Bank of America, N.A. v. Presance Corp.

• Decision Date: 07 June 2007
• Docket Number: No. 77038-7.,77038-7.
• Citation: 160 Wn.2d 560,160 P.3d 17
• Parties: BANK OF AMERICA, N.A., Respondent, v. PRESTANCE CORPORATION, a Washington corporation; Prestance Japan Corporation, a Japanese corporation; Sakae and Yuko Sugihara, husband and wife, Defendants, and Wells Fargo Bank, N.A., a national banking association; and Wells Fargo Bank West, N.A., a national banking association, Petitioners.
• Court: Washington Supreme Court

160 P.3d 17

160 Wn.2d 560

BANK OF AMERICA, N.A., Respondent, v. PRESTANCE CORPORATION, a Washington corporation; Prestance Japan Corporation, a Japanese corporation; Sakae and Yuko Sugihara, husband and wife, Defendants, and Wells Fargo Bank, N.A., a national banking association; and Wells Fargo Bank West, N.A., a national banking association, Petitioners.

No. 77038-7.

Supreme Court of Washington, En Banc.

Argued May 9, 2006.

Decided June 7, 2007.

Michael B. King, Talmadge Law Group PLLC, Tukwila, Mark A. Rossi, Bank of Hawaii, John Schochet, Dorsey & Whitney, LLP, Seattle, for petitioners.

Stephen M. Rummage, Craig W. Miller, Davis Wright Tremaine, LLP, Seattle, for respondent.

SANDERS, J.

¶ 1 We are asked to define the contours of equitable subrogation in the context of refinancing mortgagees. Washington Mutual had a first-priority lien on Sakae Sugihara's personal residence, while Bank of America had a second-priority lien. Wells Fargo Bank West (WFB West) seeks to be equitably subrogated to Washington Mutual's first-priority lien position because it paid Sugihara's debt to Washington Mutual. Bank of America argues WFB West cannot be given first-priority status because WFB West knew Bank of America had an intervening interest.

¶ 2 The trial court followed the Restatement (Third) of Property: Mortgages § 7.6 Subrogation (1997) [hereinafter Restatement (Third) § 7.6] and granted WFB West's request for equitable subrogation. The Court of Appeals reversed. We now reverse the Court of Appeals and adopt § 7.6 of the Restatement (Third). We hold a lender can be equitably subrogated to a first-priority lien despite having actual or constructive knowledge of junior lienholders.

I. Facts

¶ 3 On August 8, 1994, Sakae and Yuko Sugihara received a 30-year home loan of $543,150 from Washington Mutual, which Washington Mutual secured with a deed of trust on the property.¹ Between August 1999 and December 2001, Sakae Sugihara took out a series of business and home equity loans, each time pledging the residence as at least a portion of the security. In August 1999 Bank of America made a revolving loan of $400,000 to Prestance Corporation, a Washington corporation owned by Sugihara; the loan was secured, in part, by the Sugiharas' deed of trust on their home. In October 2000 Bank of America gave Prestance Corporation and Prestance Japan Corporation, a Japanese corporation likewise owned by Sugihara, an additional line of credit for $1,000,000, receiving Sugihara's personal guaranty and an amendment to the August 1999 deed of trust. The second loan had a due date of October 28, 2001.

¶ 4 In November 2001 Sugihara approached WFB West for $1,000,000, which was to be secured by a deed of trust on the property.² One purpose of the loan was to pay off the first-position Washington Mutual loan. WFB West expected it would then have priority over the other loans for the amount used to pay Washington Mutual. A preliminary title commitment showed the Bank of America loans, secured by the Bank of America deed of trust and its amendment. In December 2001 WFB West approved the $1,000,000 home equity line of credit. When the WFB West loan closed on December 21, 2001, it was WFB West's understanding that Bank of America's deed of trust had been (or was being) reconveyed to Wells Fargo Bank (WFB) and that WFB would subordinate its $500,000 loan, putting the WFB West deed of trust in first position.

¶ 5 Bank of America sued the Sugiharas, Prestance, Prestance Japan, WFB, and WFB West, seeking a money judgment and foreclosure to remedy the default on the second Bank of America loan. Following a three-day bench trial in September 2003, the trial court judge relied upon and cited Restatement (Third) § 7.6 to hold WFB West should be equitably subrogated to the first-priority lien position of Washington Mutual in the payoff amount of $499,477, leaving Bank of America "in no worse position than it would have been [in] had [WFB West] never made its . . . loan." Clerk's Papers at 600.

¶ 6 Bank of America appealed the equitable subrogation issue, and WFB cross-appealed on the issue of whether Bank of America had a contractual duty implied in law to reconvey its deed of trust to WFB. The Court of Appeals reversed the trial court's application of equitable subrogation, holding that, under this Court's decision in Kim v. Lee, 145 Wash.2d 79, 31 P.3d 665, 43 P.3d 1222 (2001), WFB West's actual knowledge of Bank of America's lien barred the application of equitable subrogation. Bank of Am. v. Wells Fargo Bank, 126 Wash.App. 710, 719-20, 109 P.3d 863 (2005). The court affirmed the trial court's determination that no contract implied in law existed between WFB and Bank of America. Id. at 722-23, 109 P.3d 863. WFB and WFB West petitioned this court for review on whether it should be equitably subrogated to Washington Mutual, thereby receiving a first-priority lien ahead of Bank of America.

