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

IN THE
ARIZONA COURT OF APPEALS
DIVISION ONE
US BANK, N.A., Plaintiff/Appellee,
v.
JPMORGAN CHASE BANK, N.A., Defendant/Appellant.
No. 1 CA-CV 16-0253
FILED 6-29-2017
Appeal from the Superior Court in Maricopa County
No. CV2013-016656
The Honorable Arthur T. Anderson, Judge
AFFIRMED IN PART; VACATED IN PART; REMANDED
COUNSEL
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
OPINION
Judge Diane M. Johnsen delivered the opinion of the Court, in which
Presiding Judge Samuel A. Thumma and Judge Patricia K. Norris joined.
US BANK v. JPMORGAN
Opinion of the Court
J O H N S E N, 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
1 In the statement of facts it filed on summary judgment, Chase
explained that:
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US BANK v. JPMORGAN
Opinion of the Court
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
A check in the amount of $211,148.30 was received by Chase
on or about September 16, 2005, which was insufficient to pay
off the [HELOC]. Guaranty Title Agency was advised that the
payment was $3,452.13 short of what was required to pay off
the [HELOC], on or about September 18, 2005. The [HELOC]
was not paid in full and the line of credit remained open.
US Bank did not controvert that statement. Chase has named the title
company as a non-party at fault.
2 Absent material revision after the relevant date, we cite a statute's
current version.
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US BANK v. JPMORGAN
Opinion of the Court
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 (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 (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 (App. 2011). Conversely, replacement
applies to a refinancing by the same lender. See Markham, 240 Ariz. at 363,
¶ 15.
¶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 (App. 2013). In
considering their application, we "examine the totality of the equities."
Markham, 240 Ariz. at 364, ¶ 18.4
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."
3 In this opinion, we use the terms "mortgage," "deed of trust" and
"lien" interchangeably. See Weitz Co. v. Heth, 235 Ariz. 405, 409, ¶ 12, n.2
(2014).
4 We review de novo the superior court's grant of summary judgment.
See Weitz, 235 Ariz. at 409, ¶ 11. Summary judgment is appropriate if there
is no genuine issue of material fact and "the moving party is entitled to
judgment as a matter of law." Ariz. R. Civ. P. 56(a); see also Orme Sch. v.
Reeves, 166 Ariz. 301, 305 (1990). We view the facts in the light most
favorable to the party against which judgment was entered. See Cont'l
Lighting & Contracting, Inc. v. Premier Grading & Utils., LLC, 227 Ariz. 382,
384, ¶ 2 (App. 2011).
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US BANK v. JPMORGAN
Opinion of the Court
¶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 (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 (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. 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.
¶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
5 Restatement § 7.3 applies both to the replacement and modification
of mortgages. See Restatement § 7.3. This case involves replacement, which
occurs when "a lender releases its original lien of record, discharging it with
the proceeds of the second loan secured by a new mortgage that is recorded
either immediately or shortly after releasing the initial loan as part of the
same replacement loan transaction." Cont'l Lighting, 227 Ariz. at 387, ¶ 16,
n.3 (citing Restatement § 7.3 cmt. a).
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US BANK v. JPMORGAN
Opinion of the Court
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 (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; see also Mosher v. Conway, 45 Ariz. 463, 472 (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
(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.
Partial subrogation to a mortgage is not permitted. The reason is
that partial subrogation would have the effect of dividing the
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US BANK v. JPMORGAN
Opinion of the Court
security between the original obligee and the subrogee,
imposing unexpected burdens and potential complexities of
division of the security and marshaling upon the original
mortgagee. However, if the payor can negotiate a full
settlement of the obligation for less than its face value,
subrogation will be recognized.
(Emphasis added.)
¶18 Weitz involved a construction loan secured by a deed of trust
on a high-rise condominium project. 235 Ariz. at 408, ¶ 3. As the individual
condominium units were sold, the purchase monies were applied to the
construction loan and the lender released the sold units from the deed of
trust. Id. at ¶ 5. After the majority of units were sold, the general contractor
recorded a mechanics' lien against the project. Id. at ¶ 6. Our supreme court
held that the condominium purchasers and their lenders could be equitably
subrogated to the lender's deed of trust because they fully discharged that
portion of the construction loan allocated to their properties and obtained
releases from the lender. See id. at 411, 412, ¶¶ 22, 26.
