SUPREME COURT OF ARIZONA
En Banc
SOURCECORP, INCORPORATED, ) Arizona Supreme Court
) No. CV-11-0269-PR
Plaintiff/Appellee, )
) Court of Appeals
v. ) Division One
) No. 1 CA-CV 10-0212
DEAN D. NORCUTT and STACEY L. )
NORCUTT, husband and wife, ) Maricopa County
) Superior Court
Intervenors/Appellants. ) No. CV2002-020676
)
)
) O P I N I O N
__________________________________)
Appeal from the Superior Court in Maricopa County
The Honorable J. Kenneth Mangum, Judge
REVERSED AND REMANDED
________________________________________________________________
Opinion of the Court of Appeals, Division One
227 Ariz. 463, 258 P.3d 281 (App. 2011)
AFFIRMED
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STEPTOE & JOHNSON LLP Phoenix
By Francis J. Burke, Jr.
Bennett Evan Cooper
Douglas D. Janicik
Attorneys for Sourcecorp, Incorporated
MARISCAL, WEEKS, MCINTYRE & FRIEDLANDER, P.A. Phoenix
By Michael R. Scheurich
Anne L. Tiffen
Robert C. Brown
And
GUST ROSENFELD, P.L.C. Phoenix
By Charles W. Wirken
Scott A. Malm
Attorneys for Dean D. Norcutt and Stacey L. Norcutt
HOLDEN WILLITS PLC Phoenix
By Michael J. Holden
Barry A. Willits
Attorneys for Amicus Curiae Arizona Builders’ Alliance
GUST ROSENFELD, P.L.C. Phoenix
By Richard A. Segal
Charles W. Wirken
Scott A. Malm
Attorneys for Amicus Curiae Land Title Association of Arizona
________________________________________________________________
B A L E S, Justice
¶1 Dean and Stacey Norcutt bought a home for cash and
satisfied the existing first mortgage. They later discovered
the home was also subject to a judgment lien far exceeding the
property’s value. We hold that the purchasers were equitably
subrogated to the mortgage lien’s priority for the amount they
paid to satisfy the mortgage.
I.
¶2 In September 2004, Sourcecorp, Incorporated obtained a
judgment exceeding $3 million against Steven and Rita Shill, who
owned residential property in Prescott. The property was
subject to a first mortgage in favor of Zions National Bank
securing a debt of nearly $689,000.1 Sourcecorp recorded a
judgment lien. In November 2004, the Shills sold the property
1
Zions Bank held a deed of trust, but we refer to this interest
as a “mortgage” because Sourcecorp and the opinion of the court
of appeals use this term. The distinction between a mortgage
and a deed of trust is immaterial to our analysis. Cf.
Restatement (Third) of Property: Mortgages § 1.1 (1997)
(defining “mortgage” to include deeds of trust).
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to the Norcutts for $667,500 in cash. Zions Bank accepted
$621,000 of the proceeds in full satisfaction of the debt
secured by its first mortgage. Although the Norcutts purchased
title insurance from First American Title Insurance Company, the
title insurer did not discover Sourcecorp’s judgment lien.
¶3 After the Norcutts bought the property, Sourcecorp
initiated a sheriff’s sale to foreclose on its judgment lien.
The Norcutts sued to enjoin the sale. Granting relief, the
trial court ruled that the Norcutts’ interest in the property
was superior to Sourcecorp’s judgment lien. The court of
appeals reversed for reasons not before this Court. Sourcecorp,
Inc. v. Shill, No. 1 CA-CV 05-0425 (Ariz. App. Sept. 26, 2006)
(mem. decision). On remand, the Norcutts argued that they were
equitably subrogated to the position of Zions Bank in priority
over Sourcecorp. The trial court rejected this argument and
entered summary judgment for Sourcecorp. Reversing again, the
court of appeals held that the Norcutts were equitably
subrogated. Sourcecorp, Inc. v. Norcutt, 227 Ariz. 463, 471
¶ 37, 258 P.3d 281, 289 (App. 2011).
¶4 We granted review because application of the equitable
subrogation doctrine in this context is an issue of first
impression and statewide importance. Jurisdiction exists under
Article 6, Section 5(3) of the Arizona Constitution and A.R.S.
§ 12-120.24 (2009).
3
II.