II. Standard of Review

¶ 7 The only issue before us is a legal one: should we adopt § 7.6 of Restatement (Third) to hold a refinancing mortgagee's actual or constructive knowledge of intervening liens does not automatically preclude a court from applying equitable subrogation. "[T]he question of whether equitable relief is appropriate is a question of law," Niemann v. Vaughn Cmty. Church, 154 Wash.2d 365, 374, 113 P.3d 463 (2005), and like all issues of law our review is de novo.

¶ 8 This is a question of first impression for this court. The Court of Appeals claimed our holding in Kim is dispositve. Bank of Am., 126 Wash.App. at 719-20, 109 P.3d 863. But our holding in Kim addressed whether a refinancing mortgagee's title insurer could benefit from equitable subrogation if the insurer had actual knowledge of intervening liens. The facts before us today are different and concern whether a refinancing mortgagee, not a title insurer, must be precluded from equitable subrogation if he has actual knowledge of intervening liens.

III. Equitable Subrogation Doctrine

¶ 9 Borrowed from English courts of equity, equitable subrogation simply seeks to maintain the proper order of priorities. Burgoon v. Lavezzo, 68 App. D.C. 20, 92 F.2d 726, 729 (Cir.1937).³ For example, suppose A, a homeowner, has two mortgages: one recorded first by bank B and one recorded second by bank C. Our recording act says B has a higher priority because it recorded first, putting the world on notice as to its interest in A's land. RCW 65.08.070. If D fully discharges B's debt, then equitable subrogation substitutes D for B, so D has a higher priority than C, even though D recorded after. See Jackson Co. v. Boylston Mut. Ins. Co., 139 Mass. 508, 510, 2 N.E. 103, 104 (1885) ("Subrogation is the substitution of one person in place of another . . . so that he who is substituted succeeds to the rights of the other in relation to the debt or claim, and its rights, remedies, or securities."). At first blush, equitable subrogation conflicts with the recording act because it is an exception to the general rule "first in time, first in right." But no new lien or interest is created; D simply takes over B's interest and that interest came first in time. C never expected his priority to be promoted simply because A refinanced the mortgage with a new company. C bargained with A to have a second-priority mortgage; it is immaterial who has priority before C.⁴ See RESTATEMENT (THIRD) § 7.6 cmt. a, at 510 ("The holders of intervening interests can hardly complain about this result, for they are no worse off than before the senior obligation was discharged."). Equitable subrogation preserves the proper priorities by keeping the first mortgage first and the second mortgage second.

¶ 10 Despite an initial resistance to equitable subrogation, many courts now apply it liberally. See Martin v. Hickenlooper, 90 Utah 150, 161, 59 P.2d 1139, 1144 (1936) ("It will be seen that the more recent cases show a very decided liberality over the stricter cases of a generation ago."). This language from an Arkansas Supreme Court opinion, applying subrogation freely with regard to "perfect justice" instead of unnecessary rules, is typical:

"The doctrine of subrogation is an equitable one, having for its basis the doing of complete and perfect justice between the parties without regard to form, and its purpose and object is the prevention of injustice. . . .

"It rests upon the maxim that no one shall be enriched by another's loss, and may be invoked wherever justice and good conscience demand its application in opposition to the technical rules of law, which liberate securities with the extinguishment of the original debt . . . .

Cox v. Wooten Bros. Farms, Inc., 271 Ark. 735, 737-38, 610 S.W.2d 278, 280 (1981) (quoting Baker v. Leigh, 238 Ark. 918, 923-24, 385 S.W.2d 790, 794 (1965)); see also Home Sav. Bank v. Bierstadt, 168 Ill. 618, 48 N.E. 161, 162 (1897) ("[Equitable subrogation] has been steadily expanding and growing in importance and extent in its application to various subjects and classes of persons. This equitable principle is enforced solely for the accomplishment of substantial justice where one has an equity to invoke which cannot injure an innocent person.").

¶ 11 But Bank of America asks us to adopt an unnecessarily limited view of equitable subrogation where a party is barred from seeking relief whenever he has actual knowledge of the intervening interests. This ignores subrogation's equitable underpinnings, misunderstands its use in a refinancing context, and dismisses important policy concerns — all to give credence to a rule that serves no meaningful purpose.

IV. Different Jurisdictional Approaches

¶ 12 Courts generally consider knowledge in one of three ways when applying equitable subrogation to a refinancing lender. First, the Restatement approach that says actual or constructive knowledge of intervening interests is irrelevant; second, a minority approach that says a plaintiff with either actual...