Court Opinion

ID: 867210
Source: CourtListenerOpinion
Date Created: 2013-05-11 22:42:15.733666+00
Date Added: 2024-06-11T15:37:05.256055
License: Public Domain

SUPREME COURT OF ARIZONA
                             En Banc

SOURCECORP, INCORPORATED,         )   Arizona Supreme Court
                                  )   No. CV-11-0269-PR
              Plaintiff/Appellee, )
                                  )   Court of Appeals
                 v.               )   Division One
                                  )   No. 1 CA-CV 10-0212
DEAN D. NORCUTT and STACEY L.     )
NORCUTT, husband and wife,        )   Maricopa County
                                  )   Superior Court
          Intervenors/Appellants. )   No. CV2002-020676
                                  )
                                  )
                                  )   O P I N I O N
__________________________________)

        Appeal from the Superior Court in Maricopa County
              The Honorable J. Kenneth Mangum, Judge

                      REVERSED AND REMANDED
________________________________________________________________

          Opinion of the Court of Appeals, Division One
             227 Ariz. 463, 258 P.3d 281 (App. 2011)

                            AFFIRMED
________________________________________________________________

STEPTOE & JOHNSON LLP                                       Phoenix
     By   Francis J. Burke, Jr.
          Bennett Evan Cooper
          Douglas D. Janicik
Attorneys for Sourcecorp, Incorporated

MARISCAL, WEEKS, MCINTYRE & FRIEDLANDER, P.A.               Phoenix
     By   Michael R. Scheurich
          Anne L. Tiffen
          Robert C. Brown
And

GUST ROSENFELD, P.L.C.                                      Phoenix
     By   Charles W. Wirken
          Scott A. Malm
Attorneys for Dean D. Norcutt and Stacey L. Norcutt
HOLDEN WILLITS PLC                                                                                   Phoenix
     By   Michael J. Holden
          Barry A. Willits
Attorneys for Amicus Curiae Arizona Builders’ Alliance

GUST ROSENFELD, P.L.C.                                   Phoenix
     By   Richard A. Segal
          Charles W. Wirken
          Scott A. Malm
Attorneys for Amicus Curiae Land Title Association of Arizona
________________________________________________________________

B A L E S, Justice

¶1                           Dean and Stacey Norcutt bought a home for cash and

satisfied the existing first mortgage.                                               They later discovered

the home was also subject to a judgment lien far exceeding the

property’s value.                                          We hold that the purchasers were equitably

subrogated to the mortgage lien’s priority for the amount they

paid to satisfy the mortgage.

                                                                             I.

¶2                           In September 2004, Sourcecorp, Incorporated obtained a

judgment exceeding $3 million against Steven and Rita Shill, who

owned               residential                           property      in   Prescott.   The   property   was

subject to a first mortgage in favor of Zions National Bank

securing                    a       debt             of        nearly   $689,000.1   Sourcecorp   recorded   a

judgment lien.                                   In November 2004, the Shills sold the property

                                                            
1
  Zions Bank held a deed of trust, but we refer to this interest
as a “mortgage” because Sourcecorp and the opinion of the court
of appeals use this term.    The distinction between a mortgage
and a deed of trust is immaterial to our analysis.           Cf.
Restatement (Third) of Property: Mortgages § 1.1 (1997)
(defining “mortgage” to include deeds of trust).
                                2
to    the    Norcutts        for    $667,500     in    cash.        Zions    Bank    accepted

$621,000         of   the    proceeds      in    full      satisfaction       of     the   debt

secured by its first mortgage.                       Although the Norcutts purchased

title insurance from First American Title Insurance Company, the

title insurer did not discover Sourcecorp’s judgment lien.

¶3               After      the    Norcutts      bought    the      property,       Sourcecorp

initiated a sheriff’s sale to foreclose on its judgment lien.

