Commercial as loss payee.
The opinion does not provide more background as to State Farm’s involvement, but possibly it insured others who claimed damages as a result of the same fire. State Farm sued Marvin Gardens and Thundebird for such damages. Fire Insurance intervened and sought damages from Thunderbird for the amount paid to First Commercial, relying upon a subrogation theory. The trial court granted partial summary judgment to Fire Insurance, holding there was no waiver by First Commercial and the Fire Insurance policy did not cover Thunderbird. The appellate court reversed.
With respect to equitable subrogation, the court noted that Fire Insurance did not contract with First Commercial – it was a loss payee, not an insured. The Fire Insurance policy proceeds were not paid to First Commercial as a result of any claim by First Commercial, so First Commercial stepped into (was subrogated to) the shoes of Northview, not First Commerical. “[B]ecause Northview executed enforceable waivers with Thunderbird in the construction contract, First Commercial did not gain any rights against Thunderbird as the loss payee.” 177 Ariz. at 370, 868 P.2d 953. “First Commercial has no right against Thunderbird to which Fire Insurance could be subrogated.” Id.
Rowley Plastering Co. v. Marvin Gardens Development Corp., 180 Ariz. 212, 883 P.2d 449 (Ct. App. 1994).
Marvin Gardens contract with Rowley required Rowley to indemnify Marvin Gardens for any loss for which Rowley was found to be partially responsible. A carpenter injured on the work site sued Marvin Gardens and Rowley. Rowley settled that claim for $105,000, obtaining a release of both Rowley and Marvin Gardens. The case proceeded to a jury trial upon the crossclaims between Rowley and Marvin Gardens resulting a comparative fault allocation of 15% to the plaintiff, 85% to Marvin Gardens, and 0% to Rowley.
Marvin Gardens appealed. Rowley argued that equitable subrogation entitled it to be reimbursed by Marvin Gardens to prevent unjust enrichment. Marvin Gardens argued that Rowley was a mere volunteer when it paid the injured carpenter and that it was not unjustly enriched by the release. The court of appeals held that the settlement payment under threat of proceedings precluded finding Rowley a volunteer. (This seems at odds with Home Ind. v. Employee Benefits.) The court also held that the adoption of comparative fault did not render equitable subrogation doctrine inapplicable. Because Rowley was facing potential liability in excess of its comparative fault as a result of its contract with Marvin Gardens, equitable considerations were still applicable. (This suggests that the court is refusing to recognize that the contract could waive a right to subrogation. But see Fire Exchange v. Thunderbird.) The court also noted that allowing equitable subrogation encouraged settlement.
Continental Casualty Co. v. Farmers Ins. Co., 180 Ariz. 236, 883 P.2d 473 (Ct. App. 1994).
Pohlhaus, driving his personal car on business, collided with a motorcycle, injuring McBryde and Duncan. Pohlhaus had a personal auto policy with Farmers ($100,000 per person limit) and additionally was entitled to coverage via his employer’s CNA policy ($500,000 limit).
Farmers determined that the claims exceeded its policy limits and settled with both claimants, paying its policy limits and obtaining covenants not to execute against Pohlhaus, but not settlement or release of the claims of McBryde or Duncan. Afterwards, Farmers refused to share defense costs which were borne by CNA. CNA eventually settled with McBryde for $457,500 and with Duncan for $42,500. Then CNA sued Farmers for contribution with respect to the defense costs.
The trial court ruled for CNA on cross-motions for summary judgment. The court of appeals reversed with directions to enter judgment for Farmers.
Distinguishing National Indemnity (where equitable subrogation was applied to permit one insurer to compel contribution of defense costs from another insurer), the court of appeals held that the payment of policy limits and obtaining the covenant not to execute made the difference. The court held that Farmers had complied with its duty to defend its insured. As its duty had been discharged, CNA had no right to subrogation for defense costs.
American Continental Ins. Co. v. American Casualty Co., 183 Ariz. 301, 903 P.2d 609 (1995).
This not really an equitable subrogation case. It is listed as one of the theories asserted by one insurer (American Continental) against another insurer (American Casualty) sued for contribution with respect to settlement and defense costs arising from a medical malpractice case. 183 Ariz. at 302, 903 P.2d 609, 610. The case was decided on the different doctrine of equitable contribution where two insurers insure the same risk. Id.
California Casualty Ins. Co. v. State Farm Mut. Auto. Ins. Co., 185 Ariz. 165, 913 P.2d 505 (Ct. App. 1996).
CalCasualty insured Ben Campbell and his vehicle which he loaned to Wilson who also had a policy issued by State Farm. Wilson was in an accident driving Campbell’s car and his passenger Christine Campbell claimed injuries. Both policies had $100,000 limits.
Prior to Christine Campbell bringing suit, CalCasualty settled with her for its policy limits. A release of Ben Campbell and Wilson was prepared. Christine Campbell’s attorney denied that the release was to apply to Wilson and CalCasualty’s adjuster agreed to “white out” Wilson’s name, although the adjuster later claimed it has still been intended to obtain a release as to Wilson’s personal assets.
Christine Campbell did file suit against Wilson. State Farm defended when CalCasualty declined. The matter went to trial and Christine Campbell received an award less than she already had been paid by CalCasualty, so she got no additional payment. During that litigation, the original 1990 release was modified in 1993 to include agreement not to seek satisfaction of any judgment from Wilson’s personal assets. 185 Ariz. at 167, 913 P.2d at 507.
CalCasualty sued for declaratory relief thereafter to declare it owed no duty to defend after paying its policy limits and State Farm counterclaimed for reimbursement of the defense costs. The trial court ruling for CalCasualty was reversed by the court of appeals. Until the release was modified, Wilson was still exposed and CalCasualty had not fulfilled its duty to defend. The court denied that the release could operate retroactively to alter the rights of a third party. Id. at 170, 913 P.2d at 510. So until Wilson received the 1993 reformation, CalCasualty had not satisfied its duty to defend.
Then the court briefly addressed equitable subrogation. Equitable subrogation applied for an excess insurance carrier only with respect to a right which the insured could assert against its primary carrier and derived from that policy. Having determined that CalCasualty continued to owe a duty to defend in the gap period from the May 1990 release to the January 1993 reformed release, the court held: “State Farm is therefore equitably subrogated to Wilson’s contractual rights against CalCasualty, which right includes reimbursement for the defense costs State Farm incurred during that time.” Id. at 170-71, 913 P.2d at 510-11.
Mutual Ins. Co. v. American Casualty Co., 189 Ariz. 22, 938 P.2d 71 (Ct. App. 1997).
Like American Continental v. American Casualty, this case does not really address equitable subrogation. That theory was included in a pleading and the phrase occurs in a quote from the American Continental opinion. But the case is really about equitable contribution between insurers.
Paradigm Ins. Co. v. Langerman Law Offices, P.A., 196 Ariz. 573, 2 P.3d 663 (Ct. App. 1999).
