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Bankr. E.D.N.C.: In re Spirakis - Subrogation of Creditors Rights to Third Party Payee

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By Ed Boltz, 26 November, 2017
Summary: Through a complicated series of transactions and guarantees, Georgia Spiliotis sought to subrogate to the rights of Bank of North Carolina against the debtors, Nicolas & Mary Spirakis. The bankruptcy court first differentiated between conventional subrogation, β€œis founded upon the agreement of the parties.” Joyner v. Reflector Co., 176 N.C. 274, 276, 97 S.E. 44, 46 (1918), and legal subrogation which β€œis an equitable remedy applied as a β€œmeans to substitute, to put one person in the place of another; and is usually exercised where one person has become liable for, or has been compelled to pay money for, another.” Vaughan v. Jeffreys, 119 N.C. 135, 141, 26 S.E. 94, 96 (1896). Here Ms. Spiliotis sought legal Subrogation. For legal subrogation to applied, the court applied a five part test: (1) a payment was made by the subrogee to protect [her] own interest; (2) the subrogee must not have acted as a volunteer; (3) the debt paid must have been one for which the subrogee was not primarily liable; (4) the entire debt must have been paid; and (5) subrogation must not work any injustice to others. See Frederick v. Southern Fidelity Mut. Ins. Co., 221 Case 14-00095-8-SWH Doc 148 Filed 10/30/17 Entered 10/30/17 17:20:45 Page 9 of 19 N.C. 409, 410 (1942) (applying South Carolina law and citing Dunn v. Chapman, 149 S.C. 163, 170, 146 S.E. 818, 820 (1929)). Applying these factors, the bankruptcy court held that Ms. Spiliotis would be unlikely to be able to satisfy all requirements for subrogation and, even if she did, the collection rights of BNC would no longer likely exist. Commentary: Bankruptcy estates and their Trustees, as third parties, would be neither volunteers nor primarily liable and would likely be able to assert the collection right for creditors that were paid in full in a bankruptcy. While this would most obviously include seeking contribution from other debtors, it is not impossible to imagine that could also include guarantors, including perhaps even the federal government, for VA and Fannie Mae/Freddie Mac mortgages. It could also include pursuing claims against mortgage servicers on behalf of the underlying note holders. While Chapter 7 Trustees rarely pay such secured creditors in full, it is not unheard of for Chapter 13 estates to pay the entire claim of a mortgage. (QUERY: Would payment of a crammed down debt suffice?) As such, they could potentially seek contribution from the government or mortgage servicers for the benefit of other creditors. For a copy of the opinion, please see: Spirakis - Subrogation of Creditors Rights to Third Party Payee

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Eastern District

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