¶19 Here, FMF did not fully discharge the obligation secured by
the HELOC Deed of Trust, negotiate a full settlement of the HELOC for less
than face value or obtain a release from Chase. Accordingly, the doctrine
of equitable subrogation does not apply and the HELOC Deed of Trust
retains priority over the 2005 FMF Deed of Trust for any amount above and
beyond $384,040.34. See Weitz, 235 Ariz. at 411, ¶ 20; Restatement § 7.6 cmt.
a.6
¶20 Accordingly, we vacate that part of the superior court's order
applying the doctrine of equitable subrogation and direct entry of judgment
in favor of Chase on US Bank's second claim for declaratory relief.
6 US Bank also argues that "Arizona case law is clear that an additional
advance which may be made under loan documents loses its priority to the
interests of a subsequent creditor after the mortgagee has actual notice of
the subsequently acquired interest in the property." Under Arizona case
law, however, this rule applies only if the advance is optional. La Cholla
Grp., Inc. v. Timm, 173 Ariz. 490, 492 (App. 1992). "The general rule appears
to be that, as to obligatory advances where the existence of the mortgagee's
obligation to advance funds is of record, the advances have priority over
any intervening liens." Id. Because advances under the HELOC Deed of
Trust were obligatory and not optional, US Bank's argument fails.
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US BANK v. JPMORGAN
Opinion of the Court
D. Attorney's Fees.
¶21 After granting summary judgment in favor of US Bank, the
superior court awarded US Bank $41,912 in attorney's fees. On appeal,
Chase argues the award was improper because the claims for declaratory
relief do not arise out of contract as required by A.R.S. § 12-341.01 (2017).
¶22 Section 12-341.01(A) authorizes an award of attorney's fees to
the successful party "[i]n any contested action arising out of a contract."
"[T]his court will look to the nature of the action and the surrounding
circumstances to determine whether the claim is one 'arising out of a
contract.'" Marcus v. Fox, 150 Ariz. 333, 335 (1986) ("[A]ttorney's fees are not
appropriate based on the mere existence of a contract somewhere in the
transaction."). The application of A.R.S. § 12-341.01 is a question of
statutory interpretation, which we review de novo. See Ramsey Air Meds,
L.L.C. v. Cutter Aviation, Inc., 198 Ariz. 10, 13, ¶ 12 (App. 2000).
¶23 Although the underlying loans were the product of contracts
between the Loepers and their respective lenders, US Bank's claims for
declaratory relief, which request application of the equitable doctrines of
replacement and subrogation, do not arise out of contract. See Brimet II, 231
Ariz. at 461, ¶ 22 ("This was a statutory quiet title action that turned on the
application of the equitable doctrines of replacement and subrogation; it
did not arise out of contract."); see also Caruthers v. Underhill, 230 Ariz. 513,
526, ¶ 57 (App. 2012) ("The contract must be the essential basis of the action
and not merely a factual predicate."). For this reason, and because we
vacate the superior court's ruling on US Bank's second claim for declaratory
relief, we also vacate the superior court's award of attorney's fees and costs.
CONCLUSION
¶24 For the foregoing reasons, we affirm the entry of summary
judgment on US Bank's claim for declaratory relief under the replacement
doctrine. We vacate the entry of summary judgment on US Bank's claim
seeking declaratory relief under the doctrine of equitable subrogation. On
remand, the superior court is directed to enter summary judgment in favor
of Chase on the equitable subrogation claim. We also vacate the superior
court's award of attorney's fees and costs.
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US BANK v. JPMORGAN
Opinion of the Court
¶25 For the reasons set forth above, we deny US Bank's request
for an award of fees on appeal pursuant to A.R.S. § 12-341.01. Chase is
entitled to costs on appeal upon compliance with Arizona Rule of Civil
Appellate Procedure 21. See Henry v. Cook, 189 Ariz. 42, 43 (App. 1996) ("[A]
party who succeeds on less than all claims is sufficiently successful to
recover costs under the statute.").
AMY M. WOOD • Clerk of the Court
FILED: AA
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