US Bank, N.A. v. JPMorgan Chase Bank, N.A.

• Decision Date: 29 June 2017
• Docket Number: No. 1 CA-CV 16-0253,1 CA-CV 16-0253
• Citation: 398 P.3d 118
• Parties: US BANK, N.A., Plaintiff/Appellee, v. JPMORGAN CHASE BANK, N.A., Defendant/Appellant.
• Court: Arizona Court of Appeals

398 P.3d 118

US BANK, N.A., Plaintiff/Appellee,

v.JPMORGAN CHASE BANK, N.A., Defendant/Appellant.

No. 1 CA-CV 16-0253

Court of Appeals of Arizona, Division 1.

FILED June 29, 2017

Jaburg & Wilk, PC, Phoenix, By David L. Allen, Nichole H. Wilk, Counsel for Plaintiff/Appellee

Maynard, Cronin, Erickson, Curran & Reiter, PLC, Phoenix, By Douglas C. Erickson, Counsel for Defendant/Appellant

Judge Diane M. Johnsen delivered the opinion of the Court, in which Presiding Judge Samuel A. Thumma and Judge Patricia K. Norris joined.

OPINION

JOHNSEN, Judge:

¶ 1 In this dispute between two lenders, we address the doctrines of "replacement" and equitable subrogation as they apply to respective lien rights. We affirm the superior court's application of the replacement doctrine to a claim by US Bank, N.A. for declaratory relief. We vacate the court's application of equitable subrogation and remand for entry of judgment in favor of JPMorgan Chase Bank, N.A. ("Chase") on US Bank's second claim for declaratory relief. We also remand for consideration of US Bank's remaining claims.

FACTS AND PROCEDURAL BACKGROUND

¶ 2 In 1997, Dietrich and Susanne Loeper obtained a $200,000 home equity line of credit ("HELOC") from Chase's predecessor in interest, Bank One, Arizona, N.A. ("Bank One"). The HELOC was secured by a deed of trust on the Loepers' home ("HELOC Deed of Trust"). In 2001, the HELOC was modified to increase the available credit to $250,000.

¶ 3 In 2004, the Loepers executed a note and deed of trust in favor of US Bank's predecessor in interest, First Magnus Financial Corporation ("FMF") for $387,000 ("2004 FMF Note" and "2004 FMF Deed of Trust"). At that time, Bank One executed and recorded a subordination agreement waiving the HELOC Deed of Trust's priority in favor of the 2004 FMF Deed of Trust.

¶ 4 In 2005, the Loepers executed a new note and deed of trust in favor of FMF for $682,000 ("2005 FMF Note" and "2005 FMF Deed of Trust"), and used $384,040.34 from the loan proceeds to pay off the 2004 FMF Note. The 2004 FMF Deed of Trust was released. The closing statement also allocated $211,148.30 from the proceeds of the new loan to pay off the HELOC. According to Chase, which by then owned the HELOC, it received and deposited this sum but did not close the HELOC or release the HELOC Deed of Trust because the payment "was $3,452.13 short of what was required to pay off the Loan." Chase advised the title company of the shortfall, but no action was taken to correct it.¹ Thereafter, the Loepers continued to take advances on the HELOC, resulting in an unpaid balance of more than $203,000 by 2013.

¶ 5 Meanwhile, the Loepers defaulted on the 2005 FMF Note, and the trustee began non-judicial foreclosure proceedings. The trustee obtained a trustee sale guaranty report, which showed the HELOC Deed of Trust as superior to the 2005 FMF Deed of Trust. Thereafter, the trustee under the HELOC Deed of Trust also began foreclosure proceedings.

¶ 6 US Bank, now holder of the 2005 FMF Note and Deed of Trust, then filed a four-count complaint in superior court for (1) declaratory relief—lien priority pursuant to the replacement doctrine, (2) declaratory relief—lien priority pursuant to equitable subrogation, (3) unjust enrichment, and (4) estoppel. The parties agreed to postpone any trustee's sale until the superior court's final ruling on the lien priorities.

¶ 7 Following discovery, US Bank moved for summary judgment on counts one and two of the complaint, and Chase cross-moved for summary judgment on all four counts. Following oral argument, the superior court granted US Bank's motion and denied Chase's cross-motion. Applying both the replacement doctrine and equitable subrogation, the court concluded that "equity favors subordinating Chase's lien to US Bank's lien." The court then entered judgment pursuant to Arizona Rule of Civil Procedure 54(b), awarding US Bank its attorney's fees. Chase timely appealed, and we have jurisdiction pursuant to Article 6, Section 9, of the Arizona Constitution and Arizona Revised Statutes ("A.R.S.") section 12–2101(A)(1) (2017).²

DISCUSSION

A. General Principles.

¶ 8 Previously recorded deeds of trust normally take priority over later deeds of trust. See BAC Home Loans Servicing, LP v. Semper Invs. L.L.C. , 230 Ariz. 587, 590, ¶ 6, 277 P.3d 784, 787 (App. 2012).³ Two equitable doctrines, replacement and subrogation, however, may permit a later-recorded deed of trust to assume priority over an earlier deed of trust. See Markham Contracting Co. v. Fed. Deposit Ins. Co ., 240 Ariz. 360, 363, ¶ 15, 379 P.3d 257, 260 (App. 2016). Although replacement and subrogation are similar doctrines, they apply in different situations. Subrogation applies when there are two different lenders "because, by definition, one cannot be subrogated to one's own previous deed of trust." Cont'l Lighting & Contracting, Inc. v. Premier Grading & Utils., LLC , 227 Ariz. 382, 385, ¶ 10, 258 P.3d 200, 203 (App. 2011). Conversely, replacement applies to a refinancing by the same lender. See Markham , 240 Ariz. at 363, ¶ 15, 379 P.3d 257.

