SCONC: Midfirst Bank v. Brown- Equitable Subrogation

Summary:

After purchasing her home In 2000, Betty J. Brown obtained a mortgage in 2004 from First Horizon Home Loan Corporation.  In 2010, a judgment  in favor of United  General Title Insurance was entered against Ms.  Brown in South Carolina, which was then domesticated and recorded in North Carolina in 2014. In 2016, Brown refinanced her mortgage  with Nationstar Mortgage (MidFirst Bank is Nationstar’s successor in interest), which paid off the  First Horizon mortgage.  In 2019, enforcement proceedings began against Ms. Brown to collect the 2010 judgment. The property was seized and sold at an execution sale, with Ms.  Brown's daughter, Michelle Anderson, placing the successful bid at the Sheriff's sale.

The trial court granted summary judgment to MidFirst Bank action to quiet title, asserting that the Nationstar deed of trust still encumbered the property even after the execution sale. The court also held that the doctrine of equitable subrogation applied, allowing Nationstar to assume the rights and priorities of the First Horizon deed of trust. The Court of Appeals reversed this decision, holding that the Nationstar lien was extinguished by the execution sale and that the doctrine of equitable subrogation was not available to MidFirst Bank because it was not "excusably ignorant" of the publicly recorded judgment.

The Supreme Court of North Carolina reversed the decision of the Court of Appeals, holding that it erred by applying the incorrect standard regarding equitable subrogation relying on Peek v. Wachovia Bank & Trust Co., 242N.C. 1, 15 (1955) instead of Wallace v. Benner,200 N.C. 124 (1931) The SCONC  held that the doctrine of equitable subrogation applies when:

• Money is advanced to pay off a prior encumbrance;
• The new lender is not a volunteer, defined as  one who “pays off or loans money to pay off an incumbrance without taking an assignment thereof, and without an agreement for substitution.” ;
• The new lender was not culpably negligent, defined as the   “[f]ailure to exercise that degree of care rendered appropriate by the particular circumstances, and which a man of ordinary prudence in the same situation and with equal experience would not have omitted”; and 
• It does not prejudice junior lienholders.

As this requires a very fact intensive inquiry,  the SCONC directed that this case ultimately be remanded to the trial court to reassess.

Commentary:

The SCONC did point to multiple conflicting facts that the trial court must consider in determining whether equitable subrogation applies including that:

• The observance of docketing and recordation  is  so important to subsequent purchasers and mortgagees that a very strict compliance with its provisions in every respect is required.
• The failure by Nationstar to show that it conducted a title examination  or reviewed a credit report before refinancing the mortgage.
• That Ms. Brown signed an Owner's Affidavit attesting that “there is no person, firm, corporation or governmental authority entitled to any claim or lien against said property.” 
• That it is undisputed that the United judgment lien was publicly recorded. 
• That Ms.  Anderson, Brown’s daughter, purchased the subject property at the Sheriff's sale for roughly 1/3rd of the amount owed on the Midfirst mortgage; and
• That Ms.  Brown continues to reside in the property.

All of those tend to muddy the question of who is culpably negligent.