Title: Centreville Car Care v. North America Mortgage

State: virginia

Issuer: Virginia Supreme Court

Document:

Present:  All the Justices 
 
CENTREVILLE CAR CARE, INC. 
 
OPINION BY 
v.  Record No. 010786 
JUSTICE LAWRENCE L. KOONTZ, JR. 
 
March 1, 2002 
NORTH AMERICAN MORTGAGE CO., ET AL. 
 
FROM THE CIRCUIT COURT OF FAIRFAX COUNTY 
Kathleen H. MacKay, Judge 
 
In this appeal, we consider whether the chancellor properly 
applied the equitable doctrine of subrogation to a purchase 
money deed of trust.  In granting subrogation, the chancellor 
gave the subrogated deed of trust priority over a former second 
deed of trust to the extent that funds from the loan secured by 
the subrogated deed of trust were used to extinguish a former 
first deed of trust. 
BACKGROUND 
The essential facts are not in dispute and, in large part, 
were stipulated by the parties.  On September 3, 1996, Margaret 
M. Lynch purchased, as sole owner, a residential property in 
Fairfax County (“the property”) for $210,000.  Lynch financed 
$199,500 of the purchase price with a loan from Financial 
Mortgage, Inc.  This loan was evidenced by a promissory note of 
even date secured by a first deed of trust on the property.  
Financial Mortgage immediately assigned this note and deed of 
trust to Fleet Mortgage Corporation. 
On October 7, 1996, Lynch and her husband, Abed E. Higassi, 
borrowed $150,000 from B&T Car Care, Inc.  This loan was 
evidenced by a promissory note of even date secured by a second 
deed of trust on the property.1  B&T Car Care, Inc. subsequently 
merged with Centreville Car Care, Inc. (Centreville), and 
Centreville, the surviving corporation, became the holder of 
this promissory note and the beneficiary of this deed of trust. 
On March 10, 2000, Lynch conveyed the property to Mohammed 
Bouzghaia and Corrina Y. Bouzghaia, husband and wife, for 
$210,000.  The Bouzghaias financed $208,250 of the purchase 
price with a loan from North American Mortgage Company.  The 
loan was evidenced by a promissory note of even date to be 
secured by a first deed of trust on the property.  Metropolitan 
Real Estate Settlements, Inc., the settlement agent for North 
American Mortgage, caused a title search to be performed as to 
the state of the title of the property.  The title examiner, 
however, failed to discover and disclose the existence of 
Centreville’s second deed of trust.  Thus, unbeknown to the 
Bouzghaias and North American Mortgage, the lien of the deed of 
trust in favor of North American Mortgage when recorded on March 
10, 2000, was inferior in position of priority to the lien of 
                     
1 All the aforementioned deeds of trust and the assignment 
were properly recorded in the appropriate land records of 
Fairfax County. 
 
2
Centreville’s deed of trust according to the Fairfax County land 
records. 
During the process of closing the loan from North American 
Mortgage to the Bouzghaias for the purchase of the property, the 
settlement agent disbursed $198,928.07 from the loan proceeds to 
Fleet Mortgage in full satisfaction of the note secured by its 
first deed of trust.  The settlement agent also disbursed 
$3,953.93 to Lynch from the funds available at the closing.  On 
April 28, 2000, Fleet Mortgage recorded a certificate of 
satisfaction in the land records of Fairfax County, 
extinguishing its first deed of trust.  Accordingly, what had 
been a second deed of trust in favor of Centreville advanced to 
the first deed of trust position.  Thereafter, Centreville 
advised the trustee under its deed of trust that Lynch and 
Higassi were in default on their payments on their secured note, 
and the trustee advertised a trustee’s sale of the property for 
August 29, 2000. 
On August 23, 2000, North American Mortgage and the trustee 
under its deed of trust filed a bill of complaint in the Circuit 
Court of Fairfax County against Centreville, the trustee under 
its deed of trust, and the Bouzghaias seeking equitable 
subrogation.  North American Mortgage contended that its deed of 
trust should be subrogated to the priority position of the 
original first deed of trust in favor of Fleet Mortgage.  
 