¶5 Equitable subrogation is “the substitution of another
person in the place of a creditor, so that the person in whose
favor it is exercised succeeds to the rights of the creditor in
relation to the debt.” Mosher v. Conway, 45 Ariz. 463, 468, 46
P.2d 110, 112 (1935). This equitable remedy is “designed to
avoid a person’s receiving an unearned windfall at the expense
of another.” Restatement (Third) of Property: Mortgages § 7.6
cmt. a (1997) (“Restatement”); see Mosher, 45 Ariz. at 468, 46
P.3d at 112 (noting that purpose of doctrine is to prevent
injustice). “The general rule is that a person having an
interest in property who pays off an encumbrance in order to
protect his interest is subrogated to the rights and limitations
of the person paid.” Id. at 472, 46 P.2d at 114; see also
Restatement § 7.6(a) (providing that “[o]ne who fully performs
an obligation of another, secured by a mortgage, becomes by
subrogation the owner of the obligation and the mortgage to the
extent necessary to prevent unjust enrichment”).
¶6 Mosher concerned “paving liens” on residential lots
assessed for street improvements. Under the statutory scheme,
the city could auction liens for delinquent assessments to
private parties. If the property owner or a “party in interest”
did not redeem the lien within a year, the purchaser would
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obtain the property free of encumbrances. 45 Ariz. at 465-67,
46 P.2d at 111-12. In Mosher, one lot was subject to three
liens, which were sold separately. Applying equitable
subrogation, this Court held that the second purchaser was
subrogated to the positions of the first and third purchasers
when he redeemed their liens, even though the property owner
ultimately redeemed all of the liens. The owner could not
complain about this result because it merely required her to pay
one person rather than another to release the liens. Id. at
471, 46 P.2d at 113.
¶7 Mosher said that “no general rule can be stated which
will afford a test [for equitable subrogation] in all cases.”
Id. at 468, 46 P.2d at 112. Instead, “[w]hether it is
applicable or not depends upon the particular facts and
circumstances of each case as it arises.” Id., 46 P.2d at 112.
Noting “the modern tendency” to extend the doctrine’s use, id.,
46 P.2d at 112, the Court also observed that
[A] mere volunteer, who has no rights to protect, may
not claim the right of subrogation, for one who,
having no interest to protect, without any legal or
moral obligation to pay, and without an agreement for
subrogation or an assignment of the debt, pays the
debt of another, is not entitled to subrogation, the
payment in his case absolutely extinguishing the debt.
Id. at 470, 46 P.2d at 113. The Court immediately added that
“when one, to protect his own interest, pays a debt which he
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honestly believes must be paid to accomplish that purpose, . . .
he cannot be held to be a mere volunteer.” Id., 46 P.2d at 113.
¶8 Because the Court declined to adopt a bright-line test
in Mosher and has not revisited the issue, the court of appeals
has developed guidelines for applying equitable subrogation. In
1965, the court of appeals stated that subrogation would occur
if (1) a third person discharges an encumbrance on the property
of another; (2) the person is not a volunteer; and (3) there is
an express or implied agreement “that he will be substituted in
place of the holder of the encumbrance.” Peterman-Donnelly
Eng’rs & Contractors Corp. v. First Nat’l Bank of Ariz., 2 Ariz.
App. 321, 325, 408 P.2d 841, 845 (1965).
¶9 Nearly forty years later, the court of appeals
described several tests for equitable subrogation. See Lamb
Excavation, Inc. v. Chase Manhattan Mortg. Corp., 208 Ariz. 478,
480-82 ¶¶ 8-14, 95 P.3d 542, 544-46 (App. 2004). Reviewing
cases from different jurisdictions, the court said the “majority
approach” requires four primary elements: (1) the party claiming
equitable subrogation has paid the debt; (2) the party was not a
volunteer; (3) the party was not primarily liable for the debt;
and (4) no injustice will be done to the other party by allowing
subrogation. Id. at 480 ¶ 8, 95 P.3d at 544.
¶10 Lamb Excavation explained, however, that the
Restatement has adopted a more expansive standard. Id. at 481
6
¶ 10, 95 P.3d at 545; Restatement § 7.6. Under this test, a
person who “fully performs an obligation of another, secured by
a mortgage, becomes by subrogation the owner of the obligation
and the mortgage to the extent necessary to prevent unjust
enrichment.” Restatement § 7.6. Such equitable relief may be
appropriate, for example, if the person seeking subrogation
“expected to receive a security interest in the real estate with
the priority of the mortgage being discharged.” Id.
