Court Opinion

ID: 1031234
Source: CourtListenerOpinion
Date Created: 2013-07-05 08:28:02.598123+00
Date Added: 2024-06-11T12:05:03.844988
License: Public Domain

UNPUBLISHED

                   UNITED STATES COURT OF APPEALS
                       FOR THE FOURTH CIRCUIT

                               No. 08-2259

DEUTSCHE BANK NATIONAL TRUST COMPANY, as trustee for First
Franklin Mortgage Loan Trust 2006-FF3,

                 Plaintiff - Appellant,

           v.

INTERNAL REVENUE SERVICE,

                 Defendant – Appellee,

           and

BABAK A. BATMANGHELIDJ; LEILY BATMANGHELIDJ; DANIEL BRIAN
COSTELLO, Trustee, C/O Lawrence E. Fischer, Esq.; EDWARD D
HUBACHER, Trustee, C/O Lawrence E. Fischer, Esq.; WATKINS
MOTOR LINES, INCORPORATED, C/O Douglas J. Glenn; KFH
INVESTMENTS, LLC, C/O Wayne F. Cyron; ALL PERSONS CLAIMING
AN OWNERSHIP INTEREST IN OR LIEN UPON THAT CERTAIN
PARCEL OF REAL PROPERTY LOCATED AT 9121 MILL POND
VALLEY DRIVE MCLEAN, VA 22102,

                 Defendants.

Appeal from the United States District Court for the Eastern
District of Virginia, at Alexandria. James C. Cacheris, Senior
District Judge. (1:07-cv-00683-JCC-JFA)

Argued:   October 28, 2009                   Decided:   January 14, 2010

Before MICHAEL, Circuit Judge, HAMILTON, Senior Circuit Judge,
and Jane R. ROTH, Senior Circuit Judge of the United States
Court of Appeals for the Third Circuit, sitting by designation.
Affirmed by unpublished per curiam opinion.

ARGUED: David H. Cox, JACKSON & CAMPBELL, PC, Washington, D.C.,
for Appellant. Regina Sherry Moriarty, UNITED STATES DEPARTMENT
OF JUSTICE, Washington, D.C., for Appellee. ON BRIEF: Eileen M.
O’Brien,   JACKSON   &   CAMPBELL,  PC,  Washington,    D.C.,   for
Appellant.   John A. DiCicco, Acting Assistant Attorney General,
Thomas   J.   Clark,   UNITED   STATES  DEPARTMENT   OF    JUSTICE,
Washington, D.C.; Dana J. Boente, Acting United States Attorney,
Alexandria, Virginia, for Appellee.

Unpublished opinions are not binding precedent in this circuit.

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PER CURIAM:

              This     appeal       concerns      the     Virginia      doctrine        of

equitable subrogation.          A somewhat obscure rule of equity, the

doctrine ensures that a creditor obtains a first-priority lien

on its debtor’s property when it issues a loan based on a good

faith belief that it will have such a lien.                           In this action

NationPoint, a division of National City Bank of Indiana, made a

loan to Babak Batmanghelidj based on such a good faith belief.

Appellant      Deutsche      Bank     National        Trust   Company        (DB)    later

acquired this loan from NationPoint.                     When DB discovered that

the Internal Revenue Service (IRS) possessed senior tax liens on

Mr. Batmanghelidj’s property, it brought this suit for equitable

subrogation.         The district court dismissed the suit, and DB now

appeals.      Because the IRS would be unfairly prejudiced by DB’s

subrogation, and because the doctrine cannot be applied when

such prejudice would result, we affirm.

                                           I.

              DB alleges the following facts in its complaint.                          On

November      8,     2005,    NationPoint         loaned      Babak     Batmanghelidj

$990,000.      On the same day, to provide security for the loan,

Mr.   Batmanghelidj’s        wife,    Leily      S.   Batmanghelidj,         transferred

title,   by    warranty      deed,    to   her    property     at     9121    Mill    Pond

Valley Drive in McLean, Virginia (the “Property”) to herself and

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Mr.     Batmanghelidj            as   joint        tenants    with     the    right   of

survivorship.             NationPoint’s        loan    to    Mr.    Batmanghelidj     was

thereafter secured by a Deed of Trust on the Property.                          The Deed

of Trust, also executed on November 8, 2005, was recorded on

January 26, 2006.

