MidFirst Bank v. Brown (14PA23) 5/23/2024
Equitable Subrogation Lien Priority
Chris Burti, Vice President and Senior Legal Counsel

The North Carolina Supreme Court considered this case upon discretionary review of a unanimous opinion of the North Carolina Court of Appeals. It may be fair to conclude that this opinion brings the doctrine of equitable subrogation a step closer to the standard espoused in the majority of jurisdictions applying it, not that this should necessarily be considered a good thing.

The defendants in this case are mother and daughter. The property at issue is the mother's home purchased in 2000. In 2014, a 2010 South Carolina judgment against the mother was properly domesticated and docketed in North Carolina. In 2016 the mother refinanced her 2000 mortgage and the plaintiff is the holder of the new indebtedness. In 2019, the judgment creditor executed on the judgment in North Carolina, the daughter placed an upset bid after the sheriff's sale, became the high bidder, and the sale was confirmed. Subsequently, the plaintiff filed its quiet title complaint seeking a declaratory judgment asking the court to rule that its deed of trust was still a lien the property after the sheriff's sale or that it was equitably subrogated to the priority of the original deed of trust.

The plaintiff and the defendants moved for summary judgment and the trial court granted plaintiff's motion for summary judgment and denied the defendants' motion who then timely appealed. For the reasons discussed immediately below, the Court of Appeals reversed the order of the trial court and remanded for entry of summary judgment in the defendants' favor. The Supreme Court accepted the case for discretionary review and for the reasons discussed subsequently, in turn reversed the Court of Appeals decision and remanded the case to be remanded to the trial court for further findings of fact.

The defendants made three arguments on appeal as stated in the Court of Appeals opinion:

(1) the trial court erred in granting summary judgment to Plaintiff because the property was no longer subject to Plaintiff's lien after the execution sale;
(2) the Sheriff's deed cannot dictate whether liens remain on real property; and
(3) Plaintiff cannot rely on the doctrine of equitable subrogation for survival of its lien because it cannot claim that it was excusably ignorant of the publicly recorded judgment against the property.

The Court agreed with the defendants' first argument that following the execution sale, the subject property no longer secured the refinancing deed of trust. Citing N.C.G.S. Section 339.68(b) which provides that "[a]ny real property sold under execution remains subject to all liens which became effective prior to the lien of judgment pursuant to which the sale is held, in the same manner and to the same extent as if no such sale had been held." The Court noted that the statute explicitly deal with the status of liens that become effective after the lien of an executed judgment, but construed the statutory language to mean "that liens recorded after a prior lien holder has executed and forced a sale are extinguished by the sale." The Court relied upon a "longstanding canon of statutory construction ... expressio unius est exclusio alterius, which means "the expression of one thing is the exclusion of the other." See Morrison v. Sears, Roebuck & Co., 319 N.C. 298, 303, 354 S.E.2d 495, 498 (1987)." In other words the exception of one thing evidences the Legislature's intent to exclude all other exceptions. Thus, by preserving prior liens, junior liens are not preserved because "the statute is silent on the status of liens that become effective after the lien of judgment under which an execution sale is held."

The defendants' second argument was that the Sheriff has no authority to subordinate liens and the following language in the Sheriff's deed could not lawfully have such an effect:

NO TITLE OPINION RENDERED. Deed remains subject to all liens and any encumbrances of any kind or nature (recorded or unrecorded) against the subject property, including without limitations a certain Deed of Trust recorded in the Mecklenburg County Register of Deeds on or about April 17, 2000, Book 11222 Page 893-911; a Deed of Trust filed on or about September 22, 2000, Book 11590 Page 792-798, and a Deed of Trust filed on or about June 28, 2001, Book 12385 Page 941-959; and any other restrictions, easements, rights of way, deeds of trust, liens, encumbrances, conveyances or any other clouds on title whatsoever related to prior transfers of and/or encumbrances on the subject property, whether filed or unfiled against the subject property. Purchaser was advised prior to the Sheriff's sale that it is very likely that this property is subject to the above and such conveyances, transfers, encumbrances or restrictions which are not extinguished by the Sheriff's sale or issuance of this Sheriff's Deed and Purchaser was advised to perform a full title search prior to purchasing the property subject to this Sheriff's Deed.

