Sourcecorp, Inc. v. Norcutt
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Dean and Stacey Norcutt bought a home for cash and satisfied the existing first mortgage held by Zions National Bank. They later discovered the home was also subject to a judgment lien obtained by Sourcecorp, Inc. that far exceeded the property's value. Sourcecorp subsequently initiated a sheriff's sale to foreclose on its judgment lien, and the Norcutts sued to enjoin the sale. The trial court granted relief to the Norcutts, and the court of appeals reversed. On remand, the trial court entered summary judgment for Sourcecorp. The Court of appeals reversed, holding that the Norcutts were equitably subrogated to the position of Zions Bank in priority over Sourcecorp. The Supreme Court affirmed, holding that the Norcutts were equitably subrogated to the mortgage lien's priority for the amount they paid to satisfy the mortgage. Remanded.
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SUPREME COURT OF ARIZONA En Banc SOURCECORP, INCORPORATED, ) ) Plaintiff/Appellee, ) ) v. ) ) DEAN D. NORCUTT and STACEY L. ) NORCUTT, husband and wife, ) ) Intervenors/Appellants. ) ) ) ) __________________________________) Arizona Supreme Court No. CV-11-0269-PR Court of Appeals Division One No. 1 CA-CV 10-0212 Maricopa County Superior Court No. CV2002-020676 O P I N I O N Appeal from the Superior Court in Maricopa County The Honorable J. Kenneth Mangum, Judge REVERSED AND REMANDED ________________________________________________________________ Opinion of the Court of Appeals, Division One 227 Ariz. 463, 258 P.3d 281 (App. 2011) AFFIRMED ________________________________________________________________ STEPTOE & JOHNSON LLP By Francis J. Burke, Jr. Bennett Evan Cooper Douglas D. Janicik Attorneys for Sourcecorp, Incorporated Phoenix MARISCAL, WEEKS, MCINTYRE & FRIEDLANDER, P.A. By Michael R. Scheurich Anne L. Tiffen Robert C. Brown And Phoenix GUST ROSENFELD, P.L.C. By Charles W. Wirken Scott A. Malm Attorneys for Dean D. Norcutt and Stacey L. Norcutt Phoenix HOLDEN WILLITS PLC By Michael J. Holden Barry A. Willits Attorneys for Amicus Curiae Arizona Builders Alliance Phoenix GUST ROSENFELD, P.L.C. Phoenix By Richard A. Segal Charles W. Wirken Scott A. Malm Attorneys for Amicus Curiae Land Title Association of Arizona ________________________________________________________________ B A L E S, Justice ¶1 Dean and Stacey Norcutt bought a home for cash and satisfied the existing first mortgage. They later discovered the home was also subject to a judgment lien far exceeding the property s value. We hold that the purchasers were equitably subrogated to the mortgage lien s priority for the amount they paid to satisfy the mortgage. I. ¶2 In September 2004, Sourcecorp, Incorporated obtained a judgment exceeding $3 million against Steven and Rita Shill, who owned residential property in Prescott. The property was subject to a first mortgage in favor of Zions National Bank securing a debt judgment lien. of nearly $689,000.1 Sourcecorp recorded a In November 2004, the Shills sold the property 1 Zions Bank held a deed of trust, but we refer to this interest as a mortgage because Sourcecorp and the opinion of the court of appeals use this term. The distinction between a mortgage and a deed of trust is immaterial to our analysis. Cf. Restatement (Third) of Property: Mortgages § 1.1 (1997) (defining mortgage to include deeds of trust). 2 to the Norcutts $621,000 of the for $667,500 proceeds in in cash. full secured by its first mortgage. Zions Bank satisfaction of accepted the debt Although the Norcutts purchased title insurance from First American Title Insurance Company, the title insurer did not discover Sourcecorp s judgment lien. ¶3 After the Norcutts bought the property, Sourcecorp initiated a sheriff s sale to foreclose on its judgment lien. The Norcutts sued to enjoin the sale. Granting relief, the trial court ruled that the Norcutts interest in the property was superior to Sourcecorp s judgment lien. The appeals reversed for reasons not before this Court. court of Sourcecorp, Inc. v. Shill, No. 1 CA-CV 05-0425 (Ariz. App. Sept. 26, 2006) (mem. decision). On remand, the Norcutts argued that they were equitably subrogated to the position of Zions Bank in priority over Sourcecorp. The trial court rejected this argument and entered summary judgment for Sourcecorp. court of appeals subrogated. held that the Reversing again, the Norcutts were equitably Sourcecorp, Inc. v. Norcutt, 227 Ariz. 463, 471 ¶ 37, 258 P.3d 281, 289 (App. 2011). ¶4 We granted review because application of the equitable subrogation doctrine in this context impression and statewide importance. is an issue of first Jurisdiction exists under Article 6, Section 5(3) of the Arizona Constitution and A.R.S. § 12-120.24 (2009). 