This case does not discuss equitable subrogation law. A law firm hired by an insurer to defend a doctor in a malpractice suit was fired by the insurer. The law firm sued for unpaid fees and the insurer counterclaimed on various theories, including legal malpractice. The appellate court held that an attorney-client relationship could exist between the law firm and insurer, making a legal malpractice claim possible. Because of that ruling, the court did not need to address equitable subrogation which was an alternative theory of the insurer. 196 Ariz. at 580 n.3, 2 P.3d at 670.
Capitol Indemnity Corp. v. Fleming, 203 Ariz. 589, 58 P.3d 965 (Ct. App. 2002).
Like Paradigm, this is a legal malpractice claim by someone other than the direct client. The surety for the conservator of an estate sued the attorney for the conservator. The trial court grant of the motion to dismiss for failure to state a claim was affirmed on appeal. In addition to finding there was no legal relationship between the surety and the attorney, the appellate court disposed of the alternative theory of equitable subrogation, as well. Equating subrogation with assignment, the court noted that Arizona does not permit assignment of legal malpractice claims. 203 Ariz. at 593-94, 58 P.3d at 969-70.
Lamb Excavation, Inc. v. Chase Manhattan Mortgage Corp., 208 Ariz. 478, 95 P.3d 542 (Ct. App. 2004).
The Torrejons built a house on land they owned. In February 2000, they first had a construction loan from CFB for $240,000 at 8.25%. Lamb and other subcontractors served preliminary 20-day notices of mechanic’s liens. In November 2000, the Torrejons obtained a permanent loan from Chase for $248,000 at an adjustable rate, starting at 11.275%. The Chase loan paid off the CFB loan. Chase’s deed of trust was recorded in December 2000. It was after that when Lamb and the other subcontractors filed their mechanic’s liens for non-payment.
In February 2001, Lamb sued to foreclose its lien. Upon cross-motions for summary judgment, the trial court ruled for Lamb, finding that it was not entitled to be equitably subrogated to the CFB lien. The court of appeals reversed, citing the Restatement rule, adopting a liberal application of equitable subrogation not dependent upon whether the subsequent lender had actual or constructive notice of the competing liens and implying the agreement to be substituted for the prior lienholder. 208 Ariz. at 481-82, ¶12, 95 P.3d at 545-46. The court relied principally upon Mosher, Herberman, and Peterman-Donnelly.
Although set forth in a part of the opinion that merely identifies the elements as those advocated by a majority of jurisdictions, and not necessarily Arizona, some subsequent cases cite this part as the elements according to Lamb.
The four primary elements of equitable subrogation are as follows: (1) the party claiming subrogation has paid the debt; (2) the party was not a volunteer; (3) the party was not primarily liable for the debt; and (4) no injustice will be done to the other party by allowing subrogation.
208 Ariz. at 480, ¶8, 95 P.3d at 544 (emphasis added). That fourth element significantly makes the lack of prejudice to the other party one of the elements for the party seeking equitable subrogation to establish, rather than a mere affirmative defense that the other party must invoke by pleading.
The court stated that “there must be an agreement, either express or implied, that the subsequent lender will be substituted for the holder of the prior encumbrance,” that the subsequent lender “must not be a volunteer,” and application of equitable subrogation would be defeated if “intervening rights would be prejudiced by the substitution.” 208 Ariz. at 481-82, 95 P.3d at 545-46. Stating that the Arizona approach was consistent with the Restatement, the court held that “the doctrine will apply . . . when an intervening lien claimant suffers no prejudice.” Id. at 482, 95 P.3d at 546. (Thus, the lack of prejudice is an element of deciding whether the doctrine applies, not merely an affirmative defense that may be ignored if not asserted in a pleading by an opponent.)
The appellate court held that the trial court had erred in deciding that equitable subrogation failed to apply. At least an implied agreement to subrogate was found from the escrow instructions that the Chase lien should be in first position. (This factor was deemed not significant in Herberman, however.) Because it was a commercial motivation, Chase was not deemed a volunteer. The court then analyzed the prejudice element. Lamb and the other subcontractors filed their mechanic’s liens while the CFB lien was in first position ahead of them. The court held that allowing Chase to be equitably subrogated to CFB thus did not prejudice Lamb, but rather failing to permit the subrogation awarded Lamb a windfall by moving up in priority.
(In contrast with MGM, when it purchased at the trustee sale, not only had the two liens paid out of the Chase proceeds long since been removed, but also the Chase lien had been in second priority based upon date of recording and also had been removed because Chase had foreclosed on it taking a trustee’s deed in its place. MGM successfully bid upon what was of record as the first position lien and is prejudiced by permitting equitable subrogation.)
The court also held that Chase was entitled to be subrogated only to the extent of the prior CFB lien. It had no greater rights than its subrogee. The debt balance and interest rate of the CFB loan applied. Id. at 483, 95 P.3d at 547. The trial court was reversed for further proceedings consistent with the foregoing.
But see Weitz Co. v. Heth, No. 1 CA-CV 11-0788, filed Nov. 26, 2013, which disapproved Peterman-Donnelly and Lamb to the extent they failed to recognize A.R.S. § 33-992 precludes an equitable subrogation exception for statutory mechanics’ liens.
Sun Valley Financial Services, LLC v. Guzman, 212 Ariz. 495, 134 P.3d 400 (Ct. App. 2006).
Sun Valley bought a 2002 tax lien upon real property owned by Coastal, an administratively dissolved corporation of which Guzman was the last officer. Sun Valley subsequently paid the redemption amount with respect to a 1999 tax lien which someone else had purchased and which would have been in a position to sooner foreclose the right of redemption than the 2002 tax lien. Under Arizona tax statutes, such tax liens are in parity – foreclosing one does not eliminate the other.
Following its purchase of the 1999 tax lien, Sun Valley filed a complaint to foreclose Coastal’s right to redeem. Such a foreclosure results in the county treasurer issuing a deed of the subject property to the foreclosing tax lien holder. (Because foreclosure of a right to redeem cannot occur until at least three years have passed from purchase of the tax lien certificate, Sun Valley could not yet have foreclosed with respect to the 2002 tax lien.)
Guzman opposed the foreclosure arguing that Sun Valley had not purchased nor received an assignment of the 1999 tax lien, but had redeemed it, so there was nothing on which to foreclose as to that tax lien. The trial court ruled for Sun Valley; the court of appeals reversed.
Pursuant to A.R.S. §42-18204(A), a court could enter judgment foreclosing a right to redeem if the sale of the tax lien was valid and the tax lien had not been redeemed. The court of appeals agreed with Guzman that Sun Valley’s redemption, rather than purchase of an assignment of the 1999 tax lien, eliminated the entitlement to foreclose upon that lien.