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Centreville filed its grounds of defense, and the parties 
voluntarily stayed the advertised trustee’s sale pending the 
chancellor’s resolution of the issue of the priority of the 
liens in question. 
Relying primarily upon Federal Land Bank of Baltimore v. 
Joynes, 179 Va. 394, 18 S.E.2d 917 (1942) (hereinafter, Federal 
Land Bank), and Bankers Loan & Investment Co. v. Hornish, 94 Va. 
608, 27 S.E. 459 (1897) (hereinafter, Bankers Loan), North 
American Mortgage asserted before the chancellor that its deed 
of trust should be subrogated to the priority position of Fleet 
Mortgage’s deed of trust in the amount of $198,928.07, 
representing the exact amount of the proceeds from its loan to 
the Bouzghaias that was used to satisfy the lien of Fleet 
Mortgage’s deed of trust.  North American Mortgage contended 
that this would be equitable because granting subrogation would 
leave the lien of Centreville’s deed of trust essentially in the 
same position of priority it had occupied prior to the 
conveyance of the property to the Bouzghaias and, thus, would 
not prejudice Centreville.  Centreville responded that granting 
subrogation would not be equitable under the particular facts of 
this case.  Rather, Centreville contended, among other things, 
that granting subrogation would result in prejudice to it and to 
the Bouzghaias, that North American Mortgage was the party in a 
better position to avoid a loss, and that North American 
 
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Mortgage was the party whose negligent title search failed to 
discover and disclose Centreville’s lien. 
In an opinion letter dated October 16, 2000, the chancellor 
initially concluded that negligence on the part of North 
American Mortgage or its agent in failing to discover and 
disclose Centreville’s deed of trust did not automatically bar 
application of the equitable doctrine of subrogation.  The 
chancellor further concluded, based apparently upon the original 
purchase price of $210,000 and the first lien amount of $199,500 
in favor of Fleet Mortgage, that Centreville’s predecessor in 
interest knew that its loan was “essentially unsecured” when the 
second deed of trust was recorded.  Accordingly, the chancellor 
opined that subrogation would not prejudice Centreville because 
Centreville “remains in the same . . . position . . . that it 
has knowingly been in since it made its loan” to Lynch and 
Higassi.  The chancellor further opined that failing to grant 
subrogation as requested by North American Mortgage would 
“unjustly enrich [Centreville] by allowing it a first lien 
position.” 
On October 27, 2000, the chancellor entered a final decree 
incorporating by reference the reasoning of her prior opinion 
letter and awarding North American Mortgage a first lien of 
$198,928.07 against the property.  The decree further confirmed 
that Centreville’s lien was second in priority and that the 
 
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balance of North American Mortgage’s lien, $9,321.93, was third 
in priority. 
Prior to the entry of the final decree, Centreville filed a 
motion for reconsideration.  On November 17, 2000, the 
chancellor entered an order suspending the October 27, 2000 
decree and took the motion for reconsideration under advisement.  
After reviewing briefs filed by the parties, the chancellor, in 
an order dated February 1, 2001, overruled the motion for 
reconsideration and reinstated the October 27, 2000 decree.  We 
awarded Centreville this appeal. 
DISCUSSION 
We begin our analysis in this case, as did the chancellor, 
with pertinent and well established principles previously noted 
in Federal Land Bank.  “Subrogation is the substitution of 
another person in place of the creditor to whose rights he 
succeeds in relation to the debt.  This doctrine is not 
dependent upon contract, nor upon privity between the parties; 
it is the creature of equity, and is founded upon principles of 
natural justice.”  179 Va. at 401, 18 S.E.2d at 920.  
“Subrogation not being a matter of strict right, but purely 
equitable in its nature, dependent upon the facts and 
circumstances of each particular case, no general rule can be 
laid down which will afford a test in all cases for its 
application.”  Id. at 402, 18 S.E.2d at 920.  Nevertheless, we 
 