The Norcutts sued to enjoin the sale.                               Granting relief, the

trial court ruled that the Norcutts’ interest in the property

was    superior        to    Sourcecorp’s         judgment       lien.       The     court   of

appeals reversed for reasons not before this Court.                                Sourcecorp,

Inc. v. Shill, No. 1 CA-CV 05-0425 (Ariz. App. Sept. 26, 2006)

(mem. decision).             On remand, the Norcutts argued that they were

equitably subrogated to the position of Zions Bank in priority

over Sourcecorp.              The trial court rejected this argument and

entered summary judgment for Sourcecorp.                            Reversing again, the

court       of    appeals          held   that       the   Norcutts         were    equitably

subrogated.            Sourcecorp, Inc. v. Norcutt, 227 Ariz. 463, 471

¶ 37, 258 P.3d 281, 289 (App. 2011).

¶4               We granted review because application of the equitable

subrogation           doctrine      in    this    context      is    an   issue      of    first

impression and statewide importance.                        Jurisdiction exists under

Article 6, Section 5(3) of the Arizona Constitution and A.R.S.

§ 12-120.24 (2009).
                                                 3
                                          II.

¶5            Equitable subrogation is “the substitution of another

person in the place of a creditor, so that the person in whose

favor it is exercised succeeds to the rights of the creditor in

relation to the debt.”           Mosher v. Conway, 45 Ariz. 463, 468, 46

P.2d 110, 112 (1935).             This equitable remedy is “designed to

avoid a person’s receiving an unearned windfall at the expense

of another.”        Restatement (Third) of Property: Mortgages § 7.6

cmt. a (1997) (“Restatement”); see Mosher, 45 Ariz. at 468, 46

P.3d   at     112   (noting    that    purpose         of   doctrine    is   to   prevent

injustice).         “The     general    rule      is    that   a   person    having    an

interest in property who pays off an encumbrance in order to

protect his interest is subrogated to the rights and limitations

of the person paid.”             Id. at 472, 46 P.2d at 114; see also

Restatement § 7.6(a) (providing that “[o]ne who fully performs

an obligation of another, secured by a mortgage, becomes by

subrogation the owner of the obligation and the mortgage to the

extent necessary to prevent unjust enrichment”).

¶6            Mosher   concerned “paving liens” on residential lots

assessed for street improvements.                      Under the statutory scheme,

the    city    could   auction       liens       for    delinquent     assessments    to

private parties.        If the property owner or a “party in interest”

did    not    redeem   the    lien     within     a    year,   the     purchaser   would

                                             4
obtain the property free of encumbrances.                     45 Ariz. at 465-67,

46 P.2d at 111-12.           In Mosher, one lot was subject to three

liens,     which     were    sold        separately.          Applying     equitable

subrogation,       this    Court    held    that    the   second     purchaser     was

subrogated to the positions of the first and third purchasers

when he redeemed their liens, even though the property owner

ultimately    redeemed      all     of   the    liens.     The    owner   could    not

complain about this result because it merely required her to pay

one person rather than another to release the liens.                          Id. at

471, 46 P.2d at 113.

¶7           Mosher said that “no general rule can be stated which

will afford a test [for equitable subrogation] in all cases.”

Id.   at   468,     46    P.2d     at    112.      Instead,      “[w]hether   it    is

applicable     or    not     depends       upon    the    particular      facts    and

circumstances of each case as it arises.”                  Id., 46 P.2d at 112.

Noting “the modern tendency” to extend the doctrine’s use, id.,

46 P.2d at 112, the Court also observed that

      [A] mere volunteer, who has no rights to protect, may
      not claim the right of subrogation, for one who,
      having no interest to protect, without any legal or
      moral obligation to pay, and without an agreement for
      subrogation or an assignment of the debt, pays the
      debt of another, is not entitled to subrogation, the
      payment in his case absolutely extinguishing the debt.

Id. at 470, 46 P.2d at 113.                The Court immediately added that

“when one, to protect his own interest, pays a debt which he

                                            5
honestly believes must be paid to accomplish that purpose, . . .

he cannot be held to be a mere volunteer.”               Id., 46 P.2d at 113.

¶8           Because the Court declined to adopt a bright-line test

in Mosher and has not revisited the issue, the court of appeals

has developed guidelines for applying equitable subrogation.                    In

1965, the court of appeals stated that subrogation would occur

if (1) a third person discharges an encumbrance on the property

of another; (2) the person is not a volunteer; and (3) there is

an express or implied agreement “that he will be substituted in

place   of   the     holder   of    the    encumbrance.”      Peterman-Donnelly

Eng’rs & Contractors Corp. v. First Nat’l Bank of Ariz., 2 Ariz.