¶11 In Lamb Excavation, the court of appeals distinguished
Peterman-Donnelly from the “majority approach,” 208 Ariz. at
480-81 ¶¶ 7-8, 95 P.3d at 543-44, and observed that Arizona’s
approach “appears consistent with the Restatement.” Id. at 482
¶ 13, 95 P.3d at 546. In the instant case, the court of appeals
cited the “primary elements” of the “majority approach,” noted
other factors considered in Arizona cases, and quoted Lamb
Excavation’s comment about the Restatement. 227 Ariz. at 466-
67, 469 ¶¶ 14, 25, 258 P.3d at 284-285, 287.
¶12 There is thus some ambiguity in Arizona case law
regarding the test for equitable subrogation. For reasons
explained below, we adopt the Restatement approach because it is
most consistent with the rationale for equitable subrogation.
III.
¶13 Absent equitable subrogation, once the debt to Zions
Bank was fully satisfied by the Norcutts, Sourcecorp’s judgment
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lien advanced in priority. Sourcecorp claims that it is
entitled to execute on its $3 million judgment lien through a
sheriff’s sale. The Norcutts would receive nothing from such a
sale, but would likely have a claim against their title insurer
for failing to discover Sourcecorp’s lien. In contrast, the
Norcutts argue that they are subrogated to the position of Zions
Bank and therefore have a priority over Sourcecorp’s judgment
lien.
¶14 Relying on Mosher and other cases, Sourcecorp argues
that equitable subrogation is not appropriate because the
Norcutts acted as mere volunteers in purchasing the property.
Alternatively, Sourcecorp contends that subrogation is not
available because there was no agreement, express or implied,
that the Norcutts would be subrogated. Finally, Sourcecorp
contends that equitable considerations preclude subrogation. We
consider these arguments in turn.
A.
¶15 Mosher and later cases state that a “mere volunteer”
cannot claim equitable subrogation. But Mosher also explained
that a person who pays a debt to protect the person’s interests
is not a volunteer. 45 Ariz. at 470, 46 P.2d at 113. Mosher is
thus consistent with the Restatement, which does not use the
term “volunteer” as a talisman, but instead recognizes that a
8
person who has paid a debt to protect his or her own interests
may seek equitable subrogation. See Restatement § 7.6.
¶16 We agree with the Restatement that equitable
subrogation should not turn on whether the person invoking the
doctrine is labeled a volunteer. “[T]he meaning of the term
‘volunteer’ is highly variable and uncertain, and has engendered
considerable confusion.” Restatement § 7.6 cmt. b. Instead,
the Restatement appropriately focuses on other circumstances of
the party seeking to invoke subrogation, including whether the
party has paid a preexisting obligation to protect the party’s
interest in the property. See Restatement § 7.6; see also
Dietrich Indus., Inc. v. United States, 988 F.2d 568 (5th Cir.
1993) (permitting equitable subrogation without discussing
whether purchaser was a volunteer); Grant S. Nelson & Dale A.
Whitman, 2 Real Estate Finance Law § 10.7 (5th ed. 2010) (“[T]he
issue is only whether the payor expected that the payment would
free the property; if this was the grantee’s understanding,
subrogation should be available.”).
¶17 The Norcutts paid the preexisting debt to Zions Bank
to protect their concurrently acquired interest in the property.
The Norcutts thus had a sufficient interest to allow them to
seek equitable subrogation. Cf. Han v. United States, 944 F.2d
526, 530 (9th Cir. 1991) (purchasers paid off mortgagee’s
interest “to establish and protect their own interest” and
9
therefore were not volunteers); E. Boston Sav. Bank v. Ogan, 701
N.E.2d 331, 336 (Mass. 1998) (same).
B.
¶18 Quoting Herberman v. Bergstrom, Sourcecorp also argues
that “[f]or equitable subrogation to apply, there must be an
agreement . . . that the subsequent lender will be substituted
for the holder of the prior encumbrance.” 168 Ariz. 587, 590,
816 P.2d 244, 247 (App. 1991). Other decisions of the court of
appeals contain similar language. See Lamb Excavation, 208
Ariz. at 482 ¶ 13, 95 P.3d at 546 (requiring an “express or
implied agreement” to subrogate); Peterman-Donnelly, 2 Ariz.
App. at 325-26, 408 P.2d at 845-46 (same).
¶19 Mosher, however, did not require an “agreement” in
holding that the purchaser of paving liens was equitably
subrogated to the positions of other lienholders. See 45 Ariz.
at 471, 46 P.2d at 113. Moreover, to the extent that the court
of appeals has required an “agreement,” it has adopted a very
elastic notion of the concept. In Lamb Excavation, property
owners obtained a construction loan secured by a deed of trust.