               In     order      to   obtain       first     lien    priority   on    the

Property, NationPoint made payments out of the loan proceeds to

satisfy the remaining balance (totaling $756,560.08) on three

prior liens against the Property:

          •    A deed of trust originally                    in the amount of
               $600,000   granted   by Mrs.                  Batmanghelidj and
               recorded on 11/25/98

          •    A deed of trust originally                    in the amount of
               $150,000 granted by Mr. and                   Mrs. Batmanghelidj
               and recorded on 1/31/05

          •    A deed of trust originally                    in the amount of
               $36,500   granted   by Mrs.                   Batmanghelidj and
               recorded on 07/22/05

In addition, NationPoint paid $5,886.83 in state property taxes

owed by Mr. Batmanghelidj and the $35,479 balance on an auto

loan    for     which      Mr.    Batmanghelidj        was    liable.        NationPoint

disbursed           the    remaining      $185,872.92          directly       into    Mr.

Batmanghelidj’s bank account.                  In connection with the November

8,     2005,    loan      transaction,         Mr.    Batmanghelidj       executed     an

affidavit and Indemnification Agreement stating, in part, that

there were no construction liens or state or federal tax liens

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against the Property or the Property’s owners that would remain

unsatisfied after the payments.

             In April 2006 NationPoint assigned the Batmanghelidj

loan to First Franklin Financial Corporation, which, in turn,

assigned the loan to DB in August 2006.                  After acquiring the

loan, DB conducted a title search of the Property.                 That title

search revealed that the representations in Mr. Batmanghelidj’s

affidavit and Indemnification Agreement were false and that two

judgments and two IRS liens still encumbered the Property after

the loan proceeds were disbursed.          Apparently, Mr. Batmanghelidj

had incurred more than $250,000 in federal income tax liability

prior   to   November   8,   2005,   and   liens    on     the   Property   had

attached at the instant title passed to him.               Upon discovery of

these liens, DB filed an action in Virginia state court, seeking

a   declaratory   judgment    that   its    lien    on    the    Property   had

priority over the liens of the IRS and several others.                The IRS

removed the action to the U.S. District Court for the Eastern

District of Virginia.

             On September 17, 2007, the district court granted the

IRS’s motion under Federal Rule of Civil Procedure 12(c) for

judgment on the pleadings.       The court held that the IRS’s liens

were senior to DB’s lien because they attached first and that

equitable subrogation did not apply.               DB moved to amend its

complaint, but the district court denied the motion with respect

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to the IRS on the ground that amendment would be futile.                           DB now

appeals     the       district     court’s          determination       that     equitable

subrogation does not apply.

                                             II.

               We review de novo the district court’s decision to

grant judgment on the pleadings in favor of the IRS.                           Korotynska

v.    Metropolitan       Life    Ins.    Co.,       474   F.3d   101,    104   (4th     Cir.

2006).     A Federal Rule of Civil Procedure Rule 12(c) motion for

judgment on the pleadings is decided under the same standard as

a motion to dismiss under Rule 12(b)(6).                          Independence News,

Inc. v. City of Charlotte, 568 F.3d 148, 154 (4th Cir. 2009).

“On a Rule 12(b)(6) motion, a complaint must be dismissed if it

does not allege enough facts to state a claim to relief that is

plausible on its face.”               Monroe v. City of Charlottesville, 579

F.3d 380, 386 (4th Cir. 2009).

               “Subrogation is the substitution of another person in

the    place     of    the    creditor       to     whose    rights     he   succeeds    in

relation to the debt.”             Fed. Land Bank of Baltimore v. Joynes,

18 S.E.2d 917, 920 (Va. 1942).                     When a “lender of money lent it

with the intention and understanding that he be substituted to

the position of the creditor,” a court will treat the lender as

if    he   had    been       assigned    the       loan     provided    “there    are    no

intervening       equities       to     be    prejudiced.”             Id.       Equitable

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subrogation is “purely equitable in its nature, dependent upon

the   facts      and   circumstances           of    each     particular       case.”    Id.

“[O]rdinary       negligence        of        the    subrogee     does     not     bar    the

application of subrogation where an examination of the facts

. . .   shows     that      the    equities         strongly     favor    the    subrogee.”

Centreville Car Care, Inc. v. N. Am. Mortgage Co., 559 S.E.2d

870, 872 (Va. 2002) (internal quotation marks omitted).

              Following these principles and assuming as true the

facts alleged in DB’s complaint, we conclude that while DB’s

predecessor had the “intention and understanding that [it would]

be    substituted      to    the    position         of   the    [first    priority      lien

holder],” equitable subrogation is nevertheless improper because

there     are     intervening       equities           that     would     be    prejudiced.