App. 321, 325, 408 P.2d 841, 845 (1965).

¶9           Nearly     forty      years    later,     the   court   of     appeals

described several tests for equitable subrogation.                        See Lamb

Excavation, Inc. v. Chase Manhattan Mortg. Corp., 208 Ariz. 478,

480-82 ¶¶ 8-14, 95 P.3d 542, 544-46 (App. 2004).                          Reviewing

cases from different jurisdictions, the court said the “majority

approach” requires four primary elements: (1) the party claiming

equitable subrogation has paid the debt; (2) the party was not a

volunteer; (3) the party was not primarily liable for the debt;

and (4) no injustice will be done to the other party by allowing

subrogation.        Id. at 480 ¶ 8, 95 P.3d at 544.

¶10          Lamb      Excavation         explained,     however,     that      the

Restatement has adopted a more expansive standard.                   Id. at 481
                                           6
¶ 10, 95 P.3d at 545; Restatement § 7.6.                           Under this test, a

person who “fully performs an obligation of another, secured by

a mortgage, becomes by subrogation the owner of the obligation

and   the   mortgage       to    the    extent      necessary      to    prevent      unjust

enrichment.”       Restatement § 7.6.               Such equitable relief may be

appropriate,    for    example,          if   the    person     seeking       subrogation

“expected to receive a security interest in the real estate with

the priority of the mortgage being discharged.”                         Id.

¶11         In Lamb Excavation, the court of appeals distinguished

Peterman-Donnelly      from       the    “majority      approach,”         208      Ariz.    at

480-81 ¶¶ 7-8, 95 P.3d at 543-44, and observed that Arizona’s

approach “appears consistent with the Restatement.”                            Id. at 482

¶ 13, 95 P.3d at 546.            In the instant case, the court of appeals

cited the “primary elements” of the “majority approach,” noted

other   factors     considered          in    Arizona   cases,       and      quoted    Lamb

Excavation’s comment about the Restatement.                         227 Ariz. at 466-

67, 469 ¶¶ 14, 25, 258 P.3d at 284-285, 287.

¶12         There     is    thus       some    ambiguity      in    Arizona      case       law

regarding    the    test        for    equitable     subrogation.             For    reasons

explained below, we adopt the Restatement approach because it is

most consistent with the rationale for equitable subrogation.

                                             III.

¶13         Absent equitable subrogation, once the debt to Zions

Bank was fully satisfied by the Norcutts, Sourcecorp’s judgment
                                              7
lien    advanced    in   priority.         Sourcecorp    claims   that    it    is

entitled to execute on its $3 million judgment lien through a

sheriff’s sale.      The Norcutts would receive nothing from such a

sale, but would likely have a claim against their title insurer

for failing to discover Sourcecorp’s lien.                  In contrast, the

Norcutts argue that they are subrogated to the position of Zions

Bank and therefore have a priority over Sourcecorp’s judgment

lien.

¶14           Relying on Mosher and other cases, Sourcecorp argues

that    equitable    subrogation      is    not    appropriate    because      the

Norcutts acted as mere volunteers in purchasing the property.

Alternatively,      Sourcecorp     contends       that   subrogation     is    not

available because there was no agreement, express or implied,

that    the   Norcutts   would   be   subrogated.        Finally,   Sourcecorp

contends that equitable considerations preclude subrogation.                   We

consider these arguments in turn.

                                       A.

¶15           Mosher and later cases state that a “mere volunteer”

cannot claim equitable subrogation.               But Mosher also explained

that a person who pays a debt to protect the person’s interests

is not a volunteer.       45 Ariz. at 470, 46 P.2d at 113.             Mosher is

thus consistent with the Restatement, which does not use the

term “volunteer” as a talisman, but instead recognizes that a

                                       8
person who has paid a debt to protect his or her own interests

may seek equitable subrogation.                    See Restatement § 7.6.