3 II. ¶5 Equitable subrogation is the substitution of another person in the place of a creditor, so that the person in whose favor it is exercised succeeds to the rights of the creditor in relation to the debt. Mosher v. Conway, 45 Ariz. 463, 468, 46 P.2d 110, 112 (1935). This equitable remedy is designed to avoid a person s receiving an unearned windfall at the expense of another. Restatement (Third) of Property: Mortgages § 7.6 cmt. a (1997) ( Restatement ); see Mosher, 45 Ariz. at 468, 46 P.3d at 112 injustice). (noting The that general purpose rule of is doctrine that a is person to prevent 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. Id. at 472, 46 P.2d at 114; see also Restatement § 7.6(a) (providing that [o]ne 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 ). ¶6 Mosher concerned paving liens on residential lots assessed for street improvements. the city could private parties. did not redeem auction liens Under the statutory scheme, for delinquent assessments to If the property owner or a party in interest the lien within 4 a year, the purchaser would obtain the property free of encumbrances. 45 Ariz. at 465-67, 46 P.2d at 111-12. In Mosher, one lot was subject to three liens, sold which subrogation, were this Court separately. held that the Applying second equitable purchaser was subrogated to the positions of the first and third purchasers when he redeemed their liens, even though the property owner ultimately redeemed all of the liens. The owner could not complain about this result because it merely required her to pay one person rather than another to release the liens. Id. at 471, 46 P.2d at 113. ¶7 Mosher said that no general rule can be stated which will afford a test [for equitable subrogation] in all cases. Id. at 468, applicable or 46 P.2d not at depends 112. upon Instead, the [w]hether particular circumstances of each case as it arises. it facts is and Id., 46 P.2d at 112. Noting the modern tendency to extend the doctrine s use, id., 46 P.2d at 112, the Court also observed that [A] mere volunteer, who has no rights to protect, may not claim the right of subrogation, for one who, having no interest to protect, without any legal or moral obligation to pay, and without an agreement for subrogation or an assignment of the debt, pays the debt of another, is not entitled to subrogation, the payment in his case absolutely extinguishing the debt. Id. at 470, 46 P.2d at 113. The Court immediately added that when one, to protect his own interest, pays a debt which he 5 honestly believes must be paid to accomplish that purpose, . . . he cannot be held to be a mere volunteer. ¶8 Id., 46 P.2d at 113. Because the Court declined to adopt a bright-line test in Mosher and has not revisited the issue, the court of appeals has developed guidelines for applying equitable subrogation. In 1965, the court of appeals stated that subrogation would occur if (1) a third person discharges an encumbrance on the property of another; (2) the person is not a volunteer; and (3) there is an express or implied agreement that he will be substituted in place of the holder of the encumbrance. Peterman-Donnelly Eng rs & Contractors Corp. v. First Nat l Bank of Ariz., 2 Ariz. App. 321, 325, 408 P.2d 841, 845 (1965). ¶9 Nearly forty years later, the court described several tests for equitable subrogation. of appeals See Lamb Excavation, Inc. v. Chase Manhattan Mortg. Corp., 208 Ariz. 478, 480-82 ¶¶ 8-14, 95 P.3d 542, 544-46 (App. 2004). Reviewing cases from different jurisdictions, the court said the majority approach requires four primary elements: (1) the party claiming equitable subrogation has paid the debt; (2) the party was not a volunteer; (3) the party was not primarily liable for the debt; and (4) no injustice will be done to the other party by allowing subrogation. ¶10 Lamb Id. at 480 ¶ 8, 95 P.3d at 544. Excavation explained, however, Restatement has adopted a more expansive standard. 