Eastern Sav. Bank, FSB v. Pappas, 02-CV-676.

Citation829 A.2d 953
Decision Date14 August 2003
Docket NumberNo. 02-CV-676.,02-CV-676.
PartiesEASTERN SAVINGS BANK, FSB, Appellant, v. Achilles PAPPAS, Mary Pappas West, Christy Papageorge, Appellees.
CourtCourt of Appeals of Columbia District

829 A.2d 953

EASTERN SAVINGS BANK, FSB, Appellant,
v.
Achilles PAPPAS, Mary Pappas West, Christy Papageorge, Appellees

No. 02-CV-676.

District of Columbia Court of Appeals.

Argued April 22, 2003.

Decided August 14, 2003.


829 A.2d 954
G. Vann Canada, Jr., Rockville, MD, for appellant

Daniel S. Roth, with whom Kurt Berlin, Washington, DC, was on the brief, for appellees.

Before STEADMAN, SCHWELB, and RUIZ, Associate Judges.

SCHWELB, Associate Judge:

Eastern Savings Bank (Eastern) brought this action for a declaratory judgment to determine the priority of secured interests in real property as between Eastern's

829 A.2d 955
Deed of Trust securing the payment of an indebtedness owed to Eastern by Vasiliki Pappas and a lien based on an earlier judgment against Vasiliki Pappas in favor of three judgment creditors. The trial court granted summary judgment in favor of the judgment creditors. On appeal, Eastern contends that its lien is entitled to priority over the creditors' lien pursuant to the doctrine of equitable subrogation. We agree, reverse, and remand

I.

In June 1980, Aphrodite Pappas, who was the owner of certain real property at 2507 33rd Street, N.W. in Washington, D.C., conveyed that property to Vasiliki Pappas in fee simple. Soon thereafter, Aphrodite Pappas died, leaving three children as heirs.1 Vasiliki Pappas was named personal representative of Aphrodite Pappas' estate. In 1986, however, the Probate Court removed Vasiliki Pappas as personal representative on account of numerous improprieties on her part in exercising her fiduciary responsibilities. On April 18, 1990, Vasiliki Pappas executed a deed of trust on the 33rd Street property to secure a loan made to her by CitiBank Federal Savings Bank in the amount of $159,000.00 which was duly recorded.

In 1992, and again in 1996, the successor personal representative of Aphrodite Pappas' estate obtained judgments against Vasiliki Pappas in the Superior Court for breach of fiduciary duty. Each judgment was against Vasiliki Pappas personally, and not against her in her capacity as personal representative. These judgments were duly recorded in the land records, and they became effective as judgment liens against all real property titled in the name of Vasiliki Pappas. D.C.Code § 15-102(a) (2001).

Meanwhile, Vasiliki Pappas' financial difficulties continued, and by 1998, she was in serious default on the CitiBank Deed of Trust. CitiBank instituted foreclosure proceedings. On November 3, 1998, Vasiliki Pappas secured a loan from Eastern which had the effect of refinancing the earlier CitiBank loan, and she duly executed a promissory note in the amount of $168,000.00 payable to Eastern, $153,800.00 of which was used to discharge the earlier CitiBank loan. This note was secured by a new Deed of Trust of the same date.2

Certified Title Corporation (Certified) performed a title search on the property on behalf of Eastern in connection with the refinancing of the Vasiliki Pappas indebtedness. Certified discovered the first judgment, which had been secured by the Successor Representative of the Estate of Aphrodite Pappas against Vasiliki Pappas in the amount of $3,461.12. Certified mistakenly understood, and incorrectly represented to Eastern, that this judgment had been entered against Vasiliki Pappas solely in her capacity as the former Personal Representative of Aphrodite Pappas' estate. A duly recorded judgment against Vasiliki Pappas in the amount of $62,397.76, which had been entered by the Probate Division of the Superior Court in 1992, apparently was not discovered, or, at least, not related to Eastern, during the initial title search. The title examinations were performed by an independent abstractor retained by Certified, and Eastern did not receive any title documents which would have imparted actual knowledge of

829 A.2d 956
any judgment beyond the one for $3,461.12.3

Soon after executing the promissory note and Deed of Trust in favor of Eastern, Vasiliki Pappas defaulted on the Eastern loan. As CitiBank had done following Vasiliki Pappas' earlier default, Eastern instituted foreclosure proceedings. In connection with these proceedings, counsel for Eastern caused the title to be examined, and Eastern then actually learned for the first time that the judgment in favor of the heirs was against Vasiliki Pappas individually, and not in her capacity as Personal Representative of Aphrodite Pappas' estate.4 It was also at this time that Eastern learned the full amount of Vasiliki Pappas' total judgment debt.