¶16           We     agree        with       the     Restatement         that     equitable

subrogation should not turn on whether the person invoking the

doctrine is labeled a volunteer.                      “[T]he meaning of the term

‘volunteer’ is highly variable and uncertain, and has engendered

considerable confusion.”                 Restatement § 7.6 cmt. b.                Instead,

the Restatement appropriately focuses on other circumstances of

the party seeking to invoke subrogation, including whether the

party has paid a preexisting obligation to protect the party’s

interest      in    the    property.          See    Restatement     §    7.6;    see   also

Dietrich Indus., Inc. v. United States, 988 F.2d 568 (5th Cir.

1993)    (permitting         equitable         subrogation         without       discussing

whether purchaser was a volunteer); Grant S. Nelson & Dale A.

Whitman, 2 Real Estate Finance Law § 10.7 (5th ed. 2010) (“[T]he

issue is only whether the payor expected that the payment would

free    the   property;          if   this    was    the   grantee’s      understanding,

subrogation should be available.”).

¶17           The Norcutts paid the preexisting debt to Zions Bank

to protect their concurrently acquired interest in the property.

The Norcutts thus had a sufficient interest to allow them to

seek equitable subrogation.                  Cf. Han v. United States, 944 F.2d

526,    530    (9th       Cir.    1991)      (purchasers      paid       off    mortgagee’s

interest      “to    establish        and    protect       their   own     interest”    and
                                               9
therefore were not volunteers); E. Boston Sav. Bank v. Ogan, 701

N.E.2d 331, 336 (Mass. 1998) (same).

                                              B.

¶18            Quoting Herberman v. Bergstrom, Sourcecorp also argues

that “[f]or equitable subrogation to apply, there must be an

agreement . . . that the subsequent lender will be substituted

for the holder of the prior encumbrance.”                          168 Ariz. 587, 590,

816 P.2d 244, 247 (App. 1991).                 Other decisions of the court of

appeals    contain       similar      language.         See   Lamb       Excavation,    208

Ariz. at 482 ¶ 13, 95 P.3d at 546 (requiring an “express or

implied    agreement”       to   subrogate);          Peterman-Donnelly,         2    Ariz.

App. at 325-26, 408 P.2d at 845-46 (same).

¶19            Mosher,    however,      did    not     require      an    “agreement”    in

holding     that    the    purchaser          of     paving    liens      was   equitably

subrogated to the positions of other lienholders.                           See 45 Ariz.

at 471, 46 P.2d at 113.               Moreover, to the extent that the court

of appeals has required an “agreement,” it has adopted a very

elastic notion of the concept.                     In Lamb Excavation, property

owners obtained a construction loan secured by a deed of trust.

After     several    subcontractors           served        preliminary      notices     of

mechanics’ liens, see A.R.S. § 33-992.01, the owners obtained

permanent financing and satisfied the construction loan.                                The

court     of    appeals    concluded          that    the     permanent      lender     was

equitably       subrogated       to     the     prior       lien    position     of     the
                                              10
construction lender.               See 208 Ariz. at 483 ¶ 16, 95 P.2d at 547.

In    reaching     this      conclusion,           the       court         found     “at     least    an

implied     agreement         to    subrogate”          based          on    statements        in    the

permanent loan documents and closing instructions that the new

lender would have a first lien.                    Id.

¶20          The Restatement and case law from other jurisdictions

do    not   require       an       agreement       as        a    condition          for    equitable

subrogation.       See Restatement § 7.6 cmt. a; Han, 944 F.2d at 529

(listing     five        factors           justifying            the        use      of      equitable

subrogation without requiring an agreement).                                 The requirement of

an “agreement” for subrogation – like the disqualification of

“volunteers”       -    has     been       subject       to          varying      interpretations.

Compare Citizens’ Mercantile Co. v. Eason, 123 S.E. 883, 886

(Ga.    1924)     (holding          that    a     purchaser            was     not      entitled      to

equitable subrogation because he did not pay “debts under an

agreement,        express      or      implied,          .       .     .    that      he    would     be

subrogated”),       with       In    re    Mortgages             Ltd.,      459    B.R.      739,    742

(Bankr. D. Ariz. 2011) (“Arizona case law seems to hold that the

subsequent      lender’s       intent        to    obtain            first     lien     priority     is

sufficient evidence, standing alone, to satisfy the agreement

requirement.”).