Sun Valley argued that it should be entitled to foreclose as a result of equitable subrogation and to avoid unjust enrichment of Guzman. 212 Ariz. at 499, ¶17, 134 P.3d at 404. The court explained the facts of and analyzed Mosher. Id. at 499-500, ¶¶18-25, 134 P.3d at 404-05 (equitable subrogation is treated like an assignment). The court held that Mosher did not support Sun Valley. Sun Valley did not need to purchase or redeem the 1999 tax lien to protect its position in the 2002 tax lien as the liens were in parity. It had redeemed to prevent the holder of the 1999 tax lien from being able to foreclose and obtain title to the property and to avoid having to wait for expiration of the three years from its purchase of the 2002 tax lien. Id. at 500, ¶25, 134 P.3d at 405.
The court of appeals also noted that application of equitable subrogation “would render other provisions of the tax lien system superfluous.” Id. ¶26. (Our argument would be that Chase’s use jeopardizes the real property recording system.) The tax lien sale and foreclosure system was intended to encourage investors to purchase tax liens in exchange for getting certain rights that were attractive and secure. The ability of an earlier purchased tax lien holder to sell by assignment and possibly obtain a greater return than by its own foreclosure was eliminated if another party could simply pay the redemption price and obtain the same rights via equitable subrogation. Id. at 500-01, ¶¶26-28, 134 P.3d at 405-06. (The unjust enrichment argument was unconvincingly disposed of by suggesting it simply was not ripe and that if Guzman sought to redeem the 2002 tax lien, then it might arise.)
Regal Homes, Inc. v. CNA Ins., 217 Ariz. 159, 171 P.3d 610 (Ct. App. 2007).
This is not an equitable subrogation case. It is more about determining primary and excess coverage between insurers. The phrase appears within a quote from National Transport v. St. Paul, but the discussion there is about the consequences of a carrier being determined to be a primary insurer and not about principles of equitable subrogation. 217 Ariz. at 169, ¶42, 171 P.3d at 620.
Owners Ins. Co. v. Illinois Union Ins. Co.,
Not Reported in P.3d, 2007 WL 5471953
Ariz. App. Div. 1
December 24, 2007
This is a contribution between insurers case. The phrase “equitable subrogation” appears (at ¶13) only from a quote from National Indemnity v. St. Paul.
Hartford Underwriters Ins. Co. v. Fluidmaster, Inc.,
Not Reported in P.3d, 2008 WL 4885732
Ariz. App. Div. 1
November 10, 2008
Hartford paid the Stanleys on their homeowners claim for water damage, then Hartford sued Fluidmaster for causing the damage. Because the policy contained a provision requiring the Stanleys to provide a written assignment upon request, which had not occurred, Fluidmaster obtained summary judgment that Hartford could not rely upon equitable subrogation as basis to recover. The court of appeals reversed, disagreeing that Hartford was limited to a conventional subrogation claim due to the policy clause, and remanding for further proceedings as to whether Hartford was entitled to recover via equitable subrogation.
VM Assoc. L.P. v. Kowalski Constr., Inc.,
Not Reported in P.3d, 2009 WL 3049204
Ariz. App. Div. 1
September 24, 2009
The subrogation portion of the case hinged on application of Bryan v. Southern Pac. Co., 79 Ariz. 253, 286 P.2d 761 (1955). When an insurer pays the entirety of a loss, it becomes the real party in interest in a subsequent subrogation claim. When only part of the claim is subrogated, both the insured and insurer have rights against the tortfeasor. ¶¶15-16. While Sun Valley v. Guzman is cited (¶20), there is not any useful elaboration upon the principles of equitable subrogation.
In re Estate of Olson, 223 Ariz. 441, 224 P.3d 938 (Ct. App. 2010).
The opinion is mostly based upon interpreting probate statutes, including that permitting a transfer of a deceased’s real estate interest by affidavit, rather than equitable subrogation, which was an alternate theory asserted by the lienholder pursuant to a deed of trust recorded after an affidavit of transfer was recorded and before an order invalidating the transfer. There is no other discussion of equitable subrogation. 223 Ariz. at 443-44, 224 P.3d at 940-41.
Fidelity Nat. Title Ins. Co. v. Kodatt,
Not Reported in P.3d, 2010 WL 1872861
Ariz. App. Div. 1
May 11, 2010
Kodatt got a line of credit from Bank of America secured by real property owned by Kodatt’s trust. Kodatt sold the property. The payoff statement from BofA alerted that the amount was subject to change, including if there were further draws on the line of credit. Before closing, Kodatt did draw more money, but the escrow (and title insurer) Fidelity sent a payoff amount based upon the earlier payoff statement without updating it. BofA did not release the lien. Kodatt died and then there was a default on his line of credit (which had never been terminated), BofA initiated a foreclosure, and Fidelity paid the bank. Fidelity then sued the Kodatt’s trust, urging that it was the equitable subrogee of BofA and alternatively that it was entitled to be reimbursed based upon the escrow agreement. (It does not appear that anyone made a distinction between Fidelity as escrow and as title insurer, although those functions were probably performed by different Fidelity entities and the alternate theories of recovery would each only belong to one of the entities.)
The trial court granted summary judgment to Fidelity on both theories. The court of appeals reversed.
As Kodatt individually was the borrower on the line of credit, not the trust, the bank had no cause of action to collect on the indebtedness from the trust. As to the trust, the bank’s rights were limited to the security given. Thus, there was no right to collect against the trust to which Fidelity could be subrogated. As to the alternate theory based on the escrow agreement, the court found contractual ambiguity requiring trial and precluding summary judgment.
Placourakis v. David,
Not Reported in P.3d, 2010 WL 3706048
Ariz. App. Div. 1
September 21, 2010
There are complicated facts with a partial ruling among multiple parties before trial, a bifurcated jury trial on legal issues and bench trial on equitable issues, changes in rulings upon post-trial motions, and cross-appeals. Part of the ruling was to impose a lien for a lender based upon equitable subrogation. While that was among the rulings appealed, the lender had been the subject of bankruptcy proceedings by the time the matter was in the court of appeals and filed no brief. Because the court of appeals had no information that the automatic bankruptcy stay had ever been lifted, it declined to address the equitable subrogation issue.
DLJ Mtge. Capital, Inc. v. Ramirez,
Not Reported in P.3d, 2010 WL 5061038
Ariz. App. Div. 1
December 10, 2010
This is another case where an equitable subrogation issue was asserted on appeal, but not addressed. DLJ obtained title to certain real property following a trustee’s sale then sought to use a forcible detainer action to remove from possession the former owner (Liu) and his tenant (Ramirez). In a complicated factual setting, Ramirez argued that in a prior quiet title action (to resolve conflicting claims of ownership), DLJ had successfully asserted equitable subrogation, which Ramirez argued meant that the deed of trust pursuant to which DLJ had foreclosed was invalid. “Appellants do not explain why the civil judgment finding equitable subrogation renders the deed of trust at issue invalid.” ¶16. The court of appeals also stated that any such title issue should be addressed in a separate civil proceeding and not in a forcible detainer action. The companion case is Foreclosure Assistance v. Select Portfolio, which is also listed here.
Foreclosure Assistance Found., Inc. v. Select Portfolio Servicing, Inc.,
Not Reported in P.3d, 2011 WL 1592326
Ariz. App. Div. 1
April 26, 2011
This is the companion case to DLJ. v. Ramirez. The facts are confusing.
