Present: All the Justices
CENTREVILLE CAR CARE, INC.
OPINION BY
v. Record No. 010786 JUSTICE LAWRENCE L. KOONTZ, JR.
March 1, 2002
NORTH AMERICAN MORTGAGE CO., ET AL.
FROM THE CIRCUIT COURT OF FAIRFAX COUNTY
Kathleen H. MacKay, Judge
In this appeal, we consider whether the chancellor properly
applied the equitable doctrine of subrogation to a purchase
money deed of trust. In granting subrogation, the chancellor
gave the subrogated deed of trust priority over a former second
deed of trust to the extent that funds from the loan secured by
the subrogated deed of trust were used to extinguish a former
first deed of trust.
BACKGROUND
The essential facts are not in dispute and, in large part,
were stipulated by the parties. On September 3, 1996, Margaret
M. Lynch purchased, as sole owner, a residential property in
Fairfax County (“the property”) for $210,000. Lynch financed
$199,500 of the purchase price with a loan from Financial
Mortgage, Inc. This loan was evidenced by a promissory note of
even date secured by a first deed of trust on the property.
Financial Mortgage immediately assigned this note and deed of
trust to Fleet Mortgage Corporation.
On October 7, 1996, Lynch and her husband, Abed E. Higassi,
borrowed $150,000 from B&T Car Care, Inc. This loan was
evidenced by a promissory note of even date secured by a second
deed of trust on the property. 1 B&T Car Care, Inc. subsequently
merged with Centreville Car Care, Inc. (Centreville), and
Centreville, the surviving corporation, became the holder of
this promissory note and the beneficiary of this deed of trust.
On March 10, 2000, Lynch conveyed the property to Mohammed
Bouzghaia and Corrina Y. Bouzghaia, husband and wife, for
$210,000. The Bouzghaias financed $208,250 of the purchase
price with a loan from North American Mortgage Company. The
loan was evidenced by a promissory note of even date to be
secured by a first deed of trust on the property. Metropolitan
Real Estate Settlements, Inc., the settlement agent for North
American Mortgage, caused a title search to be performed as to
the state of the title of the property. The title examiner,
however, failed to discover and disclose the existence of
Centreville’s second deed of trust. Thus, unbeknown to the
Bouzghaias and North American Mortgage, the lien of the deed of
trust in favor of North American Mortgage when recorded on March
10, 2000, was inferior in position of priority to the lien of
1
All the aforementioned deeds of trust and the assignment
were properly recorded in the appropriate land records of
Fairfax County.
2
Centreville’s deed of trust according to the Fairfax County land
records.
During the process of closing the loan from North American
Mortgage to the Bouzghaias for the purchase of the property, the
settlement agent disbursed $198,928.07 from the loan proceeds to
Fleet Mortgage in full satisfaction of the note secured by its
first deed of trust. The settlement agent also disbursed
$3,953.93 to Lynch from the funds available at the closing. On
April 28, 2000, Fleet Mortgage recorded a certificate of
satisfaction in the land records of Fairfax County,
extinguishing its first deed of trust. Accordingly, what had
been a second deed of trust in favor of Centreville advanced to
the first deed of trust position. Thereafter, Centreville
advised the trustee under its deed of trust that Lynch and
Higassi were in default on their payments on their secured note,
and the trustee advertised a trustee’s sale of the property for
August 29, 2000.
On August 23, 2000, North American Mortgage and the trustee
under its deed of trust filed a bill of complaint in the Circuit
Court of Fairfax County against Centreville, the trustee under
its deed of trust, and the Bouzghaias seeking equitable
subrogation. North American Mortgage contended that its deed of
trust should be subrogated to the priority position of the
original first deed of trust in favor of Fleet Mortgage.
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Centreville filed its grounds of defense, and the parties
voluntarily stayed the advertised trustee’s sale pending the
chancellor’s resolution of the issue of the priority of the
liens in question.
Relying primarily upon Federal Land Bank of Baltimore v.
Joynes, 179 Va. 394, 18 S.E.2d 917 (1942) (hereinafter, Federal
Land Bank), and Bankers Loan & Investment Co. v. Hornish, 94 Va.
608, 27 S.E. 459 (1897) (hereinafter, Bankers Loan), North
American Mortgage asserted before the chancellor that its deed
of trust should be subrogated to the priority position of Fleet
Mortgage’s deed of trust in the amount of $198,928.07,
representing the exact amount of the proceeds from its loan to
the Bouzghaias that was used to satisfy the lien of Fleet
Mortgage’s deed of trust. North American Mortgage contended
that this would be equitable because granting subrogation would
leave the lien of Centreville’s deed of trust essentially in the
same position of priority it had occupied prior to the
conveyance of the property to the Bouzghaias and, thus, would
not prejudice Centreville. Centreville responded that granting
subrogation would not be equitable under the particular facts of
this case. Rather, Centreville contended, among other things,
that granting subrogation would result in prejudice to it and to
the Bouzghaias, that North American Mortgage was the party in a
better position to avoid a loss, and that North American
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Mortgage was the party whose negligent title search failed to
discover and disclose Centreville’s lien.
