Opinion ID: 2592971
Heading Depth: 2
Heading Rank: 2

Heading: Land Title Would Be Prejudiced Were Ameriquest Permitted Equitable Subrogation in this Case

Text: If a payor fails to timely record an interest it claims through equitable subrogation, that delay in recordation may bar enforcement of equitable subrogation rights when another party detrimentally relies on the state of title as recorded. Restatement (Third) of Property (Mortgages) § 7.6 cmt. f; see also Rock River Lumber Corp. v. Universal Mortgage Corp., 82 Wis.2d 235, 262 N.W.2d 114, 119 (1978). Prejudice in the context of equitable subrogation almost always flows from a delay by the payor in recording his or her new mortgage, in demanding and recording a written assignment, or in otherwise publicly asserting subrogation to the mortgage paid. Restatement (Third) of Property (Mortgages) § 7.6 cmt. f. There are many examples of detrimental reliance that may result from the payor's delay in recording his equitable subrogation interest. For example, in the time between the payor's payment of the prior lien and recordation of its claimed interest, the property might be sold to an innocent purchaser or refinanced by an innocent lender who, relying on the record state of title, believes the property is free from other encumbrances. See, e.g., Persons v. Shaeffer, 3 P. 94, 95 (Cal.1884); Peterman-Donnelly Eng'rs & Contractors Corp. v. First Nat'l Bank of Ariz., 2 Ariz.App. 321, 408 P.2d 841, 846 (1965). Similarly, an intervening mortgage could be resold on the secondary mortgage market during the time between satisfaction and recordation to a purchaser who, relying on the recorded state of title, believes that the mortgage it has purchased occupies the senior lien position against the property. Richards v. Suckle, 871 S.W.2d 239, 242 (Tex. App.1994) (holding that because the investor taking assignment of the mortgage was found to have notice of the subrogation claim, subrogation was appropriate). Finally, an intervening lienholder may be prejudiced if it commences foreclosure or purchases the property at the foreclosure sale in detrimental reliance on the record state of title. See Heegaard v. Kopka, 55 N.D. 77, 212 N.W. 440, 442 (1927); Richards v. Griffith, 92 Cal. 493, 28 P. 484, 485 (1891); 2 Grant S. Nelson & Dale A. Whitman, Real Estate Finance Law § 10.6 at 28 (5th ed.2007). In the present case, Land Title asserts this last ground as the basis for its claim of prejudice. First, it argues that it initiated foreclosure by filing its notice of election and demand for sale in reliance on the record state of title. It is undisputed that Ameriquest's interest had not yet been recorded at the time Land Title filed its notice of election and demand. Therefore, Land Title argues, when it commenced foreclosure, it reasonably believed that it held the first lien against the property. However, to claim prejudice, a party's reliance must be detrimental. Here, Land Title suffered no detriment by commencing foreclosure of its lien, an act of reliance we distinguish from its purchase of the property at the foreclosure sale. Land Title recouped the full amount due on the obligation secured by its deed of trust at the foreclosure sale. Such an outcome is the most a lender, in its role as the foreclosing party (and not as a purchaser), can hope for. § 38-38-111, C.R.S. (2004) (foreclosing lienholder has no right to funds in excess of the amount owed on the obligation plus the expenses of [foreclosure] sale). Second, Land Title argues that it would be prejudiced because it detrimentally relied on the record state of title when it bid on the property at the foreclosure sale with the reasonable belief that it would be able to resell the property free and clear of all encumbrances. The record supports such detrimental reliance, as it reflects the fact that Land Title's sister entity, Title Acquisitions, invested money and effort in refurbishing the property. Although it is undisputed that Ameriquest recorded its interest before the foreclosure sale actually took place, the recordation in this case did not sufficiently put Land Title on notice that Ameriquest was claiming equitable subrogation rights. Ameriquest's deed of trust makes no reference to any claimed subrogation rights, nor does it explain that the proceeds of the loan secured by the deed of trust were used to satisfy the senior liens against the property. A reasonable purchaser, therefore, would have no way of knowing that Ameriquest was claiming first lien priority against the property for the amounts applied to payment of the Washington Mutual deed of trust and redemption of the property from foreclosure of the RE Services deed of trust. Instead, a reasonable purchaser at the foreclosure sale who checked title before bidding would simply believe that Ameriquest's deed of trust, as a lien junior to the lien foreclosed, would be extinguished by expiration of the redemption period. § 38-38-501, C.R.S. (2004). As the Restatement makes clear, a party seeking to enforce claimed subrogation rights must publicly asser[t] subrogation to the mortgage paid or risk being barred from asserting its rights by another party's subsequent claim of prejudice arising from detrimental reliance on the record state of title. Restatement (Third) of Property (Mortgages) § 7.6 cmt. f. We leave for another day resolution of the issue of precisely what a recorded subrogation interest must say in order to put others on notice of the claimed interest. In the present case, we simply hold that Ameriquest's deed of trust failed to give any notice that Ameriquest was claiming lien superiority through equitable subrogation and, therefore, Land Title's reliance on record title as showing the property free of encumbrances was reasonable. We note that the reasonableness of a party's reliance on the record state of title should be the guiding principle in determining whether that party can claim prejudice arising from such reliance. Because Land Title purchased the property with the belief that it would own the property free and clear of all encumbrances and because Ameriquest's deed of trust was insufficient to put Land Title on notice that its belief was mistaken, we hold that enforcement of Ameriquest's subrogation rights, if any, would prejudice Land Title.