Ramirez bought a home with a loan from Wells Fargo secured by the home. Following a default, Wells Fargo set a trustee sale, and Ramirez transferred the home to a trust with Chen as trustee. Ramirez assigned his beneficial interest in the trust to Stress Free Equity. A few months later (August 2006), Ramirez signed a substitution of trustee designation making his attorney trustee, instead of Chen. His attorney then quitclaimed the home back to Ramirez. Ramirez then placed two more deeds of trust (to FAF) on the property. Also within August 2006, Ramirez then conveyed the property by deed in lieu to FAF. During August 2006, Chen purported as trustee to convey the home to Liu by warranty deed. Liu paid $180,000, using a $171,000 loan secured by a deed of trust on the home to Cherry Creek; the loan paid off the Wells Fargo lien.
FAF filed a quiet title action against Lie, Cherry Creek, and SPS (the latter which claimed to be the successor-in-interest to Cherry Creek). FAF alleged that Chen’s signature on the trust agreement was a forgery, that Chen had no interest to convey to Liu, and that SPS was not the successor to Cherry Creek. SPS argued that DLJ Mortgage was the assignee of the beneficial interest of Cherry Creek and that SPS was the attorney-in-fact for DLJ.
On cross-motions for summary judgment, the trial court found SPS was entitled to assert DLJ’s interest and that DLJ by equitable subrogation held the $119,126 lien of Wells Fargo (paid by the Cherry Creek loan). Any interest of FAF was held subject to that DLJ lien.
The court of appeals reversed. FAF argued that DLJ did not acquire any interest from Cherry Creek until after the lawsuit had been brought by FAF. There were also questions of fact raised with respect to whether Liu had a valid interest in the property which needed to be resolved to determine the significance of FAF recording its deed after Cherry Creek received the deed of trust from Liu. The appellate affirmed the denial of the FAF motion for summary judgment and reversed the grant of summary judgment in favor of SPS.
Continental Lighting & Contracting, Inc. v. Premier Grading & Utilities, LLC, 227 Ariz. 382, 258 P.3d 200 (Ct. App. 2011).
This case involved equitable subrogation in the trial court, but on appeal it was determined to be governed by the related doctrine of loan or mortgage replacement (which is also addressed in the Restatement). REEL made a purchase money loan to Conover secured by a deed of trust on certain property in 2005. Conover conveyed the land to his LLC and the loan was refinanced (releasing that 2005 deed of trust), also by REEL in 2007. Then in 2008 upon part of the then-subdivided property, another deed of trust was recorded to secure additional construction funds loans by REEL. Continental and Premier had recorded notices of mechanics’ liens in 2008 for work contracted for in 2006.
There was default on the loans to REEL which foreclosed upon all of the property pursuant to the 2007 and 2008 deeds of trust. Continental and Premier instituted mechanics’ lien foreclosure actions in 2008 which were consolidated with REEL as defendant. Upon cross-motions for summary judgment, the trial court found equitable subrogation did not apply (by which REEL argued that it could enforce the 2005 deed of trust which was indisputably superior to the mechanics’ liens) and that the mechanics’ liens had priority, ruling for Continental and Premier.
The court of appeals repeated the Restatement approach approved in Lamb that equitable subrogation “will apply when there is an express or implied agreement to subrogate, . . . and when an intervening lien claimant suffers no prejudice.” 227 Ariz. at 385, ¶10, 258 P.3d at 203 (emphasis added). But the court also noted that equitable subrogation only applies when the subsequent loan is by a different lender, as “one cannot be subrogated to one’s own previous deed of trust.” Id. However, the court of appeals did determine that the analogous doctrine of replacement loan did apply. Id. at 388, ¶¶20-22, 258 P.3d at 206. The court of appeals held that it did not matter that the borrowers were different (Conover for the 2005 loan, but his LLC thereafter) and further held that Continental and Premier were not prejudiced because their liens were subordinate to the 2005 deed of trust. Thus, the trial court erred in denying REEL’s motion for summary judgment and in granting summary judgment to Continental and Premier. Id. at 390, ¶28, 258 P.3d at 208.
But see Weitz Co. v. Heth, No. 1 CA-CV 11-0788, filed Nov. 26, 2013, which limited this opinion to application of the replacement doctrine, rather than providing any guidance on equitable subrogation.
In re Mortgages, Ltd., 459 B.R. 739 (Bankr. D. Ariz. 2011).
On rehearing, the bankruptcy court denied a motion for summary judgment asserting application of equitable subrogation. The hotel property at issue had an $8.5M loan to Mortgages Ltd. secured by a deed of trust in July 2005. In December 2006, that loan was paid by out of the proceeds of a new loan by Choice Bank for $9.3M also secured by a deed of trust. At that time, remodeling work was underway on the hotel by contractor KGM. In May 2007, the Choice Bank loan was paid off by another Mortgages Ltd. loan which was in the amount of $75.6M and secured by a deed of trust. Six months later the owner signed an agreement with a new contractor, Summit Builders and it commenced work in January 2008 and recorded notice of its lien in July 2008.
The bankruptcy court initially granted summary judgment in favor of Mortgages Ltd. holding that it was entitled to assert the lien of Choice Bank by virtue of equitable subrogation. Upon rehearing, the bankruptcy court found two reasons to deny summary judgment to Mortgages Ltd. One reason was that there was evidence that Mortgages Ltd. had considered the possibility of work on the project imposing mechanic’s or materialmen’s liens, which could negate the existence of an express or implied agreement to subrogate. The court also noted that a prerequisite to imposing equitable subrogation “is that there be no prejudice to the intervening lienholder.” Id. at 743. When Summit began providing work on the project in January 2008, the Choice Bank deed of trust had been released. Neither the Mortgages Ltd. deed of trust nor any other document ever recorded by Mortgages Ltd. “put Summit on notice that Mortgages would claim to be subrogated to that released deed of trust.” Id.
Summit was entitled to believe that the priority of its lien would relate back to November, 2006, prior to Mortgage’s deed of trust that had been recorded when the Choice deed of trust was released, in May, 2007. Summit has a good argument that it would be prejudiced by the application of equitable subrogation. Such prejudice alone is a basis to deny equitable subrogation, under all tests.
Moreover, this is prejudice that Mortgages alone was in a position to avoid. When recording its own deed of trust, it could have given constructive notice that it was asserting a priority for at least a significant portion of its lien dating back to 2005. In effect, Mortgages is asserting a secret lien priority which it was in a position to make public. Equitable subrogation is a equitable doctrine, but since at least 1601 equity does not favor the assertion of a secret lien.
Id. at 744 (emphasis added).
BAC Home Loan Servicing, LP v. Semper Investments LLC, 230 Ariz. 587, 277 P.3d 784 (Ct. App. 2012).