¶21          We    adopt       the     Restatement               approach         and      reject    any

requirement       of    an     “agreement”         as        a       condition       for    equitable

subrogation.           To be sure, parties may achieve subrogation by
                                                  11
agreement, such as through an assignment of a promissory note

and    related      mortgage.         See     Restatement        §    7.6     cmt.     a

(distinguishing       “conventional         subrogation”       by    assignment      or

agreement from equitable subrogation).                  Equitable subrogation,

however, does not turn on contractual principles, but instead on

the concern to prevent unjust enrichment.                     That goal is served

by allowing subrogation when a party pays a mortgage to protect

an    interest   in   the    property,      irrespective       of    an    express    or

implied agreement that the party will succeed to the position of

the prior lienholder.

                                         C.

¶22         Finally, Sourcecorp argues that because the Norcutts

obtained    title     insurance    from       which    they    could      recoup     any

losses,     equitable         considerations           preclude           subrogation.

Sourcecorp contends that neither the Norcutts nor the insurer

should    benefit     from   the   insurer’s      negligence         in    failing   to

discover the recorded lien.

¶23         Accepting these arguments, however, would require us

to ignore the key concern underlying equitable subrogation and

would unjustly enrich Sourcecorp.              Before the Norcutts purchased

the home, Sourcecorp had a second lien on the property, which

was worth less than the outstanding mortgage debt of $689,000.

The   Norcutts   satisfied      the   first     lien    by     paying      Zions   Bank

$621,000    in   cash.       Sourcecorp        contends      that    the    result     –
                                         12
unintended by the Norcutts – was that Sourcecorp obtained a

first lien on property that had just sold for $667,500, and the

Norcutts       were   left   with    nothing      but    a   claim    against       their

insurer.

¶24            Denying     subrogation      here,        therefore,      would       give

Sourcecorp a windfall independent of whether the Norcutts were

insured or had constructive notice of the judgment lien.                         (There

is no suggestion the Norcutts had actual notice of the lien, and

we need not address whether a purchaser with actual notice could

ever be equitably subrogated.) Moreover, there is no general

requirement that a person seeking subrogation lack notice in

order     to   obtain    equitable    relief.           In   Lamb   Excavation,       for

example, the permanent lender was subrogated to a first lien

position even though various subcontractors had served twenty-

day notices of mechanics’ liens.               208 Ariz. at 484 ¶ 20, 95 P.3d

at 548 (observing that “constructive notice is not an element of

equitable subrogation under Arizona law”); see also Restatement

§   7.6    cmt.   e     (noting   that    “the    payor’s      notice,       actual    or

constructive, is not necessarily relevant.                    The question in such

cases is whether the payor reasonably expected to get security

with a priority equal to the mortgage being paid.”).                           We also

agree with the court of appeals that it would be anomalous to

deny    equitable       subrogation      merely    because     a     party    had   been

                                          13
diligent in obtaining title insurance.                    227 Ariz. at 471 ¶ 35,

258 P.3d at 289.

¶25            Sourcecorp      further    argues        that    subrogation          would

prejudice      its    interests    by    preventing       it   from    moving       up   in

priority as a lienholder after the satisfaction of the mortgage

debt to Zions Bank.            “Subrogation will be recognized only if it

will     not    materially       prejudice      the     holders       of    intervening

interests.”          Restatement    §    7.6    cmt.    e.     We    do     not    accept,

however, that subrogation would materially prejudice Sourcecorp.

¶26            Generally, the satisfaction of a superior lien results

in subordinate lienholders advancing in priority, but preventing

this result in certain circumstances is precisely the aim of

equitable subrogation.           As the Restatement notes:

       One who fully performs an obligation of another,
       secured by a mortgage, becomes by subrogation the
       owner of the obligation and the mortgage to the extent
       necessary to prevent unjust enrichment.    Even though
       the   performance   would   otherwise  discharge   the
       obligation and the mortgage, they are preserved and
       the mortgage retains its priority in the hands of the
       subrogee.