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have expressly acknowledged that “Virginia has long been 
committed to a liberal application of the principle of 
subrogation.”  Id.
Although no bright-line rule for the resolution of claims 
for subrogation can be formulated because the merits of such 
claims are necessarily fact specific, several principles or 
guidelines are uniformly established in our cases that assist in 
the proper analysis of such claims.  First, subrogation is not 
appropriate where intervening equities are prejudiced.  Id. at 
404, 18 S.E.2d at 921.  Second, ordinary negligence of the 
subrogee does not bar the application of subrogation where “[a]n 
examination of the facts . . . shows that the equities strongly 
favor” the subrogee.  Id. at 405, 18 S.E.2d at 921 (emphasis 
added). 
There is no dispute in this case that the title examination 
conducted on behalf of North American Mortgage negligently 
failed to discover and disclose the properly recorded deed of 
trust in favor of Centreville.  Because Centreville’s deed of 
trust was properly recorded and North American Mortgage is 
either charged with the negligence of the title examiner hired 
by its agent, or, in any event, charged with constructive notice 
of the existence of this deed of trust in the land records, Cf. 
Beck v. Smith, 260 Va. 452, 457-58, 538 S.E.2d 312, 315-16 
(2000), Centreville essentially contends that as between them 
 
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there was no inequity for the chancellor to remedy.  Rather, 
Centreville contends that on the facts of this case, North 
American Mortgage has an adequate remedy at law to recover its 
loss from the negligent title examiner or the appropriate title 
insurance company.2
In response, North American Mortgage essentially contends 
that Bankers Loan and Federal Land Bank stand for the 
proposition that where funds from a new loan intended to be 
secured by the lien of a first deed of trust on real property 
are used to satisfy an existing loan secured by the lien of an 
existing deed of trust on the same property, presumptively 
equitable subrogation entitles the new creditor to assume the 
position in line of priority of the creditor whose lien was thus 
extinguished.  In our view, the contentions of neither party 
fully reflect the analysis that underpinned the application of 
subrogation under the circumstances involved in those cases nor 
fully address the particular circumstances of the present case 
that bear on the proper application of the equitable doctrine of 
subrogation in those circumstances. 
                     
2 The record reflects that the chancellor received evidence 
that Stewart Title Guaranty Company insured the title for both 
North American Mortgage and the Bouzghaias.  However, the 
chancellor expressly declined to consider this evidence in her 
analysis of North American Mortgage’s claim for subrogation. 
 
8
Unlike the present case, in both Bankers Loan and Federal 
Land Bank, the particular facts of those cases prompted no issue 
of the significance of a legal separation between the obligors 
on the prior loans and their ownership of any equity in the 
property not encumbered by the liens of the security instruments 
that secured the payment of those loans.  In the present case, 
however, Lynch and her husband are the obligors on Centreville’s 
promissory note, but the Bouzghaias are the owners of the 
property subject to the lien of Centreville’s deed of trust.  
The Bouzghaias are the obligors on North American Mortgage’s 
promissory note and their property is also subject to the lien 
of the deed of trust in favor of North American Mortgage that 
secures the payment of that note.  In assessing the relative 
equitable positions of Centreville and North American Mortgage, 
we are of opinion that these factual circumstances are 
significant. 
At the time Centreville obtained its lien in the amount of 
$150,000, it stood in the second position of priority behind 
Fleet Mortgage’s first lien in the amount of $199,500.  The 
property had a value of $210,000 and, thus, Centreville was 
undoubtedly undersecured.  Nevertheless, Centreville had the 
right to anticipate that the obligors would ultimately satisfy 
these loans to extinguish the liens upon their interests in the 
property.  Centreville also had the right to anticipate that 
 
