Title Insurance Client Alert - New Favorable Virginia Equitable Subrogation Decision

The attached favorable decision rendered on November 19, 2013 provides a much-needed boost to the doctrine of equitable subrogation, which has been under siege in Virginia federal and state courts in recent years.

Briefly, in this case, the Debtor owned a condominium in Arlington. The condominium was subject to a first deed of trust in favor of GMAC Mortgage in the original principal amount of $116,500. This deed of trust was recorded April 8, 2003 (the "$116,500 Deed of Trust"). In June 2007, the Debtor took out a home equity line of credit with GMAC Mortgage in the maximum principal amount of $90,000. This home equity line of credit was secured by a deed of trust recorded June 14, 2007 (the "$90,000 Deed of Trust"). Later that year, the Debtor decided to form his own dental practice. In order to accomplish this, he purchased the assets of another dentist and formed a professional corporation.

To fund the asset purchase, the Debtor applied for an SBA loan with Wachovia SBA Lending (the "Wachovia Loan") in the amount of $950,000. He also applied for an increase in the maximum amount of the home equity line of credit secured by the $90,000 Deed of Trust to $140,000. Wachovia understood that it would be taking a first priority lien on all the assets of the dental practice, and a third priority lien on the Debtor's condominium, in order to secure the Wachovia Loan.

The Debtor was approved for both the Wachovia Loan and the $140,000 home equity line of credit. The $140,000 home equity line of credit closed on August 20, 2007. $84,529 of the new loan proceeds was used to pay off the previous home equity line of credit secured by the $90,000 Deed of Trust. GMAC did not perform a title search in connection with the closing of this new home equity line of credit. In addition, GMAC did not immediately record its deed of trust (the "$140,000 Deed of Trust"), and it was not recorded until September 27, 2007.

In the interim, the Wachovia Loan closed on August 29, 2007. Wachovia recorded its deed of trust on August 31, 2007 (the "Wachovia Deed of Trust"), prior to the recording date of the $140,000 Deed of Trust. Thereafter, Wachovia was acquired by Wells Fargo.

Asset Management Holdings, LLC ("Asset Management") purchased the loan secured by the $140,000 Deed of Trust in September 2011. It did not have a title search performed before it acquired the loan.

The Debtor's dental practice failed, and he filed a voluntary Chapter 11 petition. On the Petition Date, it appeared from the land records that as to the condominium: the $116,500 Deed of Trust held by GMAC was in first lien position; the Wachovia Deed of Trust now held by Wells Fargo was in second lien position; and the $140,000 Deed of Trust held by Asset Management was in third lien position.

Asset Management filed an adversary proceeding and asserted a claim for equitable subrogation to the lien position of the $90,000 Deed of Trust, in order to give Asset Management second priority with respect to the condominium.

Asset Management and Wells Fargo filed cross-motions for summary judgment. In its opinion, the Bankruptcy Court acknowledged that "[e]quitable subrogation claimants have not fared well in the Virginia Courts in recent years." (Citing the Centreville, Batmanghelidj, Botero-Paramo, and Perrow cases, all denying equitable subrogation.)

As a threshold matter, the Bankruptcy Court concluded that Asset Management did not act as a "volunteer" when it purchased the loan secured by the $140,000 Deed of Trust. The Bankruptcy Court reasoned that if Asset Management were a volunteer, by analogy, refinance lenders would never be entitled to equitable subrogation. The Bankruptcy Court then held that Wells Fargo was not entitled to the protections afforded intervening equities, because it had specifically bargained for a third lien position. The Bankruptcy Court distinguished the Batmanghelidj case, where the intervening lien holders held a judgment lien and a tax lien, and had not bargained for a specific lien position. The Bankruptcy Court also distinguished Centreville, involving a sale-and-purchase scenario in which the Virginia Supreme Court had found the separation of equitable title in the property from the obligation to pay the prior lien to be of great significance. There was no such separation in this case, which involved a refinance. The Bankruptcy Court found the fact that Asset Management had purchased the note secured by the $140,000 Deed of Trust at a substantial discount to be of little significance, and did not disqualify it from seeking equitable subrogation. Finally, the Bankruptcy Court found that the negligence involved was ordinary negligence, which did not bar equitable subrogation, citing the Fed. Land Bank v. Joynes case.

The Bankruptcy Court granted Asset Management's motion for summary judgment and denied Wells Fargo's motion. This subrogated Asset Management to the second lien position previously held by the $90,000 Deed of Trust, prior to the Wachovia Deed of Trust, to the extent of $84,529.

Kaufman & Canoles frequently utilizes the doctrine of equitable subrogation in support of our clients' claims for lien priority. If you have any questions regarding the attached decision, or the doctrine of equitable subrogation, please do not hesitate to contact me at (757) 873.6308 or jlwindsor@kaufcan.com or Dan Basnight at (757) 873.6309 or dfbasnight@kaufcan.com.


The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2017.

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