After several subcontractors served preliminary notices of
mechanics’ liens, see A.R.S. § 33-992.01, the owners obtained
permanent financing and satisfied the construction loan. The
court of appeals concluded that the permanent lender was
equitably subrogated to the prior lien position of the
10
construction lender. See 208 Ariz. at 483 ¶ 16, 95 P.2d at 547.
In reaching this conclusion, the court found “at least an
implied agreement to subrogate” based on statements in the
permanent loan documents and closing instructions that the new
lender would have a first lien. Id.
¶20 The Restatement and case law from other jurisdictions
do not require an agreement as a condition for equitable
subrogation. See Restatement § 7.6 cmt. a; Han, 944 F.2d at 529
(listing five factors justifying the use of equitable
subrogation without requiring an agreement). The requirement of
an “agreement” for subrogation – like the disqualification of
“volunteers” - has been subject to varying interpretations.
Compare Citizens’ Mercantile Co. v. Eason, 123 S.E. 883, 886
(Ga. 1924) (holding that a purchaser was not entitled to
equitable subrogation because he did not pay “debts under an
agreement, express or implied, . . . that he would be
subrogated”), with In re Mortgages Ltd., 459 B.R. 739, 742
(Bankr. D. Ariz. 2011) (“Arizona case law seems to hold that the
subsequent lender’s intent to obtain first lien priority is
sufficient evidence, standing alone, to satisfy the agreement
requirement.”).
¶21 We adopt the Restatement approach and reject any
requirement of an “agreement” as a condition for equitable
subrogation. To be sure, parties may achieve subrogation by
11
agreement, such as through an assignment of a promissory note
and related mortgage. See Restatement § 7.6 cmt. a
(distinguishing “conventional subrogation” by assignment or
agreement from equitable subrogation). Equitable subrogation,
however, does not turn on contractual principles, but instead on
the concern to prevent unjust enrichment. That goal is served
by allowing subrogation when a party pays a mortgage to protect
an interest in the property, irrespective of an express or
implied agreement that the party will succeed to the position of
the prior lienholder.
C.
¶22 Finally, Sourcecorp argues that because the Norcutts
obtained title insurance from which they could recoup any
losses, equitable considerations preclude subrogation.
Sourcecorp contends that neither the Norcutts nor the insurer
should benefit from the insurer’s negligence in failing to
discover the recorded lien.
¶23 Accepting these arguments, however, would require us
to ignore the key concern underlying equitable subrogation and
would unjustly enrich Sourcecorp. Before the Norcutts purchased
the home, Sourcecorp had a second lien on the property, which
was worth less than the outstanding mortgage debt of $689,000.
The Norcutts satisfied the first lien by paying Zions Bank
$621,000 in cash. Sourcecorp contends that the result –
12
unintended by the Norcutts – was that Sourcecorp obtained a
first lien on property that had just sold for $667,500, and the
Norcutts were left with nothing but a claim against their
insurer.
¶24 Denying subrogation here, therefore, would give
Sourcecorp a windfall independent of whether the Norcutts were
insured or had constructive notice of the judgment lien. (There
is no suggestion the Norcutts had actual notice of the lien, and
we need not address whether a purchaser with actual notice could
ever be equitably subrogated.) Moreover, there is no general
requirement that a person seeking subrogation lack notice in
order to obtain equitable relief. In Lamb Excavation, for
example, the permanent lender was subrogated to a first lien
position even though various subcontractors had served twenty-
day notices of mechanics’ liens. 208 Ariz. at 484 ¶ 20, 95 P.3d
at 548 (observing that “constructive notice is not an element of
equitable subrogation under Arizona law”); see also Restatement
§ 7.6 cmt. e (noting that “the payor’s notice, actual or
constructive, is not necessarily relevant. The question in such
cases is whether the payor reasonably expected to get security
with a priority equal to the mortgage being paid.”). We also
agree with the court of appeals that it would be anomalous to
deny equitable subrogation merely because a party had been
13
diligent in obtaining title insurance. 227 Ariz. at 471 ¶ 35,
258 P.3d at 289.
¶25 Sourcecorp further argues that subrogation would
prejudice its interests by preventing it from moving up in
priority as a lienholder after the satisfaction of the mortgage
debt to Zions Bank. “Subrogation will be recognized only if it
will not materially prejudice the holders of intervening
interests.” Restatement § 7.6 cmt. e. We do not accept,
however, that subrogation would materially prejudice Sourcecorp.