In March 1999, sixteen years after the death of Aphrodite Pappas, the Probate Court ordered the distribution to the heirs of portions of the judgments secured by the Successor Personal Representative against Vasiliki Pappas. On December 19, 2000, Eastern brought suit against the heirs, claiming that its lien was superior to their judgment liens under the principle of equitable subrogation. Eastern and the judgment creditors filed cross-motions for summary judgment.

On December 30, 2001, in an eight-page order, the trial court granted the heirs' motion for summary judgment and denied Eastern's motion for the same relief. Citing, inter alia, Associates Fin. Servs. of America v. District of Columbia, 689 A.2d 1217 (D.C.1997), the judge wrote that "the common law principle of `first in time, first in right' governs competing creditors' claims against a property in the absence of an exception." She noted that the only statutory exception in the District is D.C.Code § 15-104 (2001), which provides that

[t]he lien of a mortgage or deed of trust upon real property, given by the purchaser to secure the payment of the whole or any part of the purchase money, is superior to that of a previous judgment or decree against the purchaser.[5]

The judge raised, but found it unnecessary to resolve, the issue whether this statutory exception should be extended by the court to a lender like Eastern, who provides refinancing to the borrower by paying off and retiring a prior indebtedness. Relying on Associates Fin. Servs., 689 A.2d at 1222, and on Clay Properties v. Washington Post Co., 604 A.2d 890, 895 (D.C.1992) (en banc), the judge determined that "a crucial question in deciding the competing interests of lienholders and creditors is notice." The judge went on to hold that because the judgments were recorded Eastern "was on inquiry notice of the judgment against Vasiliki Pappas," that Eastern "did not acquire creditor status for value without notice," and that "[e]quity . . . does not justify moving Eastern to a position superior to the Pappas defendants." The judge therefore granted summary judgment to the heirs. This appeal followed.

II.

"Generally, priority of liens or security interests is determined according to the well-known principle of `first in time, first in right.'" Malakoff v. Washington, 434 A.2d 432, 434 (D.C.1981) (citations

829 A.2d 957
omitted). The question in this case is whether, and to what extent, this principle is affected by the doctrine of equitable subrogation

In G.E. Capital Mortgage Servs., Inc. v. Levenson, 338 Md. 227, 657 A.2d 1170 (1995), the Maryland Court of Appeals explained that subrogation is

the substitution of one person to the position of another, an obligee, whose claim he has satisfied. . . . The basic principles underlying subrogation are the same as those in constructive trusts, prevention of merger, and equitable liens, i.e., restitution to prevent forfeiture and unjust enrichment.

G.E. Osborne, Handbook on the Law of Mortgages § 277, at 561 (2d ed. 1970) (Osborne). Although the doctrine of equitable subrogation may be applied in many contexts, one context involves the refinancing of a mortgage. Osborne states:

Where a lender has advanced money for the purpose of discharging a prior encumbrance in reliance upon obtaining security equivalent to the discharged lien, and his money is so used, the majority and preferable rule is that if he did so in ignorance of junior liens or other interests he will be subrogated to the prior lien. Although stressed in some cases as an objection to relief, neither negligence nor constructive notice should be material.
Osborne, § 282, at 570.

Id. at 1172. The court stated that "[t]he great majority of case law holds that one who pays the mortgage of another and takes a new mortgage as security will be subrogated to the rights of the first mortgagee as against any intervening lienholder." Id. at 1175. See also, e.g., Caito v. United California Bank, 20 Cal.3d 694, 144 Cal.Rptr. 751, 576 P.2d 466, 471 (1978) (defining equitable subrogation).

In this jurisdiction, the doctrine of equitable subrogation was first applied to encumbrances on real property over a century ago. See Taylor v. MacGreal, 15 App. D.C. 32, 33 (1899). Thirty eight years later, in the leading case of Burgoon v. Lavezzo, 68 App.D.C.20, 92 F.2d 726 (1937),6 the court applied the doctrine in a somewhat complex situation similar in principle to the one in the present case. The court held in Burgoon that where part of the purchase money for real property had been used to discharge an existing second mortgage, the purchaser7 was entitled to subrogation of that mortgage as against the holder of an existing third mortgage which was a matter of record and of which the purchaser had constructive but not actual notice.8 In reaching its decision, the court surveyed the authorities, already numerous in 1937, which had applied or refused to apply the doctrine of equitable subrogation where a lender or purchaser sought priority over intervening

829 A.2d 958
liens. Citing Hudson v. Dismukes, 77 Va. 242, 246-47 (1883), the court explained that subrogation "is the creature of equity, and is founded upon principles of natural justice. . . and is now applied in favor of all persons who are required to pay the debt of another to protect their own interests." 68 App.D.C. at 23, 92 F.2d at 729. The court in Burgoon...

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