Addressing this contention the Court of Appeals opinion states:

... the Sheriff's deed here cannot be construed to transfer the property subject to the ... lien. The deed simply provides a warning to the buyer that the property may be subject to any liens or encumbrances not extinguished by the sale. It notifies the buyer that they should conduct an independent title search to determine what liens or encumbrances, if any, remain attached the property at the time of the sale. The deed also specifically draws the grantee's attention to several deeds of trust that may encumber the property, none of which are the ... 2016 ...deed of trust.

Further, even where a deed or deed restriction unambiguously states a term or condition of transfer, it will not stand if it violates or is contravention to a provision of our General Statutes. (citation omitted).

Because, as we have held above, pursuant to N.C. Gen. Stat. § 1-339.68(b), liens which attach to a property after a judgment under which the execution sale took place are extinguished by that sale, the Sheriff's deed could not work in contravention to that statute and mandate that such a lien survives, and we decline to read it as doing so.

The defendants' final contention was that because the judgment was properly of record at the time the refinance deed of trust was recorded, the plaintiff was on notice and cannot establish excusable ignorance, therefore the remedy of equitable subrogation is not available. The Court of Appeals agreed with this contention as well. It seems that virtually all appellate decisions dealing with the issue of equitable subrogation in North Carolina begin with a discussion of the North Carolina Supreme Court's decision in Peek v. Wachovia Bank & Tr. Co., 242 N.C. 1, 86 S.E.2d 745 (1955). The Court began there as well and sets out the rule stated in Peek thusly:

[A]s a general rule one who furnishes money for the purpose of paying off an encumbrance on real or personal property, at the instance either of the owner of the property or of the holder of the encumbrance, either upon the express understanding or under circumstances from which an understanding will be implied, that the advance made is to be secured by a first lien on the property, will be subrogated to the rights of the prior lienholder as against the holder of an intervening lien, of which the lender was excusably ignorant.

Equitable subrogation, when applicable, will give equitable relief to a lender whose security is technically junior to an intervening lienholder when it has furnished the funds to satisfy the first lien. In some jurisdictions the right is absolute, in North Carolina, our recording statutes are favored and the lender claiming relief must show that reasonable excuse exists as to why notice under the acts should not apply and record priority control; as is frequently stated, the lender must be "excusably ignorant." The opinion analyses a number of cases that address what facts constitute excusable ignorance in North Carolina and the Court of Appeals observed:

Our equitable subrogation precedent has [not] produced a bright-line rule for what excusable ignorance means, and we decline to do so here. Instead, we determine that it is a fact-intensive inquiry that depends on the specific circumstances of each case.

In this case, the plaintiff conceded that the judgment was publicly recorded but contended that it was excusably ignorant of that judgment because the mother checked a box that indicated that no liens or judgments encumbered the property when she filled out the refinancer loan documents at closing in 2016, the Court of Appeals was "unpersuaded by this argument."

The notion that a party cannot assert ignorance where the information is available via a public record or title search is not a novel one in our law. In claims of misrepresentation, we have held that a party cannot assert reasonable reliance on statements concerning matters in the public record where they failed to review those public records when they had the opportunity to do so. (citation omitted)

The panel unanimously reversed the trial court and remanded the case for entry of summary judgment in favor of the defendants. The Court of Appeals acknowledged the plaintiff's contentions that the defendant mother's misrepresentations should not be rewarded, but clearly the court was not satisfied that the plaintiff had put forth sufficient facts to overcome the notice created by our recording acts.

The Supreme Court focused on the issue of equitable subrogation and deemed that the Court of Appeals was mistaken by applying the incorrect standard regarding this doctrine. The Supreme Court observed that the Court of Appeals correctly noted that the State's "equitable subrogation precedent has [not] produced a bright-line rule" for when equitable subrogation is appropriate, and, that equitable subrogation is "a fact-intensive inquiry that depends on the specific circumstances of each case." The opinion points out that Peek is not "[t]he earliest case in North Carolina to discuss the doctrine of equitable subrogation." It determined that the:

Court of Appeals cited to dicta within Peek as the general rule regarding equitable subrogation in North Carolina: that when one furnishes money for the purpose of paying off an encumbrance on real or personal property, at the instance either of the owner of the property or of the holder of the encumbrance, either upon the express understanding or under circumstances from which an understanding will be implied, that the advance made is to be secured by a first lien on the property, will be subrogated to the rights of the prior lienholder as against the holder of an intervening lien, of which the lender was excusably ignorant.