In an opinion letter dated October 16, 2000, the chancellor
initially concluded that negligence on the part of North
American Mortgage or its agent in failing to discover and
disclose Centreville’s deed of trust did not automatically bar
application of the equitable doctrine of subrogation. The
chancellor further concluded, based apparently upon the original
purchase price of $210,000 and the first lien amount of $199,500
in favor of Fleet Mortgage, that Centreville’s predecessor in
interest knew that its loan was “essentially unsecured” when the
second deed of trust was recorded. Accordingly, the chancellor
opined that subrogation would not prejudice Centreville because
Centreville “remains in the same . . . position . . . that it
has knowingly been in since it made its loan” to Lynch and
Higassi. The chancellor further opined that failing to grant
subrogation as requested by North American Mortgage would
“unjustly enrich [Centreville] by allowing it a first lien
position.”
On October 27, 2000, the chancellor entered a final decree
incorporating by reference the reasoning of her prior opinion
letter and awarding North American Mortgage a first lien of
$198,928.07 against the property. The decree further confirmed
that Centreville’s lien was second in priority and that the
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balance of North American Mortgage’s lien, $9,321.93, was third
in priority.
Prior to the entry of the final decree, Centreville filed a
motion for reconsideration. On November 17, 2000, the
chancellor entered an order suspending the October 27, 2000
decree and took the motion for reconsideration under advisement.
After reviewing briefs filed by the parties, the chancellor, in
an order dated February 1, 2001, overruled the motion for
reconsideration and reinstated the October 27, 2000 decree. We
awarded Centreville this appeal.
DISCUSSION
We begin our analysis in this case, as did the chancellor,
with pertinent and well established principles previously noted
in Federal Land Bank. “Subrogation is the substitution of
another person in place of the creditor to whose rights he
succeeds in relation to the debt. This doctrine is not
dependent upon contract, nor upon privity between the parties;
it is the creature of equity, and is founded upon principles of
natural justice.” 179 Va. at 401, 18 S.E.2d at 920.
“Subrogation not being a matter of strict right, but purely
equitable in its nature, dependent upon the facts and
circumstances of each particular case, no general rule can be
laid down which will afford a test in all cases for its
application.” Id. at 402, 18 S.E.2d at 920. Nevertheless, we
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have expressly acknowledged that “Virginia has long been
committed to a liberal application of the principle of
subrogation.” Id.
Although no bright-line rule for the resolution of claims
for subrogation can be formulated because the merits of such
claims are necessarily fact specific, several principles or
guidelines are uniformly established in our cases that assist in
the proper analysis of such claims. First, subrogation is not
appropriate where intervening equities are prejudiced. Id. at
404, 18 S.E.2d at 921. Second, ordinary negligence of the
subrogee does not bar the application of subrogation where “[a]n
examination of the facts . . . shows that the equities strongly
favor” the subrogee. Id. at 405, 18 S.E.2d at 921 (emphasis
added).
There is no dispute in this case that the title examination
conducted on behalf of North American Mortgage negligently
failed to discover and disclose the properly recorded deed of
trust in favor of Centreville. Because Centreville’s deed of
trust was properly recorded and North American Mortgage is
either charged with the negligence of the title examiner hired
by its agent, or, in any event, charged with constructive notice
of the existence of this deed of trust in the land records, Cf.
Beck v. Smith, 260 Va. 452, 457-58, 538 S.E.2d 312, 315-16
(2000), Centreville essentially contends that as between them
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there was no inequity for the chancellor to remedy. Rather,
Centreville contends that on the facts of this case, North
American Mortgage has an adequate remedy at law to recover its
loss from the negligent title examiner or the appropriate title
insurance company. 2
In response, North American Mortgage essentially contends
that Bankers Loan and Federal Land Bank stand for the
proposition that where funds from a new loan intended to be
secured by the lien of a first deed of trust on real property
are used to satisfy an existing loan secured by the lien of an
existing deed of trust on the same property, presumptively
equitable subrogation entitles the new creditor to assume the
position in line of priority of the creditor whose lien was thus
extinguished. In our view, the contentions of neither party
fully reflect the analysis that underpinned the application of
subrogation under the circumstances involved in those cases nor
fully address the particular circumstances of the present case
that bear on the proper application of the equitable doctrine of
subrogation in those circumstances.
2
The record reflects that the chancellor received evidence
that Stewart Title Guaranty Company insured the title for both
North American Mortgage and the Bouzghaias. However, the
chancellor expressly declined to consider this evidence in her
analysis of North American Mortgage’s claim for subrogation.
8
Unlike the present case, in both Bankers Loan and Federal
Land Bank, the particular facts of those cases prompted no issue
of the significance of a legal separation between the obligors
on the prior loans and their ownership of any equity in the
property not encumbered by the liens of the security instruments
that secured the payment of those loans. In the present case,
however, Lynch and her husband are the obligors on Centreville’s
promissory note, but the Bouzghaias are the owners of the
property subject to the lien of Centreville’s deed of trust.