Restatement      §    7.6(a)     (emphasis      added).        Thus,       preventing    a

junior    lienholder      from    advancing      in    priority     is      an    intended

consequence of equitable subrogation.                   See Lamb Excavation, 208

Ariz. at 483 ¶ 18, 95 P.3d at 547 (“We fail to comprehend the

nature of the perceived prejudice or inequity, as it appears the

lienholders      would    remain    in    the    same     position     they       occupied
                                           14
before subrogation . . . .”); Restatement § 7.6 cmt. e (“The

holders    of      .   .    .   intervening            interests    can     hardly    complain

[about       subrogation];              their      position         is      not     materially

prejudiced, but is simply unchanged.”).                          Indeed, insofar as the

Norcutts     are       subrogated          only    for     the     amount    they    paid     to

discharge the first mortgage,                      see infra        ¶ 29, Sourcecorp is

somewhat     better         off,     because      this     amount    was     less    than    the

outstanding debt to Zions Bank of $689,000.

¶27           Sourcecorp also argues that if the Norcutts are placed

in the position of Zions Bank, they could eliminate Sourcecorp’s

judgment      lien         by   a       collusive        refinancing        followed    by     a

foreclosure by the new first mortgage holder.                               Cf. Centreville

Car Care, Inc. v. N. Am. Mortg. Co., 559 S.E.2d 870, 874 (Va.

2002) (noting concern about “friendly foreclosure” if purchaser

were subrogated to position of first mortgage).                               This concern,

however, is addressed by the limits to the equitable remedy.                                  As

a   result    of       paying       the    obligation       owed    to     Zions    Bank,    the

Norcutts      only         “become[]       by     subrogation        the     owner     of    the

obligation and the mortgage to the extent necessary to prevent

unjust enrichment.”             Restatement § 7.6(a) (emphasis added).

¶28           In determining the extent to which the Norcutts are

subrogated to the prior position of Zions Bank, we note that

they are cash purchasers rather than creditors looking to the

property      to       secure       a     debt.         With     respect     to     creditors,
                                                  15
“[o]rdinarily one who is entitled to subrogation is permitted to

enforce      both        the    mortgage     and     the     secured       obligation.”

Restatement      §       7.6   cmt.    a.    Fee    owners     are   in    a    different

situation, because the merger doctrine generally holds that if

they   acquire       a    mortgage     on   their    own   property,      the    lien   is

extinguished         because     the    lesser      interest    “merges”        into    the

greater.     See Mid Kansas Fed. Sav. & Loan Ass'n v. Dynamic Dev.

Corp., 167 Ariz. 122, 129, 804 P.2d 1310, 1317 (1991) (noting

that equitable considerations may preclude merger).

¶29          Recognizing that equitable subrogation depends on the

facts of the particular case, see Mosher, 45 Ariz. at 468, 46

P.2d at 112, we conclude that it is not appropriate to confer on

the Norcutts a right to “foreclose” on the interest to which

they   are    subrogated.              Instead,     the    purposes       of    equitable

subrogation are fully served by deeming the Norcutts to have a

priority to proceeds from any sale of the property in the amount

they paid to satisfy the debt, $621,000.                       Cf. Lamb Excavation,

208 Ariz. at 483 ¶ 19, 95 P.3d at 547 (noting that payor is

subrogated only to the extent funds are applied toward payment

of prior lien).            Applying equitable subrogation in this manner

does not eliminate Sourcecorp’s judgment lien.                         To the extent

that lien adversely affects the Norcutts’ equity or renders the

property less marketable, we neither address nor foreclose any

claims the Norcutts might have against their title insurer.
                                             16
                                     IV.

¶30        For the reasons stated, we affirm the opinion of the

court of appeals and remand to the superior court for entry of

summary judgment in favor of the Norcutts consistent with this

opinion.   We deny the requests for attorneys’ fees.

                          _____________________________________
                          W. Scott Bales, Justice

CONCURRING:

_____________________________________
Rebecca White Berch, Chief Justice

_____________________________________
Andrew D. Hurwitz, Vice Chief Justice

_____________________________________
A. John Pelander, Justice

_____________________________________
Robert M. Brutinel, Justice

                                17