Arrowpointe Fed. Credit Union v. Bailey

• Decision Date: 25 November 2020
• Docket Number: Opinion No. 5784,Appellate Case No. 2018-000230
• Citation: 852 S.E.2d 473,432 S.C. 373
• Court: South Carolina Court of Appeals
• Parties: ARROWPOINTE FEDERAL CREDIT UNION, Respondent, v. Jimmy Eugene BAILEY; Laura Jean Bailey; and U.S. Bank National Association not in its individual capacity but solely in its capacity as Indenture Trustee for WVUE 2015-1, Defendants, Of which U.S. Bank National Association not in its individual capacity but solely in its capacity as Indenture Trustee for WVUE 2015-1 is the Appellant.

432 S.C. 373

852 S.E.2d 473

ARROWPOINTE FEDERAL CREDIT UNION, Respondent,

v. Jimmy Eugene BAILEY; Laura Jean Bailey; and U.S. Bank National Association not in its individual capacity but solely in its capacity as Indenture Trustee for WVUE 2015-1, Defendants,Of which U.S. Bank National Association not in its individual capacity but solely in its capacity as Indenture Trustee for WVUE 2015-1 is the Appellant.

Appellate Case No. 2018-000230

Opinion No. 5784

Court of Appeals of South Carolina.

Heard October 15, 2020

Filed November 25, 2020

Rehearing Denied January 13, 2021

Andrew Bryant Walker and Shaun C. Blake, both of Rogers Lewis Jackson Mann & Quinn, LLC, and Sean Matthew Foerster, of Rogers Townsend & Thomas, PC, all of Columbia, for Appellant.

Christy Curtis Jones, of Sherpy & Jones, PA, and Jonathan McKey Milling and Cydney McAdams Milling, both of Milling Law Firm, LLC, all of Columbia, for Respondent.

THOMAS, J:

ArrowPointe Federal Credit Union filed this action against Jimmy Eugene Bailey, Laura Jean Bailey, and JPMorgan Chase Bank, seeking foreclosure of a mortgage and a declaration that its mortgage be declared a first lien. Appellant¹ appeals the special referee's order granting ArrowPointe summary judgment and ordering foreclosure, arguing the referee erred in finding (1) South Carolina does not recognize the replacement mortgage doctrine, (2) ArrowPointe suffered material prejudice by the application of the replacement mortgage doctrine, and (3) the existence of material prejudice under the replacement mortgage doctrine defeats the priority of the replacement mortgage. We affirm.

FACTS

A. Stipulated Facts

The parties stipulated to the following facts:

The Baileys owned 247 Morninglow Drive in Winnsboro and mortgaged the property to Quicken, which secured a note in the principal amount of $256,500. The Quicken Mortgage was recorded on October 20, 2009² (First Mortgage) and was in a senior lien priority position on the subject property. On October 27, 2009, the Baileys gave ArrowPointe a mortgage securing an equity line of credit (ArrowPointe LOC) in the principal amount of $99,000. The ArrowPointe LOC was recorded on November 4, 2009. At the time, "the parties to that transaction intended the [ArrowPointe LOC] to be a junior mortgage on the Subject Property second in lien priority position behind the First Mortgage."

On November 23, 2009, the Baileys entered a subsequent mortgage and loan transaction with Quicken (Second Mortgage), obtaining a new loan in the principal amount of $296,000, an increase from the First Mortgage of $39,500. The proceeds of the Second Mortgage were used to pay off the loan secured by the First Mortgage in the amount of $257,459.04.³ The First Mortgage was released of record, and the Second Mortgage was recorded on December 15, 2009. The Second Mortgage was assigned numerous times.

At the time of the Second Mortgage, Quicken did not have actual knowledge of the ArrowPointe Loan, but was on record notice of it. In addition, the Baileys executed an acknowledgment by affidavit that "there [were] no outstanding home improvement loans, mortgages, deeds of trust, or equity lines of credit, recorded or unrecorded."

The Baileys defaulted on the ArrowPointe LOC, and ArrowPointe filed this foreclosure action. At the time of the Joint Stipulation, the amount due on the ArrowPointe LOC was $187,201.60.

B. Other Facts

Appellant and ArrowPointe filed competing motions for summary judgment, each claiming lien priority. At a hearing on September 19, 2013, Appellant abandoned its equitable subrogation argument and argued the replacement mortgage doctrine entitled it to priority. By order dated March 19, 2015, the special referee denied Appellant's motion for summary judgment, concluding "the replacement mortgage theory is not the law of the State of South Carolina and should not apply in this case. Therefore, as a matter of law, [the Second Mortgage] does not take priority over [the ArrowPointe LOC]." Appellant moved for reconsideration, the referee heard arguments, and the motion for reconsideration was orally denied.

At a subsequent hearing, the referee heard arguments on ArrowPointe's motion for summary judgment. Appellant argued it was entitled to first priority under the replacement mortgage doctrine, and even if ArrowPointe was prejudiced, it was only prejudiced to the extent the Second Mortgage was greater than the First Mortgage. Appellant argued it "was $260,000 in already with these borrowers, and to the extent [it] raised it up into the 290s and the Court determines that's a material prejudice, ... [it] should get up to 260."

