Late this summer, the Arizona Court of Appeals in Bank of America, N.A. v. Felco Business Services, Inc. ruled that a claim of senior priority under the doctrine of equitable subrogation is not waived for failure to object to a trustee’s sale.

Two owners took out a loan and deed of trust from Countrywide. Months later, they took out another loan and deed of trust from a different lender. Then they refinanced the first loan and deed of trust with a new bank. The owners used the refinanced loan (secured with a third deed of trust) to pay off and release the original loan from Countrywide.

Then they defaulted on their loan to the second lender. The second lender noticed a trustee’s sale and notified Countrywide. Countrywide, a poster child for fraud and incompetence, did nothing. After the sale, Bank of America acquired all Countrywide assets in a bailout. Bank of America sued saying the third deed of trust for the refinanced loan had priority over the second lender’s deed of trust under the doctrine of equitable subrogation, which allows a deed of trust to assume the priority position of an earlier deed. The trial court held that A.R.S. § 33-811(C) required that a senior lien be asserted as a defense or objection to the trustee’s sale, such that the failure to object to the sale waived Plaintiffs’ claim of senior priority under the doctrine of equitable subrogation.

The Arizona Court of Appeals ruled that equitable subrogation is not a defense to a trustee’s sale and does not constitute a waiver under A.R.S. § 33-811(C) because lien priority is a separate matter from the validity of a trustee’s sale. Defendants could have conducted the sale even if Plaintiffs had asserted that it had a senior lien before the sale. A.R.S. § 33-811(C)’s express language does not preclude assertions of equitable subrogation. This law remained available to Bank of America after the trustee’s sale. Because equitable subrogation is an equitable remedy and its application depends on the particular facts of each case, the Arizona Court of Appeals remanded the matter back to determine whether applying the doctrine is applicable.

The card deck is very stacked in Arizona for the lender/bank/note holder. You must be very careful when borrowing and twice as careful when a default occurs under a loan. Feel free to give Arizona attorney Bill Miller a call (602-319-6899) if you are in a situation with a bank or lender that requires a second set of eyes.

We also handle, Breach of contract, Non-compete agreements, Non-disclosure agreements, Employee theft and embezzlement, Insurance purchases and enforcement of policy coverage, Negotiation and/or enforcement of commercial leases, Negligence and gross negligence resulting in losses, Intentional acts causing a company to suffer damages, Tortious interference with contractual relationships, Unjust enrichment, Real Estate fraud, Consumer fraud, Conversion/Theft, Intentional and/or negligent misrepresentation, Business torts and Real estate title and escrow.

Back in late 2013, we closely follow a title dispute where, First American issued title insurance policies for two parcels for which Johnson Bank was the lender. After the purchase, the owners of the land discovered undisclosed covenants, conditions, and restrictions (“CC&Rs”), which prevented development. After the owners defaulted, Johnson Bank foreclosed and made claims under their title insurance. First American and Johnson Bank clashed as to the date that should be used to calculate diminution of value, with First American arguing that it should be the date of foreclosure and Johnson Bank arguing it should be the date the loans were issued. Arizona follows the majority rule, which calls for valuing the property as of the date a title defect is discovered. But a lender is in a different position than an owner. The valuation date for a loss under a lender’s title insurance policy is an issue of first impression in Arizona. The insurance contract itself was ambiguous as to the valuation date, so the Court resolved the question by looking to “social policy and the transaction as a whole,” construing remaining ambiguity against the insurer.
Citing authority that the valuation date for a lender’s loss should be the date of the loan because the purpose of the loan is frustrated from the outset by a title defect, the Court further noted that in this case the title defect was the direct cause of the default that caused Johnson Bank’s damages. The Court also suggested that, unlike owners, lenders do not benefit from appreciations in property value. If the loss was valued from the foreclosure date on a lender, the title insurance company could benefit from falling real estate values without facing any risk from rising values.
The bottom line is that when foreclosing or fighting a foreclosure be very careful in determination of valuation issues. More than adverse tax consequences are at issue. At the Law Firm of William A. Miller e have experience in these area and we are happy to assist you. Call Bill at 602-319-6899 or stop by at 8170 North 86th Place, Suite 208 Scottsdale, AZ 85258. We also handle, Breach of contract, Non-compete agreements, Non-disclosure agreements, Employee theft and embezzlement, Insurance purchases and enforcement of policy coverage, Negotiation and/or enforcement of commercial leases, Negligence and gross negligence resulting in losses, Intentional acts causing a company to suffer damages, Tortious interference with contractual relationships, Unjust enrichment, Real Estate fraud, Consumer fraud, Conversion/Theft, Intentional and/or negligent misrepresentation, Business torts and Real estate title & escrow.

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