Bank of America, NA v. Wells Fargo Bank, NA

• Decision Date: 04 April 2005
• Docket Number: No. 53692-3-I.
• Citation: Bank of America, NA v. Wells Fargo Bank, NA, 109 P.3d 863, 126 Wash. App. 710 (Wash. App. 2005)
• Parties: BANK OF AMERICA, N.A., Appellant/Cross-Respondent, v. WELLS FARGO BANK, N.A., and Wells Fargo Bank West, N.A., Respondents/Cross-Appellants, and Prestance Corporation, and Prestance Japan Corporation, Defendants.
• Court: Washington Court of Appeals

109 P.3d 863

126 Wash. App. 710

BANK OF AMERICA, N.A., Appellant/Cross-Respondent, v. WELLS FARGO BANK, N.A., and Wells Fargo Bank West, N.A., Respondents/Cross-Appellants, and Prestance Corporation, and Prestance Japan Corporation, Defendants.

No. 53692-3-I.

Court of Appeals of Washington, Division 1.

April 4, 2005.

Craig Miller, Stephen M. Rummage, Rebecca S. Cohen, Seattle, WA, for Appellants.

Michael B. King, Mark A. Rossi, Lane Powell PC, Seattle, WA, for Respondents.

COLEMAN, J.

¶ 1 This appeal and cross-appeal involves three banking entities, Bank of America, Wells Fargo Bank, and Wells Fargo Bank West, each of whom hold liens on the same piece of real property after the homeowner secured multiple loans from these institutions over a two-year period. The questions raised here are whether Wells Fargo Bank West may be equitably subrogated to the first place lien position despite Bank of America's status as an intervening lienholder and whether a contract implied in law existed between Wells Fargo Bank and Bank of America requiring reconveyance of Bank of America's deed of trust to Wells Fargo. We reverse the trial court's grant of equitable subrogation to Wells Fargo Bank West and affirm the trial court's denial of a contract implied in law between Bank of America and Wells Fargo Bank.

FACTS

¶ 2 In 1999, Bank of America (BoA) entered into a revolving loan agreement for $400,000 with Sakae Sugihara, secured by a deed of trust on Sugihara's house. The property was already encumbered by a 30-year mortgage financed in 1994 by Washington Mutual (WaMu). In October 2000, BoA entered into a second revolving loan with Sugihara for $1,000,000, secured by an amendment to BoA's original deed of trust on Sugihara's home.

¶ 3 The following year, in June 2001, Sugihara applied to Wells Fargo Bank for a $500,000 home equity loan, again secured by his house. Sugihara's loan application disclosed the WaMu mortgage and the first BoA loan for $400,000, but not the second loan for $1,000,000. Wells Fargo Bank's preliminary title commitment revealed the BoA amended deed of trust, which caused the bank to initially reject Sugihara's application. When questioned by the Wells Fargo loan officer, Sugihara claimed the second BoA loan had been released. Based on Sugihara's assurances, Wells Fargo approved the loan without seeking confirmation from BoA.

¶ 4 When the Wells Fargo Bank loan to Sugihara closed in November 2001, Wells Fargo sent a check to BoA for $402,694.43 as a full payment of the first BoA loan. At that time, both BoA loans were already in default. BoA decided not to release their deed of trust because their second loan to Sugihara still had $970,000 outstanding. BoA did not inform Wells Fargo Bank of the decision not to release the deed of trust.

¶ 5 In November 2001, at the same time the Wells Fargo Bank loan was closing, Sugihara applied for an additional $1,000,000 home equity loan from a separate Wells Fargo Bank entity, Wells Fargo Bank West (WFB West). WFB West's preliminary title commitment showed the BoA deed of trust and the amendment, reflecting both BoA loans. In December 2001, a WFB West loan officer, acting without authorization, approved the loan for closing. WFB West's closing instructions to its escrow agent directed the agent to close the loan without regard to the BoA loans because the WFB West loan officer mistakenly believed that BoA was in the process of re-conveying its deed of trust. WFB West did not seek assurances from BoA. WFB West closed the loan, paid off the WaMu 30 year mortgage, and gave the balance to Sugihara.

¶ 6 BoA sought foreclosure on Sugihara's house because the second BoA loan remained in default. Both Wells Fargo banks counterclaimed, seeking release of the deed of trust from BoA on the ground that BoA had breached a contractual obligation to reconvey the deed of trust after Wells Fargo Bank had paid off the first BoA loan.

¶ 7 The court held that WFB West should be equitably subrogated to the lien position of WaMu (i.e., first position) in the amount of their payoff of the WaMu loan ($499,477). The court denied WFB's claim that BoA be required to reconvey their deed of trust. Both parties appeal.

DISCUSSION

¶ 8 Standard of Review. BoA challenges the trial court's findings of fact and conclusions of law. In these circumstances, we determine whether the findings of fact are supported by substantial evidence in the record. Landmark Dev., Inc., v. City of Roy, 138 Wash.2d 561, 573, 980 P.2d 1234 (1999). Substantial evidence exists if the record contains "evidence of sufficient quality to persuade a fair minded rational person of the truth of the declared premise." World Wide Video, Inc. v. City of Tukwila, 117 Wash.2d 382, 387, 816 P.2d 18 (1991). We then determine whether the findings of fact support the trial court's conclusions of law. Landmark, 138 Wash.2d at 573, 980 P.2d 1234. Questions of law are reviewed de novo. Hu Hyun Kim v. Lee, 145 Wash.2d 79, 86, 31 P.3d 665, 43 P.3d 1222 (2001).