Russo owned property secured by a purchase money loan of $716,000 with a deed of trust held by First Magnus, then assigned to Chevy Chase Bank. Russo obtained a second loan for another $400,000 secured by a deed of trust to First Horizon. Russo the obligated himself for another $700,000 (a revolving line of credit) from D’Esprit, also secured by a deed of trust on the same property. The foregoing occurred between August 2004 and November 2005. 230 Ariz. at 589, ¶2, 277 P.3d at 786.
In August 2006, Russo obtained a new loan of $1,000,000 from First Magnus which paid off the first-position lien of First Magnus then held by Chevy Chase. Along with additional funds provided by Russo, the balance of that loan also was used to pay the second-position lien of First Horizon. The lien of D’Esprit was not paid nor that lender contacted. The 2006 lien was transferred by First Magnus to BAC (fka Countrywide Home Loans). Only $350,000 had actually been borrowed on the D’Esprit line of credit when that lien was recorded, but the remaining, additional $350,000 was disbursed after the 2006 First Magnus refinancing loan, then that deed of trust was assigned to Semper.
Russo defaulted. Semper started a trustee sale on the D’Eprit deed of trust. BAC sued Semper to stop the sale and for a determination of lien priority. Id. ¶3.
BAC and Semper filed cross-motions for summary judgment. BAC argued that it was entitled to equitable subrogation and Semper opposed. “In general, previously recorded liens have priority over subsequent ones.” Id. at 590, ¶6, 22 P.3d at 787. “For equitable subrogation to apply, there must exist an agreement to subrogate, express or implied; the subsequent lender must not be a volunteer; the lender must have a reasonable expectation of receiving a security interest; and intervening claimants must suffer no prejudice.” Id., citing Lamb (emphasis added). The court of appeals held that the differing interest rates did not preclude equitable subrogation as Semper was not put into a weaker position nor was it otherwise prejudiced (instead the court found Semper was improved from third position to second position). Summary judgment for BAC, applying equitable subrogation, was affirmed.
Sourcecorp, Inc. v. Norcutt, 227 Ariz. 463, 258 P.3d 281 (Ct. App. 2011), aff’d, 229 Ariz. 270, 274 P.3d 1204 (2012).
(This part of the summary is just regarding the court of appeals decision.) This case reached the court of appeals upon appeal following remand from a prior appeal (unpublished). The Shills owned (homesteaded) property in Prescott encumbered by a deed of trust and tax liens and also a judgment lien in favor of Sourcecorp. The Sourcecorp judgment was recorded in October 2004, but without a required information sheet which did not get submitted until January 2005. The Shills sold to the Norcutts with an escrow that closed in November 2004, paying off the first position deed of trust to Zions Bank and some tax liens, but not the Sourcecorp judgment which apparently was overlooked by the title insurer (First American).
Sourcecorp caused a sheriff’s sale to be scheduled pursuant a writ of general execution upon its judgment against the Shills and the recording of the judgment while they owned the property. The Norcutts intervened and stopped the sale.
Initially, the trial court ruled for the Norcutts that the failure of Sourcecorp to have included the judgment information sheet when it submitted its judgment for recording, invalidated the lien. The judgment recording was ineffective until the information sheet was submitted, which was after the conveyance to the Norcutts. 227 Ariz. at 465, ¶6, 258 P.3d at 283. On the prior appeal, the court of appeals reversed that ruling. Id.
On remand, the Norcutts argued that the Shills’ homestead exemption prevented the Sourcecorp judgment from attaching and alternatively that they were entitled to the assert the prior lien position of Zions Bank by virtue of equitable subrogation, as their purchase price proceeds were used to satisfy that lien. Id. ¶7. Sourcecorp successfully countered that the homestead exemption was abandoned when the Shills sold and that the Norcutts were ineligible for equitable subrogation as they were purchasers, not new lenders. Id. ¶8. The trial court granted summary judgment for Sourcecorp.
In this appeal, the court of appeals acknowledged that the Norcutts were purchasers and not new lenders, that there was no Arizona law regarding that situation, that both sides could recite authority for the positions taken, and that the outcome differed among other jurisdictions. The four elements were set forth in citation to Lamb.
(1) the party asserting subrogation has paid the debt; (2) the party asserting subrogation was not a volunteer; (3) the party asserting subrogation was not primarily liable for the debt; and (4) no injustice will be done to the other party by allowing subrogation.
227 Ariz. at 466, ¶14, 258 P.3d at 284. (Note, fourth element should put burden on proponent of equitable subrogation to show no prejudice, rather than require its assertion as an affirmative defense.)
“Equitable subrogation is an equitable doctrine, the purpose of which is to prevent injustice.” Id. at 467, ¶15, 258 P.3d at 285. (Do not like the next paragraph where court distinguishes argument that Norcutts could not hold lien on their own property by recharacterizing as whether they were entitled to succeed to the priority of the prior creditor. ¶16.) The court of appeals held that the fact that Lamb involved a lender and agreement to obtain a lien did not preclude equitable subrogation for lack of such a situation in this case. Peterman-Donnelly cited as not involving a specific agreement. ¶26. Ultimately, the court found the equities weighed in favor of the Norcutts and that Sourcecorp was not prejudiced because the Zion Bank lien was in place when it recorded its judgment. ¶34.
(This part of the summary is of the supreme court opinion. It affirms the earlier opinion of the court of appeals.)
“There is some ambiguity in Arizona case law regarding the test for equitable subrogation. For reasons explained below, we adopt the Restatement approach because it is the most consistent with the rationale for equitable subrogation.” 229 Ariz. at 273, ¶12, 274 P.3d at 1207. Noting the varying and elastic meaning given by courts to the requirements that the claimant not have paid as a “volunteer” and that there be at least an implied “agreement,” the supreme court rejected those as not part of the Restatement requirements. 229 Ariz. at 274-75, ¶¶16, 21, 274 P.3d at 1208-09.
The supreme court determined that denying equitable subrogation to the Norcutts would give Sourcecorp a windfall and that the only prejudice asserted was the failure to receive that windfall of moving up in priorty. 229 Ariz. at 275-76, ¶¶24-26, 274 P.3d at 1209-10. “Subrogation will be recognized only if it will not materially prejudice the holders of intervening interests.” Id. at 275, ¶25, 274 P.3d at 1209, quoting Restatement § 7.6 cmt. e.
The supreme court did not hold that affording equitable subrogation to the Norcutts entitled them to a right to foreclose. They only received a priority to proceeds from any sale of the property to be repaid the amount they had paid for release of the prior lien. Thus, Sourcecorp’s judgment was not eliminated and the Norcutts were left to make a claim against their title insurer to the extent that priority did not address all of their interests. Id. at 276, ¶29, 274 P.3d at 1210. The opinion of the court of appeals was affirmed.