The opinion states that Wallace v. Benner, 200 N.C. 124 (1931), provides the general rule for the application of equitable subrogation in North Carolina.

This Court has made it clear that "the rule [of equitable subrogation] is settled":

[W]here money is expressly advanced in order to extinguish a prior encumbrance, and is used for this purpose . . . the lender or mortgagee may be subrogated to the rights of the prior encumbrancer whose claim he has satisfied . . . . Also, if the money is advanced to a debtor to discharge an existing first mortgage upon his property, and in pursuance of an agreement that the lender is to have a first lien upon the property for the repayment of the sum loaned, the lender is entitled, as against a junior encumbrancer, to be treated as the assignee of the first mortgage which has been paid off and discharged with the money loaned, whenever it becomes necessary to do so to effectuate the agreement with the lender, and to prevent the junior encumbrance from being raised accidentally to the dignity of a first lien, contrary to the intention of the parties.
. . . .
The exceptions to the general rule to the doctrine of [equitable] subrogation: (1) [t]he relief is not granted to a volunteer; (2) nor where the party claiming relief is guilty of culpable negligence; (3) nor where to grant relief will operate to the prejudice of the junior lien holder. ... (emphases added).

This article will focus on the Court's analysis of the second exception, noting that the opinion's analysis of the other two exceptions should also be considered important for anyone seeking to argue the application of the rule.

The second exception to the general rule in Wallace requires the trial court to determine whether a party seeking relief under the rule was "culpably negligent" in its failure to be aware of the publicly recorded intervening lien and the resulting failure to obtain their intended first-place lien priority. The Supreme Court states that:

When the Wallace Court published its opinion, Black's Law Dictionary defined culpable as "[b]lamable; censurable; . . . connotes fault." Culpable, Black's Law Dictionary (2d ed. 1910). Further, Black's Law Dictionary defined culpable negligence as a "[f]ailure to exercise that degree of care rendered appropriate by the particular circumstances, and which a man of ordinary prudence in the same situation and with equal experience would not have omitted." Culpable negligence, Black's Law Dictionary (2d ed. 1910).

Since it was undisputed in the case that United's lien was recorded, the Supreme Court found it "extremely concerning that plaintiff has not produced evidence that either a title examination was conducted or that a credit report was obtained..." among other facts in the record that the Court deemed significant.

The Supreme Court, like the Court of Appeals noted that whether a party relying on the doctrine "was culpably negligent is a fact-intensive inquiry that depends on the specific circumstances at hand...it is for the fact-finder to determine which party is most 'blamable.'" The opinion asserts that the trial court must consider all the facts at hand and "balance the equities". Concluding:

Under the extremely unique circumstances of this case, the trial court should utilize broad discretion to obtain the necessary information to determine whether there is a genuine issue of material fact. For the reasons stated above, we reverse the decision of the Court of Appeals and remand to the trial court for reassessment under the Wallace standard of culpable negligence.

As we stated in our prior analysis of the Court of Appeals opinion (MidFirst Bank v. Brown, Sheriff's Sale Lien Priority, Equitable Subrogation, Debtor Misrepresentation, Issue 294, Article 449 (7/1/2023)) and as this opinion reaffirms, this case serves as a cautionary tale that title examinations must be diligently performed. Yet the opinion also seems to move the standard for relief under the doctrine in an equitable subrogation case from one of "excusable ignorance" to a somewhat lower standard of "culpable negligence."

The ruling may be a two edged sword for title insurers and raises a concern as to our ability to reasonably rely on N.C.G.S. Section 47-18(a), North Carolina's pure race recording statute in order to opine (and insure) the priority of liens when the record appears to be clear. A title insurer might be insuring the lender/purchaser at a foreclosure sale of the junior lien having apparent priority due to the refinance or might be insuring the refinance lender. Depending upon the outcome at the trial court, this case would have resulted in a loss on any title claim.

Significantly, the Supreme Court in a footnote to its opinion observed: "It is interesting to note that there are no innocent third-party purchasers for value involved in this case." Hopefully, that consideration would help to balance the equities in favor of the innocent purchaser relying upon the record such as the case where an intervening lien was missed in a title search on a purchase and sale transaction. On the other hand, even if such a defense is successful, the victory is still a dead loss to the title insurer having to pay to defend and this case makes summary judgment in litigated cases far less likely.