¶ 9 The first issue on appeal is whether WFB West's lien should be equitably subrogated to WaMu's first lien position in light of BoA's status as an intervening lienholder.

¶ 10 Washington's recording system is established by RCW 65.08.070.¹ The purpose of the statute is to make a deed recorded first in time superior to any other conveyance of the property, unless a mortgagee has actual knowledge of an unrecorded transfer. Altabet v. Monroe Methodist Church, 54 Wash.App. 695, 697, 777 P.2d 544 (1989) (citing Tacoma Hotel, Inc. v. Morrison & Co., 193 Wash. 134, 74 P.2d 1003 (1938)). See also Hollenbeck v. City of Seattle, 136 Wash. 508, 514, 240 P. 916 (1925) ("generally, liens take precedence in order of time; the first in time being the first in right"). A deed of trust creates a lien against the property it describes. John Davis & Co. v. Cedar Glen No. Four, Inc., 75 Wash.2d 214, 221-22, 450 P.2d 166 (1969). Equitable subrogation provides an exception to the first in time rule by permitting a person who pays off an encumbrance to assume the same lien priority position as the holder of the previous encumbrance. Houston v. Bank of Am. Fed. Sav. Bank, 119 Nev. 485, 78 P.3d 71, 73 (2003). As an equitable remedy, subrogation is designed to avoid one person receiving an unearned windfall, i.e., the intervening lienholder through an advancement in priority, at the expense of another, i.e., the new mortgagee who paid the prior debt. First Commonwealth Bank v. Heller, 863 A.2d 1153, 1157 (2004). Restatement (Third) of Property: Mortgages § 7.6 cmt. a (1997).

¶ 11 Equitable subrogation in mortgage refinancing is a relatively new concept in Washington. The Washington Supreme Court considered the issue in a case of first impression in Kim, 145 Wash.2d 79, 31 P.3d 665. In 1995, Sterling Trust loaned money to Lee's parents, secured by a lien against a Yakima residence where Lee lived. In 1997, Kim obtained a judgment against Lee, which he recorded. Later that year, Lee acquired the residence, subject to Sterling's lien. In 1998, Pioneer loaned money to Lee, secured by a lien against the same residence. Lee used Pioneer's loan proceeds to pay off Sterling's lien. Pioneer did not know of Kim's judgment because its title insurer, Yakima Title, had failed to discover that judgment. After Sterling was paid off, Kim informed Yakima Title that his lien was superior to Pioneer's. Still not told of Kim's lien by Yakima Title, Pioneer assigned its deed of trust to PHH Mortgage Services. PHH then obtained a new title policy from Yakima Title, which despite its knowledge of Kim's judgment, again failed to disclose it to PHH. When PHH eventually learned of Kim's judgment, it tendered its defense to Yakima Title, which then claimed that PHH had priority over Kim through equitable subrogation to Sterling's former lien.

¶ 12 The Supreme Court denied Yakima Title's claim of equitable subrogation. The court stated that subrogation is an equitable concept designed to "`impose ultimate responsibility for a wrong or loss on the party who, in equity and good conscience, ought to bear it,'" Kim, 145 Wash.2d at 88, 31 P.3d 665 (quoting Mahler v. Szucs, 135 Wash.2d 398, 411, 957 P.2d 632 (1998)). The court adopted the principle of subrogation established in Restatement (Third) of Property, section 7.3,² and concluded that equitable subrogation is appropriate unless (1) material prejudice to an intervening lienholder results, (2) the subrogee has actual knowledge of the intervening lien, or (3) the culpability of the subrogee would create a result that would ignore the interests of equity and justice.

¶ 13 Applying the three elements, the court concluded that the changed terms of the two loans prejudiced Kim and that Yakima's actual knowledge³ of Kim's judgment barred equitable subrogation. Further, in considering Yakima's culpability, the court determined that Yakima should not be relieved of the consequences of its negligence in failing to discover or disclose Kim's judgment.

¶ 14 In the only other Washington case to consider equitable subrogation in mortgage refinancing, BNC Mortgage, Inc. v. Tax Pros, 111 Wash.App. 238, 253, 46 P.3d 812 (2002), Division Two declined equitable subrogation to BNC, a financial institution, which had paid off the mortgage of a prior lienholder. The court mentioned Kim, but did not consider its elements because the court in Kim"did not ... clearly explain why"⁴ it had reached its result. BNC, 111 Wash.App. at 257, 46 P.3d 812.⁵ Nor did the court consider whether BNC's actual or constructive knowledge of the intervening lienholder barred subrogation. BNC, 111 Wash.App. at 256, 46 P.3d 812.

¶ 15 WFB West argues that the Restatement (Third) of Property provides the correct analysis for equitable subrogation in Washington. The Restatement's approach focuses on the avoidance of unjust enrichment and provides that equitable subrogation is appropriate in the following...