6 that the Id. at 481 ¶ 10, 95 P.3d at 545; Restatement § 7.6. Under this test, a person who fully performs an obligation of another, secured by a mortgage, becomes by subrogation the owner of the obligation and the mortgage enrichment. appropriate, to the extent Restatement § 7.6. for example, if the necessary to prevent unjust Such equitable relief may be person seeking subrogation expected to receive a security interest in the real estate with the priority of the mortgage being discharged. ¶11 Id. In Lamb Excavation, the court of appeals distinguished Peterman-Donnelly from the majority approach, 208 Ariz. at 480-81 ¶¶ 7-8, 95 P.3d at 543-44, and observed that Arizona s approach appears consistent with the Restatement. ¶ 13, 95 P.3d at 546. Id. at 482 In the instant case, the court of appeals cited the primary elements of the majority approach, noted other factors considered in Arizona cases, Excavation s comment about the Restatement. and quoted Lamb 227 Ariz. at 466- 67, 469 ¶¶ 14, 25, 258 P.3d at 284-285, 287. ¶12 regarding There is thus the test for some ambiguity equitable in Arizona subrogation. case For law reasons explained below, we adopt the Restatement approach because it is most consistent with the rationale for equitable subrogation. III. ¶13 Absent equitable subrogation, once the debt to Zions Bank was fully satisfied by the Norcutts, Sourcecorp s judgment 7 lien advanced in priority. Sourcecorp claims that it is entitled to execute on its $3 million judgment lien through a sheriff s sale. The Norcutts would receive nothing from such a sale, but would likely have a claim against their title insurer for failing to discover Sourcecorp s lien. In contrast, the Norcutts argue that they are subrogated to the position of Zions Bank and therefore have a priority over Sourcecorp s judgment lien. ¶14 that Relying on Mosher and other cases, Sourcecorp argues equitable subrogation is not appropriate because the Norcutts acted as mere volunteers in purchasing the property. Alternatively, Sourcecorp contends that subrogation is not available because there was no agreement, express or implied, that the Norcutts would be subrogated. Finally, Sourcecorp contends that equitable considerations preclude subrogation. We consider these arguments in turn. A. ¶15 Mosher and later cases state that a mere volunteer cannot claim equitable subrogation. But Mosher also explained that a person who pays a debt to protect the person s interests is not a volunteer. 45 Ariz. at 470, 46 P.2d at 113. Mosher is thus consistent with the Restatement, which does not use the term volunteer as a talisman, but instead recognizes that a 8 person who has paid a debt to protect his or her own interests may seek equitable subrogation. ¶16 We agree with See Restatement § 7.6. the Restatement that equitable subrogation should not turn on whether the person invoking the doctrine is labeled a volunteer. [T]he meaning of the term volunteer is highly variable and uncertain, and has engendered considerable confusion. Restatement § 7.6 cmt. b. Instead, the Restatement appropriately focuses on other circumstances of the party seeking to invoke subrogation, including whether the party has paid a preexisting obligation to protect the party s interest in the property. See Restatement § 7.6; see also Dietrich Indus., Inc. v. United States, 988 F.2d 568 (5th Cir. 1993) (permitting equitable subrogation without discussing whether purchaser was a volunteer); Grant S. Nelson & Dale A. Whitman, 2 Real Estate Finance Law § 10.7 (5th ed. 2010) ( [T]he issue is only whether the payor expected that the payment would free the property; if this was the grantee s understanding, subrogation should be available. ). ¶17 The Norcutts paid the preexisting debt to Zions Bank to protect their concurrently acquired interest in the property. The Norcutts thus had a sufficient interest to allow them to seek equitable subrogation. Cf. Han v. United States, 944 F.2d 526, (purchasers 530 interest (9th to Cir. 1991) establish and protect 9 paid their off own mortgagee s interest and therefore were not volunteers); E. Boston Sav. Bank v. Ogan, 701 N.E.2d 331, 336 (Mass. 1998) (same). B. ¶18 Quoting Herberman v. Bergstrom, Sourcecorp also argues that [f]or equitable subrogation to apply, there must be an agreement . . . that the subsequent lender will be substituted for the holder of the prior encumbrance. 