By order dated January 18, 2018, the referee granted ArrowPointe's motion for summary judgment. The referee again found the doctrine of replacement mortgage was not part of the case or statutory law of South Carolina. The referee also found even if the doctrine was the law in South Carolina, ArrowPointe suffered material prejudice because the principal amount of the Second Mortgage was larger than the First Mortgage and "any material prejudice is fatal to Replacement Mortgage." The referee ordered foreclosure and sale of the subject property and awarded ArrowPointe first lien priority. This appeal follows.

STANDARD OF REVIEW

"When an appeal involves stipulated or undisputed facts, an appellate court is free to review whether the trial court properly applied the law to those facts." WDW Props. v. City of Sumter , 342 S.C. 6, 10, 535 S.E.2d 631, 632 (2000). "In such cases, the appellate court owes no particular deference to the trial court's legal conclusions." J.K. Constr., Inc. v. W. Carolina Reg'l Sewer Auth. , 336 S.C. 162, 166, 519 S.E.2d 561, 563 (1999).

LAW/ANALYSIS

A. Doctrine of Replacement Mortgage

Appellant argues the special referee erred in finding it was not entitled to lien priority under the replacement mortgage doctrine. We disagree.

South Carolina is a "race-notice" state in which our recording statute determines the priority of liens by the date of recording. See S.C. Code Ann. § 30–7–10 (2007) (codifying South Carolina's recording act); Regions Bank v. Wingard Props., Inc. , 394 S.C. 241, 255, 715 S.E.2d 348, 355 (Ct. App. 2011) ("The recording statute found in section 30–7–10 ... provides that all mortgages are valid, without notice, from the day they are recorded in the register of deeds for the county where the real property is located."); Leasing Enters., Inc. v. Livingston , 294 S.C. 204, 208, 363 S.E.2d 410, 412 (Ct. App. 1987) ("Our reading of the current statute indicates the recording act is a race-notice act which will provide protection to the subsequent purchaser or creditor provided he records first.").

One exception to our race-notice statute is the doctrine of equitable subrogation. "Equitable subrogation allows a subsequent creditor to assume the rights and priority of a prior creditor." What's New , 13 Aug. S.C. Law. 47, 53 (2001). To be equitably subrogated to a prior mortgage, a party must meet the following elements: (1) the party claiming subrogation has paid the debt; (2) the party was not a volunteer but "had a direct interest in the discharge" of the debt or lien; (3) the party was secondarily liable for the debt or for the discharge of the lien; (4) no injustice will be done to the other party by the allowance of the equity; and (5) the party asserting the doctrine must not have had actual notice of the prior mortgage. Indep. Nat'l Bank v. Buncombe Prof'l Park, LLC , 411 S.C. 605, 608, 769 S.E.2d 663, 665 (2015).

Like the doctrine of equitable subrogation, the doctrine of replacement mortgage is an exception to the race-notice statute. The doctrine of replacement mortgage urged by Appellant to be adopted is described as follows:

(a) If a senior mortgage is released of record and, as part of the same transaction, is replaced with a new mortgage, the latter mortgage retains the same priority as its predecessor, except

(1) to the extent that any change in the terms of the mortgage or the obligation it secures is materially prejudicial to the holder of a junior interest in the real estate, or

(2) to the extent that one who is protected by the recording act acquires an interest in the real estate at a time that the senior mortgage is not of record.

Restatement (Third) of Property (Mortgages) § 7.3 (1997 & June 2020 Update).

"In recent years, a significant number of courts have adopted the Restatement or followed its logic." Grant S. Nelson & Dale A. Whitman, Adopting Restatement Mortgage Subrogation Principles: Saving Billions of Dollars for Refinancing Homeowners , 2006 BYU L. Rev. 305, 314 (2006). The state appellate courts have varying approaches to equitable subrogation:

Courts have adopted three different approaches to equitable subrogation, reflecting different apportionments of equity: (1) the majority position holds that a party with actual knowledge of an intervening lien cannot seek equitable subrogation; (2) the minority position holds that a party with actual or constructive knowledge of an intervening lien cannot seek equitable subrogation; and (3) the Third Restatement of Property approach states that actual or constructive knowledge of an intervening lien is irrelevant and does not bar application of equitable subrogation.

Glenn R. McGillivray, What's Your Priority?: Revitalizing Pennsylvania's Approach to Equitable Subrogation of Mortgages After First Commonwealth Bank v. Heller , 58 Vill. L. Rev. 301, 310 (2013).

Appellant argues the common law in South Carolina supports the replacement mortgage doctrine. South Carolina has held that a party may assert the doctrine of equitable subrogation if the party did not have actual notice of an intervening mortgage even if the party had constructive notice. Enter. Bank v. Fed. Land Bank of Columbia , 139 S.C. 397, 401, 138 S.E. 146, 148 (1927). In Enterprise Bank , the Supreme Court allowed equitable subrogation where "[a] most elaborate and painstaking abstract was made of the title...