Paramount Windows Corp. v. OneWest Bank FSB
Not Reported in P.3d, 2012 WL 3806146
Ariz. App. Div. 1
September 04, 2012 (all for this case is quoted – note Sourcecorp cite is only to court of appeals opinion)
¶ 10 “Subrogation is the substitution of another person in the place of a creditor, so that the person in whose favor it is exercised succeeds to the rights of the creditor in relation to the debt.” Mosher v. Conway, 45 Ariz. 463, 468, 46 P.2d 110, 112 (1935). Subrogation substitutes someone who pays off a superior encumbrance into that party’s priority position, even where there is recordation of an intervening lien. Lamb Excavation, Inc. v. Chase Manhattan Mortgage Corp., 208 Ariz. 478, 480, ¶ 6, 95 P.3d 542, 544 (App. 2004); Restatement (Third) of Prop.: Mortgages § 7.6 (1997) (“One who fully performs an obligation of another, secured by a mortgage, becomes by subrogation the owner of the obligation and the mortgage to the extent necessary to prevent unjust enrichment. Even though the performance would otherwise discharge the obligation and the mortgage, they are preserved and the mortgage retains its priority in the hands of the subrogee.”).
¶ 11 Equitable subrogation has four elements: (1) the party asserting subrogation has paid the debt; (2) the party asserting subrogation was not a volunteer; (3) the party asserting subrogation was not primarily liable for the debt; and (4) no injustice will be done to the other party by allowing subrogation. Lamb, 208 Ariz. at 480, ¶ 8, 95 P.3d at 544. This court has held
Further, for equitable subrogation to apply, ‘[t]here must exist a claim or obligation against the debtor; an original right to that claim on the part of him in whose place substitution is sought, and some right belonging to him who seeks the substitution which will be protected thereby. So when one, being himself a creditor, pays another creditor, whose claim is preferable to his, it is held that the person so paying is subrogated to the rights of the other creditor.
Sourcecorp, Inc. v. Norcutt, 227 Ariz. 463, 466–67, 258 P.3d 281, 284–85 (App. 2011) citing Mosher, 45 Ariz. at 468, 46 P.2d at 112. Equitable subrogation applies only to the extent of the prior lien. Lamb, 208 Ariz. at 483, ¶ 19, 95 P.3d at 547.
¶ 12 Paramount argues that the incorrect legal description in OneWest’s deed of trust was fatal to any claim of priority. FN9 “Our recording statutes are for the protection of persons dealing in real property without actual notice.” Hall v. World Sav. and Loan Ass’n, 189 Ariz. 495, 503, 943 P.2d 855, 863 (App. 1997) citing County of Pinal v. Pomeroy, 60 Ariz. 448, 455, 139 P.2d 451, 454 (1943). Even an unrecorded instrument is fully enforceable between the parties to the transaction. See A.R.S § 33–412 (2007); 3502 Lending, LLC v. CTC Real Estate Service, 224 Ariz. 274, 277, 229 P.3d 1016, 1019 (App. 2010) (action to quiet title involving deed of trust recorded but missing legal description of the property) (citing Maddox v. Hardy, 187 P.3d 486, 492 & n. 20 (Alaska 2008) and 14 Richard R. Powell, Powell on Real Property § 82.01, at 82–13 (Michael Allan Wolf rev. ed.2005). An unrecorded instrument is enforceable against a creditor with notice. See A.R.S. § 33–412.
FN9 There is no dispute that all the records had the correct street address.
Brimet II, LLC v. Destiny Homes Marketing, LLC, 231 Ariz. 457, 296 P.3d 993 (Ct. App. 2013).
The COA reversed SJ for the appellee (Brimet) and remanded with directions to instead enter SJ for the appellant (Destiny). This case involves competing interests (an option and a deed of trust), a trustee’s sale, and the doctrines of mortgage replacement and equitable subrogation.
Lender 1 (First Horizon) made an acquisition loan of $438,750 to Borrower (a different Destiny entity) for 18 undeveloped lots, secured by a 1st position deed of trust. Borrower and appellant Destiny entered into an option contract which was recorded in 2nd position. Next came a construction loan, also from Lender 1 to Borrower, which paid off the acquisition loan and the deed of trust securing it was recorded after the option. Borrower ultimately paid $652,500 of the construction loan (the amount of the acquisition loan plus another $213,750). Another year elapsed, then Borrower refinanced with Northern Trust using a $1.5 million loan to pay off the balance of the construction loan. A deed of trust securing the Northern Trust loan was recorded on 12 of the original 18 lots (some lots had been released from the earlier deed of trust as loan payments were made). Borrower defaulted on the Northern Trust loan which bought the property (the 12 lots) at the trustee sale for a credit bid of $496,706, then sold the property to Brimet. Brimet obtained SJ against Destiny that the trustee sale had eliminated the interest of Destiny’s option. The trial court agreed that the doctrines of replacement and equitable subrogation entitled Brimet (through Northern) to the benefit of the acquisition loan deed of trust recorded prior to the option. Destiny appealed.
Brimet argued an apportionment theory spread the portion of the construction loan applied to pay the acquisition loan across the 18 lots, that the Borrower had used loan proceeds to obtain release prices for part of the lots, so the release payments did not apply to the other lots, and the lien priority should remain for those. Brimet’s math left $294,864 it claimed was still entitled to 1st lien priority by equitable subrogation.
The COA rejected Brimet’s argument. Once Borrower made payments on the construction loan in excess of the amount of the acquisition loan, Lender 1’s 1st position lien priority (as a replacement mortgage) was extinguished so the option was in first position and the construction loan was 2nd. That had already occurred before the refinancing by Northern Trust, so Northern’s deed of trust was junior, not senior, to the option and the Northern trustee sale was ineffective in eliminating the option. There was no lien senior to the option to which Northern could be equitably subrogated. Destiny wins (but it’s still just an option).
Arguably Northern knew of the Option and the priority issue before Northern conducted its trustee’s sale. Yet, Northern waited until after it had concluded the sale to bring a quiet title action seeking confirmation that its sale had extinguished the Option. The existence or non-existence of the prior Option, though, would be relevant to anyone interested in bidding at the sale and should have been done prior to the sale. The court does not express any misgivings about the sequence of events, though.
Skiff v. Carl
Not Reported in P.3d, 2013 WL 5567413
Ariz. App. Div. 1
October 08, 2013
Equitable subrogation is recited as a basis for allowing one judgment creditor to stand in the shoes of his deceased predecessor in interest with respect to the other judgment creditor in a proceeding to determine how the prior, unequal payment of their mutual attorney fees should be accounted for in distributing the proceeds of the sale of the house that had been the subject of the judgment. ¶3. There is no citation to any case law regarding equitable subrogation nor any discussion relevant to how or when it is applied.
Weitz Co., LLC v. Heth, 233 Ariz. 442, 314 P.3d 569 (Ct. App. 2013) – vacated
Equitable subrogation versus statutory mechanics lien laws – the court held that the statutes prevail. Where the legislature has established a lien priority system for protection of mechanics and materialmen, a court may not substitute equitable principles to alter the statutory system. Summary judgment confirming the mechanics lien priority over a lender’s lien was affirmed.
This opinion disapproved Peterman-Donnelly and Lamb to the extent they failed to recognize A.R.S. § 33-992 precludes an equitable subrogation exception for statutory mechanics’ liens.