816 P.2d 244, 247 (App. 1991). appeals contain similar 168 Ariz. 587, 590, Other decisions of the court of language. See Lamb Excavation, 208 Ariz. at 482 ¶ 13, 95 P.3d at 546 (requiring an express or implied agreement to subrogate); Peterman-Donnelly, 2 Ariz. App. at 325-26, 408 P.2d at 845-46 (same). ¶19 Mosher, holding that the however, did purchaser not of require paving an liens agreement was subrogated to the positions of other lienholders. at 471, 46 P.2d at 113. in equitably See 45 Ariz. Moreover, to the extent that the court of appeals has required an agreement, it has adopted a very elastic notion of the concept. In Lamb Excavation, property owners obtained a construction loan secured by a deed of trust. After several subcontractors served preliminary notices of mechanics liens, see A.R.S. § 33-992.01, the owners obtained permanent financing and satisfied the construction loan. The court was of equitably appeals concluded subrogated to the that the prior 10 permanent lien lender position of the construction lender. In reaching implied this See 208 Ariz. at 483 ¶ 16, 95 P.2d at 547. conclusion, agreement to the subrogate court based found on at least statements in an the permanent loan documents and closing instructions that the new lender would have a first lien. ¶20 do Id. The Restatement and case law from other jurisdictions not require subrogation. (listing an agreement as a condition for equitable See Restatement § 7.6 cmt. a; Han, 944 F.2d at 529 five factors justifying the use subrogation without requiring an agreement). of equitable The requirement of an agreement for subrogation like the disqualification of volunteers - has been subject to varying interpretations. Compare Citizens Mercantile Co. v. Eason, 123 S.E. 883, 886 (Ga. 1924) (holding that a purchaser was not entitled to equitable subrogation because he did not pay debts under an agreement, express subrogated ), with or In implied, re . . Mortgages . Ltd., that he would be 459 B.R. 739, 742 (Bankr. D. Ariz. 2011) ( Arizona case law seems to hold that the subsequent lender s intent to obtain first lien priority is sufficient evidence, standing alone, to satisfy the agreement requirement. ). ¶21 We requirement subrogation. adopt of an the Restatement agreement as approach a and condition reject for any equitable To be sure, parties may achieve subrogation by 11 agreement, such as through an assignment of a promissory note and related mortgage. (distinguishing See conventional Restatement subrogation agreement from equitable subrogation). § by 7.6 cmt. a assignment or Equitable subrogation, however, does not turn on contractual principles, but instead on the concern to prevent unjust enrichment. That goal is served by allowing subrogation when a party pays a mortgage to protect an interest in the property, irrespective of an express or implied agreement that the party will succeed to the position of the prior lienholder. C. ¶22 Finally, Sourcecorp argues that because the Norcutts obtained title losses, insurance equitable from which considerations they could preclude recoup any subrogation. Sourcecorp contends that neither the Norcutts nor the insurer should benefit from the insurer s negligence in failing to discover the recorded lien. ¶23 Accepting these arguments, however, would require us to ignore the key concern underlying equitable subrogation and would unjustly enrich Sourcecorp. Before the Norcutts purchased the home, Sourcecorp had a second lien on the property, which was worth less than the outstanding mortgage debt of $689,000. The Norcutts $621,000 in satisfied cash. the first Sourcecorp 12 lien by contends paying that the Zions Bank result unintended by the Norcutts was that Sourcecorp obtained a first lien on property that had just sold for $667,500, and the Norcutts were left with nothing but a claim against their would give insurer. ¶24 Denying subrogation here, therefore, Sourcecorp a windfall independent of whether the Norcutts were insured or had constructive notice of the judgment lien. (There is no suggestion the Norcutts had actual notice of the lien, and we need not address whether a purchaser with actual notice could ever be equitably subrogated.) Moreover, there is no general requirement that a person seeking subrogation lack notice in order to obtain equitable relief. In Lamb Excavation, for example, the permanent lender was subrogated to a first lien position even though various subcontractors had served twentyday notices of mechanics liens. 208 Ariz. at 484 ¶ 20, 95 P.3d at 548 (observing that constructive notice is not an element of equitable subrogation under Arizona law ); see also Restatement § 7.6 cmt. e (noting that the payor s constructive, is not necessarily relevant. notice, actual or The question in such cases is whether the payor reasonably expected to get security with a priority equal to the mortgage being paid. ). We also agree with the court of appeals that it would be anomalous to deny equitable subrogation merely 13 because a party had been diligent in obtaining title insurance. 