Indeed,         with       regard        to         NationPoint’s         intention       and

understanding, we think it likely that NationPoint would not

have extended a loan to Mr. Batmanghelidj unless it believed it

would     receive      a    first    priority          lien.       Moreover,       in    some

circumstances, lenders like NationPoint may be entitled to rely

on representations like those made by Mr. Batmanghelidj that no

other liens exist.             But while the equities favor DB to some

extent, we think the balance tips in favor of the IRS due to the

prejudice it would suffer.

              Junior lien holders have a right to expect that the

liens senior to theirs will eventually be paid, whether that

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payment    flows    from    the   debtor       or   from    a    liquidation      of   the

property.        Centreville      Car    Care,      Inc.,       559   S.E.2d    at     873.

Absent an agreement to the contrary, however, they do not have

the right to expect that senior liens will not change hands.

When the transaction merely substitutes one senior lien holder

for another without increasing the amount of senior debt, the

junior    lien     holder    cannot      complain.       See     Fed.    Land   Bank    of

Baltimore, 18 S.E.2d at 920.               Of course, when the transaction

shrinks the senior debt, junior lien holders are not prejudiced

because they are better off than they would have been absent the

transaction.       Id. at 922.

              Junior lien holders are prejudiced, however, when the

senior debt increases.            Prior to November 8, 2005, there were

liens totaling $756,560.08 senior to those held by the IRS.                            The

proceeds from the NationPoint loan did not simply satisfy this

debt.     A substantial amount of loan proceeds — $227,238.75 —

went either directly into Mr. Batmanghelidj’s bank account or to

pay     unsecured    debts      rather    than       towards      paying    the      IRS’s

judgment liens.         If this court subrogated NationPoint’s loan,

the   liens    senior      to   those    held       by   the    IRS     would   grow    by

$227,238.75.       This result would clearly prejudice the IRS.

              DB responds by arguing that it is requesting only that

$756,560.08 worth of its $990,000 lien be subrogated.                           In this

way, the lien amount senior to the IRS liens will not increase

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and therefore no prejudice will result.                    This argument, however,

was    implicitly      rejected     by     the   Supreme    Court   of    Virginia   in

Centreville Car Care, Inc. v. N. Am. Mortgage Co.                        In that case

a couple bought a home for $210,000 believing that the only lien

on the property was the mortgage associated with the seller’s

original purchase.           Of the $208,250 in loan proceeds the buyers

obtained to purchase the home, only $198,928.07 went to satisfy

the prior lien on the property.                  The remainder of the proceeds

went to the sellers.            In fact, there was a second lien on the

property held by Centreville Car Care that was promoted to first

lien when the prior mortgage was paid.                      Hence, the lien that

North American Mortgage had on the home was not, as it had

thought, first priority.              The Virginia Supreme Court held that

“Centreville was entitled to receive the balance of funds from

North American Mortgage's loan to the [buyers] that was paid to

[the    sellers]     after    the    promissory      note    held   by    [prior   lien

holder]       was   satisfied       from    those   funds.       To      this   extent,

Centreville was prejudiced.”                 Centreville Car Care, Inc., 559

S.E.2d at 873.         For this reason, among others, the court did not

grant partial or any other type of subrogation to North American

Mortgage.

              Again, subrogation is a matter of equity, “dependent

upon    the    facts    and   circumstances         of   each   particular       case.”

Federal Land Bank of Baltimore, 18 S.E.2d at 920.                           Here, the

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equities   possibly   favor    the   IRS   even   more   definitively     than

Centreville Car Care.         Not only did Mr. Batmanghelidj receive

additional funds from NationPoint’s loan above the value of the

liens, two creditors — the state government and the auto loan

holder — were essentially allowed to cut the line, receiving

payment    before   more   senior,    secured     lenders   like   the    IRS.

Moreover, the fault here may lie, as it did in Centreville Car

Care, Inc., with the title examiner employed by the original

lender.    DB potentially has recourse against Mr. Batmanghelidj

for his false representations, NationPoint’s title examiner for

its failure to find the IRS liens, and NationPoint for breach of

its   assignment    agreement.        Under     these    circumstances,     we

conclude that the equities do not favor DB, and we therefore

decline to apply the doctrine of equitable subrogation. *

           The district court’s order granting the IRS’s motion

for judgment on the pleadings is therefore

                                                                   AFFIRMED.

      *
       We note that the district court concluded that NationPoint
was negligent for not finding the IRS liens.           Ordinarily,
negligence is a question for a jury rather than a court that has
before it nothing more than allegations in a complaint.        See
Estate of Moses v. Sw. Va. Transit Mgmt. Co., 643 S.E.2d 156,
160-61 (Va. 2007).        Because we conclude that equitable
subrogation   is   inappropriate  here   regardless  of    whether
NationPoint was negligent, we do not reach that issue.

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