¶ 9 The superior court applied both doctrines in this case. We review de novo the application of these equitable doctrines. See Brimet II, LLC v. Destiny Homes Mktg., LLC , 231 Ariz. 457, 459, ¶ 10, 296 P.3d 993, 995 (App. 2013). In considering their application, we "examine the totality of the equities." Markham , 240 Ariz. at 364, ¶ 18, 379 P.3d 257.⁴

B. Replacement.

¶ 10 Chase argues the HELOC Deed of Trust is superior to the 2005 FMF Deed of Trust "under the rule of first in time, first in right."

¶ 11 Arizona expressly has adopted the replacement doctrine as defined by the Restatement (Third) of Property: Mortgages ("Restatement") § 7.3 (1997):

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 ... 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....

Cont'l Lighting , 227 Ariz. at 388, ¶ 22, 258 P.3d 200 (citing Restatement § 7.3).⁵ The rationale behind the replacement doctrine is that "the intervening lienholder suffers no prejudice because its lien maintains the same position it occupied before the subsequent lender satisfied the pre-existing obligation." Lamb Excavation, Inc. v. Chase Manhattan Mortg. Corp. , 208 Ariz. 478, 481, ¶ 11, 95 P.3d 542, 545 (App. 2004).

¶ 12 Applying Restatement § 7.3 in Continental Lighting , this court held that:

where a senior lien is released of record and, as part of the same transaction, is replaced with a new lien, the latter retains the same priority as its predecessor, except to the extent that any change in the terms of the security document or the underlying debt it secures is materially prejudicial to a junior lienholder's interest in the real property.

227 Ariz. at 388, ¶ 22, 258 P.3d 200. In Continental Lighting , the amount of the new loan exceeded the balance on the original loan; therefore, the new deed of trust assumed the priority of the original deed of trust to the extent of the balance on the original loan paid off by the new loan. Id. at 388–89, ¶ 23, 258 P.3d 200.

¶ 13 Here, the Loepers used the 2005 FMF Note proceeds to satisfy and replace the 2004 FMF Note and the 2004 FMF Deed of Trust. Therefore, application of the replacement doctrine is appropriate. Pursuant to the subordination agreement, the 2004 FMF Deed of Trust had priority over the HELOC Deed of Trust. Therefore, applying the replacement doctrine, the 2005 FMF Deed of Trust, which replaced the 2004 FMF Deed of Trust, retained priority over the HELOC Deed of Trust to the extent of $384,040.34, the amount paid on the 2004 FMF Note from the proceeds of the 2005 FMF Loan. Chase suffers no prejudice from application of the replacement doctrine because the HELOC Deed of Trust maintains the same position it occupied before the 2005 Deed of Trust replaced the 2004 Deed of Trust.

¶ 14 Accordingly, we affirm the superior court's application of the replacement doctrine and conclude that the 2005 FMF Deed of Trust takes priority over the HELOC Deed of Trust to the extent of $384,040.34.

C. Equitable Subrogation.

¶ 15 Chase next argues that, even if the replacement doctrine applies, equitable subrogation does not apply because US Bank's predecessor, FMF, "was aware of Chase's lien and failed to take proper steps to ensure that it was satisfied and released."

¶ 16 As with replacement, Arizona has adopted the definition of subrogation set forth in Restatement § 7.6: "One who fully performs an obligation of another, secured by a mortgage, becomes by subrogation the owner of the obligation and the mortgage to the extent necessary to prevent unjust enrichment." (Emphasis added); Sourcecorp, Inc. v. Norcutt , 229 Ariz. 270, 273, ¶¶ 10, 12, 274 P.3d 1204, 1207(2012) (adopting Restatement § 7.6). This court has held that "the doctrine of equitable subrogation allows a subsequent lender who applies funds to a primary and superior encumbrance to be substituted in the priority position of the primary lienholder." BAC Home Loans , 230 Ariz. at 590, ¶ 6, 277 P.3d 784 ; see also Mosher v. Conway , 45 Ariz. 463, 472, 46 P.2d 110 (1935) ("The general rule is that a person having an interest in property who pays off an encumbrance in order to protect his interest is subrogated to the rights and limitations of the person paid.").

¶ 17 As our supreme court has explained, however, "[e]quitable subrogation is generally permitted only when a person fully discharges a debt secured by a mortgage." Weitz Co. v. Heth , 235 Ariz. 405, 411, ¶ 20, 333 P.3d 23, 29 (2014) (emphasis added). In announcing this general rule, the court relied on Restatement § 7.6 comment a, which states:

Where subrogation to a mortgage is sought, the entire obligation secured by the mortgage must be discharged.

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