¶26 Generally, the satisfaction of a superior lien results
in subordinate lienholders advancing in priority, but preventing
this result in certain circumstances is precisely the aim of
equitable subrogation. As the Restatement notes:
One who fully performs an obligation of another,
secured by a mortgage, becomes by subrogation the
owner of the obligation and the mortgage to the extent
necessary to prevent unjust enrichment. Even though
the performance would otherwise discharge the
obligation and the mortgage, they are preserved and
the mortgage retains its priority in the hands of the
subrogee.
Restatement § 7.6(a) (emphasis added). Thus, preventing a
junior lienholder from advancing in priority is an intended
consequence of equitable subrogation. See Lamb Excavation, 208
Ariz. at 483 ¶ 18, 95 P.3d at 547 (“We fail to comprehend the
nature of the perceived prejudice or inequity, as it appears the
lienholders would remain in the same position they occupied
14
before subrogation . . . .”); Restatement § 7.6 cmt. e (“The
holders of . . . intervening interests can hardly complain
[about subrogation]; their position is not materially
prejudiced, but is simply unchanged.”). Indeed, insofar as the
Norcutts are subrogated only for the amount they paid to
discharge the first mortgage, see infra ¶ 29, Sourcecorp is
somewhat better off, because this amount was less than the
outstanding debt to Zions Bank of $689,000.
¶27 Sourcecorp also argues that if the Norcutts are placed
in the position of Zions Bank, they could eliminate Sourcecorp’s
judgment lien by a collusive refinancing followed by a
foreclosure by the new first mortgage holder. Cf. Centreville
Car Care, Inc. v. N. Am. Mortg. Co., 559 S.E.2d 870, 874 (Va.
2002) (noting concern about “friendly foreclosure” if purchaser
were subrogated to position of first mortgage). This concern,
however, is addressed by the limits to the equitable remedy. As
a result of paying the obligation owed to Zions Bank, the
Norcutts only “become[] by subrogation the owner of the
obligation and the mortgage to the extent necessary to prevent
unjust enrichment.” Restatement § 7.6(a) (emphasis added).
¶28 In determining the extent to which the Norcutts are
subrogated to the prior position of Zions Bank, we note that
they are cash purchasers rather than creditors looking to the
property to secure a debt. With respect to creditors,
15
“[o]rdinarily one who is entitled to subrogation is permitted to
enforce both the mortgage and the secured obligation.”
Restatement § 7.6 cmt. a. Fee owners are in a different
situation, because the merger doctrine generally holds that if
they acquire a mortgage on their own property, the lien is
extinguished because the lesser interest “merges” into the
greater. See Mid Kansas Fed. Sav. & Loan Ass'n v. Dynamic Dev.
Corp., 167 Ariz. 122, 129, 804 P.2d 1310, 1317 (1991) (noting
that equitable considerations may preclude merger).
¶29 Recognizing that equitable subrogation depends on the
facts of the particular case, see Mosher, 45 Ariz. at 468, 46
P.2d at 112, we conclude that it is not appropriate to confer on
the Norcutts a right to “foreclose” on the interest to which
they are subrogated. Instead, the purposes of equitable
subrogation are fully served by deeming the Norcutts to have a
priority to proceeds from any sale of the property in the amount
they paid to satisfy the debt, $621,000. Cf. Lamb Excavation,
208 Ariz. at 483 ¶ 19, 95 P.3d at 547 (noting that payor is
subrogated only to the extent funds are applied toward payment
of prior lien). Applying equitable subrogation in this manner
does not eliminate Sourcecorp’s judgment lien. To the extent
that lien adversely affects the Norcutts’ equity or renders the
property less marketable, we neither address nor foreclose any
claims the Norcutts might have against their title insurer.
16
IV.
¶30 For the reasons stated, we affirm the opinion of the
court of appeals and remand to the superior court for entry of
summary judgment in favor of the Norcutts consistent with this
opinion. We deny the requests for attorneys’ fees.
_____________________________________
W. Scott Bales, Justice
CONCURRING:
_____________________________________
Rebecca White Berch, Chief Justice
_____________________________________
Andrew D. Hurwitz, Vice Chief Justice
_____________________________________
A. John Pelander, Justice
_____________________________________
Robert M. Brutinel, Justice
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