Opinion ID: 2589246
Heading Depth: 3
Heading Rank: 2

Heading: Subordination Agreement

Text: The next issue we consider is the effect of Thomas' Subordination Agreement with U.S. Bank that subordinated Thomas' deed of trust to the second loan obtained by Calderwood from U.S. Bank. On appeal, M & D argues that because Thomas, whose deed of trust was recorded ahead of M & D's, subordinated his deed of trust to the second U.S. Bank loan which was behind M & D in order of payment, M & D is now entitled to payment before both Thomas and U.S. Bank. This is referred to as a complete subordination. The district court disagreed, finding that this was a case of partial subordination where Thomas and U.S. Bank essentially exchanged positions of priority to the extent that U.S. Bank's loan is smaller or equal to Thomas's interest. Or, in other words, if Thomas' claim was for $100 and the second U.S. Bank loan was for $75, the first $100 to be paid from Calderwood would go $75 to U.S. Bank, and $25 to Thomas. M & D would then be paid in full, and any remaining payment would go towards Thomas' remaining $75 interest. The district court found that because M & D was not a party to Thomas' Subordination Agreement and because M & D's interest was neither harmed or helped by the Subordination Agreement in terms of its priority in line, M & D is not entitled to benefit by Thomas' agreement to subordinate his interest to U.S. Bank. The relevant portion of the Subordination Agreement reads as follows: SUBORDINATION. The Subordinated Deed of Trust and the Subordinated Indebtedness [the $1.7 million note and deed of trust owed by Calderwood to Thomas] secured thereby is hereby subordinated in all respects to Lender's Lien [the security interest of U.S. Bank securing the further extension of credit] and the Superior Indebtedness [U.S. Bank's extension of credit], and it is hereby agreed that the Lender's Lien shall be and remain, at all times, prior and superior to the lien of the Subordinated Deed of Trust. Beneficiary [Thomas] also subordinates to Lender's Lien all other Security Interests in the Real Property held by Beneficiary [Thomas], whether now existing or hereafter acquired. The words Security Interest mean and include without limitation any type of collateral security, whether in the form of a lien, charge, mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise. Though Thomas provides authority from California and Arizona supporting the district court's utilization of a partial subordination theory, that rule has never been adopted in Idaho. The district court correctly noted that the theory of partial subordination does not affect M & D's interest in the Calderwood property in any way and essentially leaves M & D's priority of payment the same as it was before the Subordination Agreement between Thomas and U.S. Bank was entered into. However, there are basic rules of priority and recording which are violated by such an application of the law. We find the Alabama Supreme Court case cited by M & D instructive on this issue. In it that court defined a subordination agreement as: An agreement by which one holding an otherwise senior lien or other real estate interest consents to a reduction in priority vis-a-vis another person holding an interest in the same real estate. An agreement by which the subordinating party agrees that its interest in real property should have a lower priority than the interest to which it is being subordinated. Black's Law Dictionary (6th ed.1990). By definition, subordination contemplates a reduction in priority. Nothing in the definition contemplates raising a lower priority lienholder up to the position of the subordinating party. AmSouth Bank. N.A. v. J & D Financial Corporation, 679 So.2d 695, 698 (Ala.1996). As the Georgia Supreme Court noted in Old Stone Mortg. Realty Trust v. New Georgia Plumbing, Inc., 239 Ga. 345, 236 S.E.2d 592 (1977), it is the rule in other jurisdictions that `one who subordinates a first lien to a third lien makes his lien inferior to both the second and the third liens.' 51 AmJur2d, Liens, s 55. 236 S.E.2d at 593. Though Thomas has every right to release his claim on his position of priority over M & D and place himself behind the second U.S. Bank loan, he does not have the right or ability to elevate U.S. Bank's priority to a position ahead of M & D. Because M & D's deed of trust was recorded before the second U.S. Bank lien, M & D has the right to be paid by Calderwood before U.S. Bank receives any payment on its second loan. Certainly U.S. Bank could not obtain a priority ahead of Thomas without Thomas' permission; and likewise, it cannot obtain a priority ahead of M & D without M & D's permission. Because Thomas relinquished his right to receive payment until after U.S. Bank received payment in full on its second loan to Calderwood, M & D is entitled to be paid in full before U.S. Bank is paid on its second loan and consequently before Thomas receives payment as well. In Culp v. Tri-County Tractor, Inc., 112 Idaho 894, 897, 736 P.2d 1348, 1351 (Ct.App.1987) the Court of Appeals held: We begin by noting the general thrust of a subordination agreement: It is the subordination of the right to receive payment of certain indebtedness (the `subordinated debt') to the prior payment of certain other indebtedness (the `senior debt') of the same debtor.... [A] complete subordination permits no payment to be made on the subordinated debt at any time while the senior debt remains outstanding. We agree that when one debt is senior to another debt in priority of payment, the inferior debt may not be paid ahead of any senior debt without the agreement of the senior creditor, regardless of any subordination agreement between another senior creditor and the inferior creditor. We therefore vacate the findings of the district court declining to place M & D's interest above Thomas' by virtue of the subordination agreement entered into between Thomas and U.S. Bank.