by Mark D. Epstein - Wendel, Rosen, Black & Dean LLP
California being a "race-notice" jurisdiction, the state follows a "first in time, first in right” system of lien priorities, meaning that other things being equal, deeds of trust and other liens that are recorded and indexed first in time generally have priority over subsequently recorded liens. Cal. Civ. Code § 2897; Thaler v. Household Finance Corp. (2000) 80 Cal.App.4th 1093, 1099. However, under appropriate circumstances, courts can declare that the relative priority positions of successively recorded liens are reversed pursuant to a judicial doctrine known as equitable subrogation. The doctrine of equitable subrogation is an exception to the “first in time, first in right” rule and applies in those situations where equity requires a different result. JP Morgan Chase Bank v. Banc of America Practice Solutions, Inc. (2012) 209 Cal.App.4th 855; citing Simon Newman Co. v. Fink (1928) 206 Cal. 143, 147.
The courts have explained equitable subrogation as follows:
One who advances money to pay off an encumbrance on realty at the insistence of either the owner of the property or the holder of the encumbrance, either on the express understanding, or under circumstances from which an understanding will be implied, that the advance made is to be secured by a first position lien on the property, is not a mere volunteer; and in the event the new security is for any reason not a first lien on the property, the holder of such security, if not chargeable with culpable and inexcusable neglect, will be subrogated to the rights of the prior encumbrancer under the security held by him, unless the superior or equal equities of others would be prejudiced thereby.
Smith v. State Savings and Loan Association (1985) 175 Cal.App.3d 1092, 1096;Katsivalis v. Serrano Reconveyance Co. (1970) 70 Cal.App.3d 200, 210.
The doctrine of equitable subrogation can also provide an exception to the general rule that a foreclosure sale extinguishes or “wipes out” all interests in the property over which the foreclosing party’s deed of trust had priority. In certain situations where a junior lienor has paid off or refinanced a debt that was secured by a senior lien which is then discharged or reconveyed, the court will revive the extinguished junior lien to provide the payer with an enforceable lien that has the same priority as the former lien that was paid off. Caito v. United Cal. Bank (1978) 20 Cal.3d 694, 704.
Equitable subrogation may be denied in circumstances where the party seeking to be subrogated to the priority position of a senior lienor (the prospective subrogee) has actual knowledge of the third party claim. However, equitable subrogation will not be denied when the subrogee merely has constructive knowledge of the intervening lien. The mere failure to search the public records does not amount to culpable or inexcusable neglect that would defeat an equitable subrogation claim. Smith v. Savings & Loan Assn., supra, 175 Cal.App.3d at 1099; Katsivalis v. Serrano Reconveyance Co., supra, 70 Cal.App.3d at 210.
California Civil Code Section 3524 provides as follows:
“Between those who are equally in the right, or equally in the wrong, the law does not interpose.”
In other words, if two parties find them in the same position of fault (or lack thereof), or of right versus wrong, the law will not interpose a remedy or solution in favor of one against the other. The parties remain equal, and in the same position vis-à-vis one another.
The “superior equities doctrine” element of equitable subrogation is a legal doctrine that first arose in the context of the broader insurance law. Generally stated, “subrogation” is defined as the substitution of another person in place of the creditor or claimant to whose rights he or she succeeds in relation to the debt or claim. State Farm General Ins. Co. v. Wells Fargo Bank, N.A. (2006) 143 Cal.App.4th 1098, 1105. An insurer who pays off an insured’s claim is prevented from recovering against a party whose equities “are equal or superior to those of the insurer.” Fort Bragg Unified School Dist. v. Solano County Roofing, Inc. (2011) 194 Cal.App.4th 891, 915. In order to prevail on a claim of equitable subrogation in any context, the plaintiff has the burden to prove that its possesses not just equal equities to the defendant against whom it seeks subrogation, but that the plaintiff has superior equities. State Farm General Ins. Co. v. Wells Fargo Bank, N.A., supra, 143 Cal.App.4th at 1107; Meyers v. Bank of America Nat. Trust & Savings Ass'n (1938) 11 Cal.2d 92, 98 [“The right of subrogation is an equitable right, and where equities are equal the right does not exist and there can be no relief.”]) In first articulating and applying the “superior equities doctrine,” the California Supreme Court held that an insurer could not seek subrogation against a bank that was an, “innocent third party.” (Id. at 102.)
The courts have long held that in order to achieve equity, the doctrine of equitable subrogation should be applied liberally. However, the doctrine must not prejudice the superior or equal rights of senior intervening lienor(s). Bess v. Wise (1969) 275 Cal.App.2d 158, 165; Meyer Koulish Co. v. Cannon (1963) 213 Cal.App.2d 419, 424. Therefore, the courts must look to the intentions of the parties and determine whether the application of the equitable subrogation doctrine would give the lenders what each intended. Katsivalis v. Serrano Reconveyance Co., supra, 70 Cal.App.3d at 211.
If the first-in-time lender has already knowingly subjected its lien to a senior encumbrance, then the courts are inclined apply the doctrine to a junior lien if the other required elements are satisfied. JP Morgan Chase Bank v. Banc of America Practice Solutions, Inc., supra, 209 Cal.App.4th at 862; Lawyers Title Ins. Corp. v. Feldsher (1996) 42 Cal.App.4th 41, 49; Smith v. State Savings & Loan Assn., supra, 175 Cal.App.at 1097; Simon Newman Co. v. Fink, supra, 206 Cal. at 146; Katsivalis v. Serrano Reconveyance Co., supra, 70 Cal.App.3d at 211.) In each of the foregoing cases, the courts determined that the application of the equitable subrogation doctrine gave both lenders exactly what each intended at the outset, where the intervening lienors had previously bargained for a junior lien position while the subrogees had bargained for, and reasonably expected to have, a senior lien.