COA vacated by S.Ct. August 26, 2014, 235 Ariz. 405, 333 P.3d 23.
Weitz Co., LLC v. Heth, 235 Ariz. 405, 333 P.3d 23 (2014).
Starting in April 2005 (with a second advance in February 2007) First National Bank (FNB) loaned approximately $62 million to Copper Square for a high rise mixed use project, secured by a deed of trust on the land. As condominiums were sold, FNB agreed to release those from the deed of trust based upon set release prices. Weitz Company was the general contractor, starting construction work in November 2005.
By May 2008, 85 of 91 condo units had been sold. Each was released from the FNB deed of trust and a purchase money deed of trust recorded for the purchaser’s lender. Around that time, Weitz recorded a mechanic’s lien against the project. Six months later, Weitz sued to foreclose. The defendants included the new condo owners and their lenders, in addition to Copper Square.
The owners and lenders moved for partial summary judgment, arguing that they were entitled to equitable subrogation to FNB’s April 2005 deed of trust which had priority over Weitz’s mechanic’s lien. The trial court granted the motion. The court of appeals affirmed, but on the ground that where the legislature has established a lien priority system for protection of mechanics and materialmen, a court may not substitute equitable principles to alter the statutory system. The Arizona Supreme Court vacated the court of appeals’ opinion and reversed the trial court.
The supreme court confirmed that Arizona follows Restatement (Third) of Property: Mortgages §7.6(a) (1997). ¶12. “Because an equitably subrogated lien ‘attaches’ when the superior lien was recorded, § 33-992(A) does not require that an intervening mechanic’s lien be given priority.” ¶15. The court did not find that applying equitable subrogation interfered with any legislative intent regarding mechanic’s liens.
The supreme court then addressed partial subrogation, which is not part of the doctrine of equitable subrogation. Restatement §7.6(a) cmt. a. “We agree with Owners and Lenders, however, that a prospective subrogee is required to discharge only the portion of an obligation that is secured by the property at issue.” ¶ 21. The court found the existence of the agreed partial releases determinative. “We conclude that equitable subrogation of a mortgage is prohibited when it would divide security between the original oblige and a payor who discharges part of the obligation.” ¶ 22. Weitz also made an argument that such subrogation would prejudice its interests, which the court indicated it could assert on remand.
HACI Mechanical Contractors, Inc. v. BMO Harris Bank
Not Reported in P.3d, 2015 WL 1455204
No. 1 CA–CV 13–0147, March 31, 2015
Initially, the court of appeals concluded that Arizona Revised Statutes § 33–992(A) precluded equitable subrogation of BMO’s deed of trust over HACI Mechanical Contractor’s, Inc.’s mechanics’ lien. On review to the supreme court, the court of appeals’ decision was remanded for reconsideration in light of Weitz Co., LLC v. Heth, 235 Ariz. 405, 333 P.3d 23 (2014)
Windsor Century owned Century Plaza which was encumbered by two 2004 deeds of trust aggregating $6,750,000 and held by Sir Mortgage. Windsor hired Summit for certain construction work for which Summit subcontracted with HACI for a portion of the work. Construction began March 2, 2006. HACI recorded a preliminary 20-day notice June 21, 2006. Windsor closed a construction loan from BMO Harris in August 2006 for $39,852,000, of which $6,814,483 was paid to satisfy the Sir Mortgage deeds of trust
After Windsor defaulted in 2008, BMO declared a default. HACI recorded a notice and claim of lien February 20, 2009. BMO concluded a trustee sale in October 2009 at which it was the successful credit bidder at $11,100,000.
As part of a multiparty litigation, HACI sought to foreclose its mechanics’ lien. The trial court granted summary judgment against HACI that BMO had lien priority over the mechanics’ lien by virtue of equitable subrogation to the Sir Mortgage loans. On reconsideration as directed by the supreme court, the court of appeals agreed with HACI that equitable subrogation could only be applied up to the amount of the Sir Mortgage deed of trust amounts paid off, and not in additional amounts loaned by BMO. The court relied on Comment e to Restatement (Third) of Property § 7.6 (1997): “The payor is subrogated only to the extent that the funds disbursed are actually applied toward payment of the prior lien. There is no right of subrogation with respect to any excess funds.”
Markham Contracting Co., Inc. v. FDIC, 240 Ariz. 360, 379 P.3d 257 (2016).
Markham Contracting perfected a mechanic’s lien on Troon’s property. At the time, First Arizona held a first position deed of trust encumbering Troon’s property. Thus, Markham’s lien was in second position. Subsequently, First Arizona (together with another lender) made a new loan to Troon, part of which was used to pay off the earlier loan. The deed of trust to First Arizona (together with another lender) for that loan was subsequent to the recording of the Markham lien.
After First Arizona filed notice of a trustee’s sale of the Troon property, Markham asserted that its mechanic’s lien was superior. First Arizona disagreed and stated its intention to proceed with the sale and that it would not recognize the priority of the Markham lien. Markham filed a lien foreclosure action. First Arizona conducted its trustee sale and obtained the former Troon property for a $3.175 million credit bid. In the Markham foreclosure action, First Arizona obtained summary judgment that its later loan was equitably subrogated to the prior loan, therefore held a first priority, and extinguished the Markham lien. Markham appealed.
The court of appeals agreed that First Arizona was equitably subrogated to the prior deed of trust when the second loan was used in part to pay off the prior loan. That put First Arizona in first priority ahead of Markham’s mechanic’s lien to the extent of the amount of the earlier loan. Disregarding the delay by First Arizona in asserting an equitable subrogation claim, the appellate court still found the trustee’s sale by First Arizona failed to extinguish Markham’s lien. That was because at First American’s trustee sale with respect to the second loan, it had asserted a credit bid that was in excess of the amount it would have been entitled to assert based upon equitable subrogation to the first loan. Its bid exceeded its priority, so Markham should have received the excess portion. The appellate court’s resolution was that Markham’s mechanic’s lien continued to encumber the property.
US Bank, N.A. v. JPMorgan Chase Bank, N.A.
No. 1 CA–CV 16-0253, June 29, 2017
Loeper obtained a $200,000 line of credit from Bank One in 1997. Chase Bank later succeeded to Bank One in that regard. The credit was secured by a residential deed of trust. The line of credit was increased to $250,000 in 2001.
In 2004 Loeper obtained a $387,000 loan from First Magnus, evidenced by a promissory note and secured by another deed of trust on Loeper’s residence. US Bank later succeeded to the interest of First Magnus. Pursuant to a subordination agreement, the First Magnus/US Bank deed of trust received priority over the previously recorded Bank One/Chase Bank deed of trust.
Loeper obtained a new loan from First Magnus in 2005 and executed a new note and deed of trust. That loan was for $682,000, over half of which was used to pay off the balance owed on the existing $387,000 loan and release the deed of trust securing that loan. It was also supposed to pay off the balance owed on the $250,000 Bank One line of credit.