9
when Fleet Mortgage’s lien was extinguished Centreville’s lien 
would advance to the position of priority of a first lien on the 
property.  Moreover, under the events that actually occurred, 
Centreville was entitled to receive the balance of funds from 
North American Mortgage’s loan to the Bouzghaias that was paid 
to Lynch after the promissory note held by Fleet Mortgage was 
satisfied from those funds.  To this extent, Centreville was 
prejudiced. 
We must also consider the fact that North American 
Mortgage, as against Centreville’s rights and equities, is to be 
charged with negligently failing to discover the existence of 
Centreville’s properly recorded second deed of trust.  In this 
regard, we consider the factual circumstances to determine 
whether the equities nevertheless “strongly favor” North 
American Mortgage’s claim for subrogation to the position of 
priority of the first lien holder.  Federal Land Bank, 179 Va. 
at 405, 185 S.E.2d at 921.  For the reasons that follow, we are 
of opinion that the equities asserted by North American Mortgage 
fall far short of strongly favoring its subrogation claim so as 
to excuse its negligence.  Indeed, North American Mortgage’s 
position if upheld under the circumstances of this case would 
essentially establish a legal right rather than an equitable 
one. 
 
10
As we noted in Federal Land Bank, “[w]e must look to the 
realities of the situation as they existed at the time of the 
[chancellor’s] decree.”  179 Va. at 406, 18 S.E.2d at 922.  At 
that time, granting subrogation to North American Mortgage would 
result in the obligors on the debt secured by the lien of the 
first deed of trust being different from the obligors on the 
debt secured by the lien of Centreville’s deed of trust.  
Moreover, the latter obligors would no longer have an equitable 
ownership in the property subject to Centreville’s lien.  The 
realities are that under those circumstances Centreville would 
be prejudiced because there would be no incentive for Lynch and 
Higassi to pay their debt to Centreville in order to protect any 
equitable ownership in the property.  In addition, there would 
be little, if any, reason to anticipate that the Bouzghaias 
would pay the debt secured by North American Mortgage’s lien on 
their property because the property would remain encumbered by 
Centreville’s lien.  Under this circumstance, the primary 
realities are that upon the chancellor’s granting of 
subrogation, North American Mortgage and the Bouzghaias would 
logically effect a “friendly foreclosure” to eliminate 
Centreville’s lien and leave Centreville with little or no 
recovery under the foreclosure sale.  Equity will not condone 
the creation of such a circumstance, especially when that 
circumstance flows directly from the negligence of the party 
 
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seeking the benefit of it to the prejudice of an innocent party.  
Similarly, our commitment to a “liberal application of the 
principle of subrogation,” Federal Land Bank, 179 at 402, 18 
S.E.2d at 920, is not offended by that reasoning. 
Finally, there is no merit to North American Mortgage’s 
contention that if it is not permitted to subrogate its lien to 
the position of first priority of Fleet Mortgage, Centreville 
will receive a “windfall” by having its lien advanced to the 
position of first priority.  North American Mortgage contends 
that this is so because Centreville had no expectation of being 
secured to the full extent of its lien, and that equity should 
not allow Centreville to be fully secured as a result of the 
satisfaction of Fleet Mortgage’s lien.  While it is undoubtedly 
true that Centreville received a significant benefit as a result 
of the satisfaction of Fleet Mortgage’s lien from the funds 
provided by North American Mortgage’s loan to the Bouzghaias in 
that Centreville’s lien advanced to the position of priority of 
a first lien on the property, we would not characterize that 
benefit as a windfall that suggests unjust enrichment under the 
circumstances of this particular case.  Moreover, any “windfall” 
in this case as a result of granting subrogation would inure to 
the benefit of the negligent title examiner and the party that 
insured the title for North American Mortgage and the 
Bouzghaias.  While North American Mortgage and the Bouzghaias 
 
12
have recourse against those parties for the loss in this case, 
Centreville has no such recourse.  Thus, the equities in this 
case favor Centreville, the innocent party who would be 
prejudiced if subrogation were granted. 
CONCLUSION 
For these reasons, we hold that the chancellor erred in 
awarding subrogation in favor of North American Mortgage.  We 
will reverse the judgment of the chancellor and enter judgment 
for Centreville confirming that the lien of its deed of trust is 
first in position of priority as against the lien held by North 
American Mortgage. 
Reversed and final judgment. 
 
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