227 Ariz. at 471 ¶ 35, 258 P.3d at 289. ¶25 Sourcecorp prejudice its further interests by argues that preventing it subrogation from moving would up in priority as a lienholder after the satisfaction of the mortgage debt to Zions Bank. will not Subrogation will be recognized only if it materially interests. prejudice Restatement § 7.6 the holders of cmt. e. do We intervening not accept, however, that subrogation would materially prejudice Sourcecorp. ¶26 Generally, the satisfaction of a superior lien results in subordinate lienholders advancing in priority, but preventing this result in certain circumstances is precisely the aim of equitable subrogation. As the Restatement notes: 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. Even though the performance would otherwise discharge the obligation and the mortgage, they are preserved and the mortgage retains its priority in the hands of the subrogee. Restatement junior § 7.6(a) lienholder from (emphasis advancing added). in Thus, priority consequence of equitable subrogation. preventing is an a intended See Lamb Excavation, 208 Ariz. at 483 ¶ 18, 95 P.3d at 547 ( We fail to comprehend the nature of the perceived prejudice or inequity, as it appears the lienholders would remain in the 14 same position they occupied before subrogation . . . . ); Restatement § 7.6 cmt. e ( The holders of . . . intervening [about subrogation]; their interests are subrogated only discharge the first mortgage, somewhat better off, because for not complain materially Indeed, insofar as the the amount see infra this hardly is position prejudiced, but is simply unchanged. ). Norcutts can amount they paid to ¶ 29, Sourcecorp is was less than the outstanding debt to Zions Bank of $689,000. ¶27 Sourcecorp also argues that if the Norcutts are placed in the position of Zions Bank, they could eliminate Sourcecorp s judgment lien by a collusive refinancing followed foreclosure by the new first mortgage holder. by a Cf. Centreville Car Care, Inc. v. N. Am. Mortg. Co., 559 S.E.2d 870, 874 (Va. 2002) (noting concern about friendly foreclosure if purchaser were subrogated to position of first mortgage). This concern, however, is addressed by the limits to the equitable remedy. a result Norcutts of only paying the become[] obligation by owed subrogation to Zions the Bank, owner of As the the obligation and the mortgage to the extent necessary to prevent unjust enrichment. ¶28 Restatement § 7.6(a) (emphasis added). In determining the extent to which the Norcutts are subrogated to the prior position of Zions Bank, we note that they are cash purchasers rather than creditors looking to the property to secure a debt. With 15 respect to creditors, [o]rdinarily one who is entitled to subrogation is permitted to enforce both Restatement the § 7.6 mortgage cmt. a. and the secured Fee owners are obligation. in a different situation, because the merger doctrine generally holds that if they acquire extinguished greater. a mortgage because the on their lesser own property, interest the merges lien into is the See Mid Kansas Fed. Sav. & Loan Ass'n v. Dynamic Dev. Corp., 167 Ariz. 122, 129, 804 P.2d 1310, 1317 (1991) (noting that equitable considerations may preclude merger). ¶29 Recognizing that equitable subrogation depends on the facts of the particular case, see Mosher, 45 Ariz. at 468, 46 P.2d at 112, we conclude that it is not appropriate to confer on the Norcutts a right to foreclose on the interest to which they are subrogated. Instead, the purposes of equitable subrogation are fully served by deeming the Norcutts to have a priority to proceeds from any sale of the property in the amount they paid to satisfy the debt, $621,000. Cf. Lamb Excavation, 208 Ariz. at 483 ¶ 19, 95 P.3d at 547 (noting that payor is subrogated only to the extent funds are applied toward payment of prior lien). Applying equitable subrogation in this manner does not eliminate Sourcecorp s judgment lien. To the extent that lien adversely affects the Norcutts equity or renders the property less marketable, we neither address nor foreclose any claims the Norcutts might have against their title insurer. 16 IV. ¶30 For the reasons stated, we affirm the opinion of the court of appeals and remand to the superior court for entry of summary judgment in favor of the Norcutts consistent with this opinion. We deny the requests for attorneys fees. _____________________________________ W. Scott Bales, Justice CONCURRING: _____________________________________ Rebecca White Berch, Chief Justice _____________________________________ Andrew D. Hurwitz, Vice Chief Justice _____________________________________ A. John Pelander, Justice _____________________________________ Robert M. Brutinel, Justice 17
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