Chase held the Bank One line of credit at the time of the 2005 payoff, but did not close the line of credit because the amount received ($211,148.30) was insufficient (by $3,452.13) to pay off the entire balance. Chase advised the escrow officer at Guaranty Title of the shortfall, but nothing was done in that regard.
Subsequent to the 2005 refinance with First Magnus, Loeper took additional advances on the never-closed line of credit (now with Chase). The balance on that line of credit was approximately $203,000 in 2013 (and the deed of trust securing it had never been released).
Loeper defaulted on the First Magnus/US Bank loan. US Bank initiated a non-judicial foreclosure pursuant to its 2005 deed of trust. Its trustee sale guaranty report identified the 2001 Bank One/Chase deed of trust as in a superior position. Chase also initiated non-judicial foreclosure on its deed of trust.
US Bank filed a declaratory action against Chase. Its complaint sought “(1) declaratory relief – lien priority pursuant to the replacement doctrine, (2) declaratory relief – lien priority pursuant to equitable subrogation, (3) unjust enrichment, and (4) estoppel.” ¶6. The parties agreed to first have the court resolve lien priorities. They filed cross-motions for summary judgment. The superior court granted US Bank’s motion, holding that its lien was prior based on the doctrines of replacement and of equitable subrogation. Chase appealed.
The court of appeals acknowledged that the priority of deeds of trust generally tracked the order of recording. The appellate court also acknowledged that the equitable doctrines of replacement or subrogation could permit a later recorded deed of trust to have priority. ¶8. (The court of appeals has previously addressed the distinction between replacement and equitable subrogation in Brimet II, LLC v. Destiny Homes Marketing, LLC, 231 Ariz. 457, 459-60, ¶¶ 10-12, 296 P.3d 993, 995-96 (Ct. App. 2013).)
Citing Restatement (Third) of Property: Mortgages §7.3 (1997) and quoting from Cont’l Lighting & Contracting, Inc. v. Premier Grading & Utils., LLC, 227 Ariz. 382, 387, ¶ 16, 258 P.3d 200, 205 (Ct. App.2011), the court stated that the replacement doctrine is applicable if “a lender releases its original lien of record, discharging it with the proceeds of the second loan secured by a new mortgage that is recorded either immediately or shortly after releasing the initial loan as part of the same replacement loan transaction.” ¶11, n.5. Equitable subrogation is applied when a prior loan is discharged by a second loan made by a different lender.
Since Loeper used the proceeds of the 2005 First Magnus loan to satisfy the 2004 First Magnus loan, the doctrine of replacement was applicable. The 2005 First Magnus/US Bank deed of trust thus retained the priority held by the 2004 First Magnus/US Bank deed of trust to the extent of the approximately $384,000 paid to satisfy the existing lien. Bank One/Chase had agreed to be subordinate in priority to the extent of that 2004 lien and was held not to be prejudiced by subordination limited to the amount of the paid-off 2004 loan. The superior court was affirmed in its summary judgment holding that US Bank’s deed of trust had priority over the Chase deed of trust “to the extent of $384,040.34.” ¶14.
The replacement doctrine was inapplicable to the extent the 2005 First Magnus loan was applied to payment of the Bank One/Chase line of credit – that was payment of a different lender’s lien, rather than replacement of a lender’s own lien. In that regard, the issue was whether the doctrine of equitable subrogation applied – part of the proceeds of the 2005 First Magnus loan had paid down the line of credit by over $200,000. The superior court had also granted summary judgment to US Bank awarding it a further priority based on equitable subrogation based on that pay down of the line of credit. The court of appeals reversed in that regard.
Citing Restatement (Third) of Property: Mortgages §7.6 (1997) and quoting from Weitz Co. L.L.C. v. Heth, 235 Ariz. 405, 411, ¶ 11, 333 P.3d 23, 29 (2014), the court of appeals stated that “[e]quitable subrogation is generally permitted only when a person fully discharges a debt secured by a mortgage.” While the 2005 First Magnus loan had substantially paid the Bank One/Chase line of credit, it had not fully satisfied it. The doctrine of equitable subrogation did not apply at all and the Chase deed of trust retained priority “for any amount above and beyond $384,040.34.” ¶19.
The court of appeals affirmed the summary judgment based on the replacement doctrine, but reversed the ruling as to equitable subrogation. The court of appeals also reversed the award of attorneys’ fees to US Bank. While there were certainly underlying contracts between the lenders and their borrowers for the loans, the lawsuit was for declaratory relief based upon equitable doctrines and did not arise from those loan contracts.
Bank of America, N.A. v. Felco Business Services, Inc. 401(K) Profit Sharing Plan
No. 1CA-CV 16-099, Aug. 29, 2017.
In February 2007, Borrowers secured a $200,000 Countrywide loan with a recorded deed of trust on a lot in Sedona, Arizona. In June 2007, Borrowers secured aa $600,000 Felco improvement loan with a second position deed of trust on the same property. In 2008, Countrywide refinanced the $200,000 loan to a $204,000 loan at a lower interest rate. A third deed of trust (which stated that it was to be in first position) was recorded against the same Sedona property. The refinance loan paid off the first Countrywide loan.
Borrowers defaulted on the Felco loan. A statement of breach was issued in February 2009, scheduling a trustee sale by Felco in May 2009. Felco’s trustee sale guarantee title report identified its deed of trust as being superior to that of Countrywide (being the third deed of trust). Felco sent notice of the trustee’s sale to Countrywide, which did not participate in the sale nor seek to enjoin it. Felco was the successful bidder at its trustee sale, bidding the full amount it calculated as its credit bid, which was a little less than $1 million.
Bank of America acquired Countrywide and in August 2009 that deed of trust was assigned to BofA. A few months later, BofA sent a letter to Felco taking the position that the Felco deed of trust was subordinate to that of BofA (Countrywide) and unaffected by the trustee sale. In May 2011, BofA sued Borrowers and Felco for declaratory relief that the BofA deed of trust was the senior lien via equitable subrogation or the related doctrine of replacement mortgage. Felco moved for partial summary judgment that equitable subrogation did not apply because it would prejudice Felco as an intervening lienholder and because BofA (Countrywide) did not assert it before Felco’s trustee sale. The superior court granted Felco’ s motion.
The Arizona Court of Appeals held that equitable subrogation (or the doctrine of replacement mortgage) was not waived by BofA’s failure to assert it in advance of the Felco trustee sale. The appellate court held that it was not a waivable defense pursuant to Ariz. Rev. Stat. § 33-811(C). “As an equitable remedy independent of a trustee’s sale, equitable subrogation is neither a defense nor objection to the sale.” ¶14.
A lien’s priority is determined by factors independent of the sale, including the order in which the deeds were recorded or the application of legal doctrines such as equitable subrogation or mortgage replacement. A lienholder can foreclose on the security property and conduct a trustee’s sale pursuant to the deed of trust regardless whether the lien is in a junior or senior position. A lien’s priority dictates whether the lien is extinguished or remains an encumbrance on the property after the sale occurs.
¶15. The partial summary judgment was reversed and the matter remanded for the superior court to determine whether equitable subrogation applied.