Court Opinion

ID: 4713645
Source: CourtListenerOpinion
Date Created: 2021-08-12 00:39:50.958532+00
Date Added: 2024-06-11T08:07:18.708128
License: Public Domain

¶36 (dissenting) — The majority holds that a lender can be equitably subrogated to a first-priority lien even though the lender has actual or constructive knowledge of junior lienholders. I would hold that Wells Fargo Bank West’s (WFB West) actual knowledge of Bank of America’s (BoA) lien bars application of the doctrine of equitable subrogation. Thus, I respectfully dissent.
Owens, J.
¶37 Washington’s recording statute, RCW 65.08.070, modified “the common law rule of ‘first in time, first in right,’ ” which gives priority to the first interest in real property created. 18 William B. Stoebuck & John W. Weaver, Washington Practice: Real Estate: Transactions § 18.21, at 342 (2d ed. 2004). Under RCW 65.08.070, a deed of trust’s recording date generally governs the priority of competing liens on the same real property. A security interest that is recorded first, even though it was created second in time, will be given priority over the earlier unrecorded interest if the second lienholder has no knowledge of the prior lien. By generally giving priority to the first recorded lien, the recording statute promotes predictability in the resolution of competing security interests in the same real property. However, the statute protects only “good faith” mortgagees, since it prevents a second lienholder who records first from vaulting into the first-priority lien position if that second lienholder has actual knowledge of the preexisting unrecorded lien. RCW 65.08.070. The recording statute thus makes constructive or actual knowledge determinative: just as a lien that is recorded second in time cannot take *583precedence over the prior recorded lien (since the first lienholder’s recording gives the second lienholder constructive knowledge of the preexisting recorded lien), a second lienholder who has actual knowledge of the prior unrecorded lien cannot move up in priority simply by beating the first lienholder to the county auditor’s office.
¶38 In the present case, the majority adopts without qualification the doctrine of equitable subrogation set forth in section 7.6 (and comment e) of the Restatement (Third) of Property: Mortgages (1997) [hereinafter Restatement (Third)]. This approach allows refinancing mortgagee WFB West to move into the first-priority lien position of the original mortgagee, Washington Mutual Savings Bank, even though WFB West had actual knowledge of BoA’s and Wells Fargo Bank’s20 intervening liens on the property. Of the three possible approaches to the knowledge issue, the unqualified Restatement (Third) approach is the most advantageous to any refinancing mortgagee, since it permits equitable subrogation despite the refinancing lender’s constructive or actual knowledge of intervening liens. It is the only approach that benefits WFB West in the present case and the least consistent approach with our prior case law and the recording statute.
¶39 I would decline to adopt the doctrine of equitable subrogation set forth in section 7.6 and comment e of the Restatement (Third) and would instead adopt “the traditional (and still majority) rule,” which “allows subrogation with constructive knowledge, but not with actual knowledge.” Pet. for Review at 11; Pet’rs’ Suppl. Br. at 9. While this approach is admittedly an exception to the recording act (since the refinancing lender moves ahead of a previously recorded lien), the “actual knowledge” bar to equitable subrogation nevertheless harmonizes to some extent with the recording act’s provision that a subsequent lienor may not take precedence over a prior unrecorded lien of *584which the subsequent lienor has actual knowledge. RCW 65.08.070. As the Restatement (Third) acknowledges, “[m]ost of the cases disqualify [from equitable subrogation] the payor who has actual knowledge of the intervening interest.” Restatement (Third) § 7.6 cmt. e at 519-20; see, e.g., First Union Nat'l Bank v. Nelkin, 354 N.J. Super. 557, 808 A.2d 856 (2002); Dimeo v. Gesik, 164 Or. App. 567, 993 P.2d 183 (1999), adhered to as modified on recons., 197 Or. 560, 106 P.3d 697 (2005).
¶40 The traditional approach is consistent with the recording statute’s interest in withholding benefits from a lienholder who has actual knowledge of a prior lien. In my view, a refinancing mortgagee who has actual knowledge of an intervening lien yet fails to take protective measures would be hard pressed to prove that it “reasonably expected” to assume a first-priority lien position. Restatement (Third) § 7.6(b)(4), at 508; see Patrick J. Rohan, 4C-3H Real Estate Financing § 3H.09[3] (2006) (observing that “Commercial lenders can examine the property, ask questions about the existence of intervening lienholders, acquire subordination agreements with any existing lienholders, or, in many cases, assume the earlier lender’s rights through assignment”); see also BNC Mortgage, Inc. v. Tax Pros, Inc., 111 Wn. App. 238, 256, 46 P.3d 812 (2002).
¶41 The majority’s assumption that, under the traditional approach, “mortgage companies could purposefully remain ignorant of intervening interests” is misplaced. Majority at 572. Here again, in my view a commercial lender who undertakes no title search will be unable to demonstrate, as the Restatement (Third) requires, that it “reasonably expected to receive a security interest in the real estate with the priority of the mortgage being discharged.” Restatement (Third) § 7.6(b)(4), at 508 (emphasis added). I see no difficulty in distinguishing between, on the one hand, the wishful thinking of a lender who eschews a title search and, on the other hand, the reasonable expectations of a lender who arranges for a search of the relevant property records.
*585¶42 Further, making the refinancing mortgagee’s actual knowledge of the intervening lien a bar to equitable subrogation is more consistent with our holding in Hu Hyun Kim v. Lee, 145 Wn.2d 79, 31 P.3d 665, 43 P.3d 1222 (2001). The issue in Kim was whether a refinancing mortgagee’s title insurer should benefit from equitable subrogation if the insurer had constructive and actual knowledge of a judgment creditor’s intervening lien. The Kim court held that “[a] title insurer should not avoid liability through the doctrine of equitable subrogation because the title insurer had actual knowledge of a prior judgment lien and failed to disclose such a lien to its insured before issuance of the title policy.” Id. at 82. Although Kim is not, as the Court of Appeals in this case stated, “controlling precedent,” the holding certainly marked our disapproval of the notion that subrogation should be permitted “ ‘even if the payor had actual knowledge of the intervening interest.’ ” Id. at 90 (quoting Restatement (Third) § 7.6 cmt. e at 520).
¶43 Thus, I would hold that actual knowledge of a prior lien bars application of the doctrine of equitable subrogation. Such a holding is most consistent with the principle in the recording statute that a lien created second in time will have first priority if it is recorded first and is likewise most consistent with our prior case law. Accordingly, I would hold that WFB West’s actual knowledge of BoA’s lien bars the unqualified application of the doctrine of equitable subrogation set forth in section 7.6 of the Restatement (Third) and affirm the Court of Appeals.
Alexander, C.J., and C. Johnson, J., concur with Owens, J.
Reconsideration denied September 28, 2007.

 Wells Fargo Bank and WFB West are separately chartered national banking associations.