The Bouzghaias are the obligors on North American Mortgage’s
promissory note and their property is also subject to the lien
of the deed of trust in favor of North American Mortgage that
secures the payment of that note. In assessing the relative
equitable positions of Centreville and North American Mortgage,
we are of opinion that these factual circumstances are
significant.
At the time Centreville obtained its lien in the amount of
$150,000, it stood in the second position of priority behind
Fleet Mortgage’s first lien in the amount of $199,500. The
property had a value of $210,000 and, thus, Centreville was
undoubtedly undersecured. Nevertheless, Centreville had the
right to anticipate that the obligors would ultimately satisfy
these loans to extinguish the liens upon their interests in the
property. Centreville also had the right to anticipate that
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when Fleet Mortgage’s lien was extinguished Centreville’s lien
would advance to the position of priority of a first lien on the
property. Moreover, under the events that actually occurred,
Centreville was entitled to receive the balance of funds from
North American Mortgage’s loan to the Bouzghaias that was paid
to Lynch after the promissory note held by Fleet Mortgage was
satisfied from those funds. To this extent, Centreville was
prejudiced.
We must also consider the fact that North American
Mortgage, as against Centreville’s rights and equities, is to be
charged with negligently failing to discover the existence of
Centreville’s properly recorded second deed of trust. In this
regard, we consider the factual circumstances to determine
whether the equities nevertheless “strongly favor” North
American Mortgage’s claim for subrogation to the position of
priority of the first lien holder. Federal Land Bank, 179 Va.
at 405, 185 S.E.2d at 921. For the reasons that follow, we are
of opinion that the equities asserted by North American Mortgage
fall far short of strongly favoring its subrogation claim so as
to excuse its negligence. Indeed, North American Mortgage’s
position if upheld under the circumstances of this case would
essentially establish a legal right rather than an equitable
one.
10
As we noted in Federal Land Bank, “[w]e must look to the
realities of the situation as they existed at the time of the
[chancellor’s] decree.” 179 Va. at 406, 18 S.E.2d at 922. At
that time, granting subrogation to North American Mortgage would
result in the obligors on the debt secured by the lien of the
first deed of trust being different from the obligors on the
debt secured by the lien of Centreville’s deed of trust.
Moreover, the latter obligors would no longer have an equitable
ownership in the property subject to Centreville’s lien. The
realities are that under those circumstances Centreville would
be prejudiced because there would be no incentive for Lynch and
Higassi to pay their debt to Centreville in order to protect any
equitable ownership in the property. In addition, there would
be little, if any, reason to anticipate that the Bouzghaias
would pay the debt secured by North American Mortgage’s lien on
their property because the property would remain encumbered by
Centreville’s lien. Under this circumstance, the primary
realities are that upon the chancellor’s granting of
subrogation, North American Mortgage and the Bouzghaias would
logically effect a “friendly foreclosure” to eliminate
Centreville’s lien and leave Centreville with little or no
recovery under the foreclosure sale. Equity will not condone
the creation of such a circumstance, especially when that
circumstance flows directly from the negligence of the party
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seeking the benefit of it to the prejudice of an innocent party.
Similarly, our commitment to a “liberal application of the
principle of subrogation,” Federal Land Bank, 179 at 402, 18
S.E.2d at 920, is not offended by that reasoning.
Finally, there is no merit to North American Mortgage’s
contention that if it is not permitted to subrogate its lien to
the position of first priority of Fleet Mortgage, Centreville
will receive a “windfall” by having its lien advanced to the
position of first priority. North American Mortgage contends
that this is so because Centreville had no expectation of being
secured to the full extent of its lien, and that equity should
not allow Centreville to be fully secured as a result of the
satisfaction of Fleet Mortgage’s lien. While it is undoubtedly
true that Centreville received a significant benefit as a result
of the satisfaction of Fleet Mortgage’s lien from the funds
provided by North American Mortgage’s loan to the Bouzghaias in
that Centreville’s lien advanced to the position of priority of
a first lien on the property, we would not characterize that
benefit as a windfall that suggests unjust enrichment under the
circumstances of this particular case. Moreover, any “windfall”
in this case as a result of granting subrogation would inure to
the benefit of the negligent title examiner and the party that
insured the title for North American Mortgage and the
Bouzghaias. While North American Mortgage and the Bouzghaias
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have recourse against those parties for the loss in this case,
Centreville has no such recourse. Thus, the equities in this
case favor Centreville, the innocent party who would be
prejudiced if subrogation were granted.
CONCLUSION
For these reasons, we hold that the chancellor erred in
awarding subrogation in favor of North American Mortgage. We
will reverse the judgment of the chancellor and enter judgment
for Centreville confirming that the lien of its deed of trust is
first in position of priority as against the lien held by North
American Mortgage.
Reversed and final judgment.
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