The doctrine of equitable subrogation allows a court to give effect to the intentions of the parties with respect to lien priority in secured real estate transactions. The doctrine can be stated as follows: A lender who advances money to pay off an encumbrance on real property, at the request of the owner or holder of the encumbrance, with the understanding that the advance is to be secured by a first priority lien: 1) Is not a volunteer; 2) In the event the new security is not a first lien, the holder will be subrogated to the rights of the prior encumbrancer, unless the new encumbrancer is charged with “culpable and inexcusable neglect” or the superior or equal equities of others would be prejudiced.
Courts look with favor on equitable liens so equity will generally give a lender the security for which he bargained for where there is a mistake or fraud with respect to an intervening right which cuts off a preexisting encumbrance which has been satisfied by the lender’s loan proceeds.
In Branscomb v. JPMorgan Chase, the appellate court found that the trial court committed error when it ruled that Branscomb’s $100,000 deed of trust, which originally was in third position, should be reformed to reflect an indebtedness of $500,000, and become a first-position lien.
Chase and MMB paid off a first and second-position lien, respectively, at the owner’s request. Chase was to receive a new first deed of trust on the property and MMB was to receive a new second deed of trust. At the time Branscomb made his loan to the owner, Branscomb knew his loan would be secured by a junior lien on the property. Branscomb did not expect to receive a first-position lien. Under these circumstances, Chase and WWM were entitled to equitable subrogation because they were not chargeable with culpable and inexcusable neglect, nor did the superior or equal equities favor Branscomb because Branscomb would not be prejudiced by granting Chase and MMB equitable subrogation.
The appellate court held the trial court committed error when it concluded equitable subrogation was not available because Chase and MMB had actual knowledge of Branscomb’s deed of trust. Generally, equitable subrogation may be denied to a new lender who has actual knowledge of a junior encumbrance.
Some knowledge, however, of an intervening lien does not automatically preclude a party from invoking the remedy of equitable subrogation, provided the interests of the intervening lienholder are not prejudiced. While evidence supported the trial court’s finding that Chase and MMB had actual knowledge of Branscomb’s $100,000 deed of trust they were not aware that Branscomb claimed the actual amount of the loan was $500,000. Nor did the evidence show Chase and WMMb had knowledge the lien would remain on the property and rise to first position. To the contrary, Chase and MMB required, as a prerequisite to closing, that its new deed of trust be in the same position as its prior deed of trust.
There was no evidence Chase or MMB knew, expected, or agreed that: (1) Branscomb’s lien would remain on the property after the refinance transactions and rise to first position; or (2) The lenders would forfeit their first and second priority positions. Under these facts knowledge of Branscomb’s $100,000 deed of trust did not constitute culpable and inexcusable neglect precluding equitable subrogation.
In denying equitable subrogation the trial court also relied in part on the fact Chase and MMB might have a cause of action against the escrow holder for negligence. But, such a potential claim does not affect the equities of the parties because: (1) There is no guarantee such a lawsuit would succeed; (2) If Chase and MMB receive the equitable subrogation to which they are entitled, there is no loss for a title insurance company to indemnify; and (3) If sued by Chase or MMB, the title insurance company might be entitled to assert Chase’s and MMB’s right to equitable subrogation.
Nor could Chase or MMB be charged with culpable and inexcusable neglect based upon any action of the escrow holder because the escrow holder owed no duty to Branscomb. The agency created by an escrow is limited to the obligation to carry out the instructions of the parties to the escrow: an escrow holder has no general duty to go beyond the escrow instructions and to disclose suspicious facts or circumstances. Therefore, the escrow holder’s failure to investigate the discrepancy between the amounts on the note ($500,000) and the deed of trust ($100,000) cannot be attributable to Chase or MMB.
Mr. Daymude consults with clients and accepts cases involving disputes over lien priority, including those which involve the doctrine of equitable subrogation. For other types of cases accepted, please scroll the Home and My Practice pages. If you are seeking a legal consultation or representation, call Michael Daymude at 818-971-9409.