THE STATE OF SOUTH CAROLINA
In The Supreme Court
ArrowPointe Federal Credit Union, Respondent,
v.
Jimmy Eugene Bailey; Laura Jean Bailey; and U.S. Bank
National Association, not in its individual capacity but
solely in its capacity as Indenture Trustee for WVUE
2015-1, Defendants,
of which U.S. Bank National Association, not in its
individual capacity but solely in its capacity as Indenture
Trustee for WVUE 2015-1, is the Petitioner.
Appellate Case No. 2021-000149
ON WRIT OF CERTIORARI TO THE COURT OF APPEALS
Appeal from Fairfield County
Carol Ann Tolen, Special Referee
Opinion No. 28129
Heard May 18, 2022 – Filed January 11, 2023
AFFIRMED
Shaun C. Blake and Andrew Bryant Walker, both of
Rogers Lewis Jackson Mann & Quinn, LLC, of Columbia,
and Sean Matthew Foerster, of Rogers Townsend &
Thomas, PC, of Columbia, for Petitioner.
Christy Curtis Jones, of Sherpy & Jones, P.A., of
Columbia, and Jonathan McKey Milling, of Milling Law
Firm, LLC, of Columbia, for Respondent.
Demetri K. Koutrakos and Harry Alwyn Dixon, of
Callison Tighe & Robinson, LLC, of Columbia, for Amici
Curiae the American Land Title Association and the
Palmetto Land Title Association.
JUSTICE JAMES: In this real estate mortgage priority dispute, we must decide
whether we will adopt the "replacement mortgage doctrine." The special referee
ruled the question of whether to adopt the doctrine is one for the General Assembly,
and the court of appeals affirmed. ArrowPointe Fed. Credit Union v. Bailey, 432
S.C. 373, 852 S.E.2d 473 (Ct. App. 2020). We granted U.S. Bank's petition for a
writ of certiorari. We affirm the court of appeals' opinion.
Background
Jimmy Eugene Bailey and Laura Jean Bailey mortgaged their residence at 247
Morninglow Drive in Winnsboro (the subject property) to Quicken Loans. The
mortgage (Quicken First Mortgage) secured a note in the principal amount of
$256,500 and was recorded on October 20, 2009. One week later, the Baileys
entered into an equity line of credit with ArrowPointe Federal Credit Union (the
ArrowPointe LOC) in the maximum principal amount of $99,000. The ArrowPointe
LOC was secured by a mortgage, which was recorded on November 4, 2009. At
that time, ArrowPointe had record notice of the Quicken First Mortgage. The events
that followed led to the question before us.
On November 23, 2009, the Baileys refinanced the Quicken First Mortgage
and obtained a new loan from Quicken Loans (the Quicken Refinance Mortgage) in
the principal amount of $296,000—a $39,500 increase from the Quicken First
Mortgage. The Baileys executed a "Title Company Client Acknowledgement" at
closing, which stated the only outstanding lien on the subject property was the
Quicken First Mortgage; this was obviously incorrect, as the ArrowPointe LOC was
an outstanding lien. There is no clear explanation in the record as to whether
Quicken obtained a title examination to ascertain the existence of intervening liens
or, if an examination was conducted, why the ArrowPointe LOC was not discovered.
In any event, Quicken Loans did not ask ArrowPointe to sign a subordination
agreement, and ArrowPointe was unaware of the refinance transaction.
The Baileys used $257,459.04 from the Quicken Refinance Mortgage to pay
off the Quicken First Mortgage. On December 15, 2009, Quicken Loans released
the Quicken First Mortgage and recorded the Quicken Refinance Mortgage. The
Baileys received $26,235.11 in cash from the remaining principal on the Quicken
Refinance Mortgage. Quicken Loans thereafter assigned the Quicken Refinance
Mortgage numerous times, with Petitioner U.S. Bank becoming the final holder.
The Baileys subsequently defaulted on the ArrowPointe LOC, and
ArrowPointe filed this action seeking a declaration that its line of credit had priority
over the Quicken Refinance Mortgage. The parties stipulated that as of March 13,
2017, the amount due on the ArrowPointe LOC was $187,201.60.
Both U.S. Bank and ArrowPointe moved for summary judgment. U.S. Bank
argued it was entitled to priority under the replacement mortgage doctrine.
ArrowPointe, however, contended it was entitled to priority because Quicken Loans
had record notice of its line of credit at the time of refinancing. The special referee
granted ArrowPointe's motion. The referee found South Carolina does not recognize
the replacement mortgage doctrine, and even if it did, the doctrine would not apply
in this case. The referee further found that because Quicken Loans did not obtain a
subordination agreement from ArrowPointe at the time of refinancing, ArrowPointe
had priority under the race-notice statute. Accordingly, the referee ordered
foreclosure of the mortgage securing the ArrowPointe LOC and sale of the subject
property.
U.S. Bank appealed the referee's order, and the court of appeals affirmed.
ArrowPointe, 432 S.C. at 383, 852 S.E.2d at 478. The court of appeals held the
question of whether to adopt the replacement mortgage doctrine is one for the
General Assembly. Because Quicken Loans had record notice of the ArrowPointe
LOC at the time of refinancing, the court of appeals concluded ArrowPointe has
priority over U.S. Bank. We affirm the court of appeals' opinion.
Discussion
South Carolina has a race-notice recording statute, which prioritizes property
liens based on notice and the date of recording. See S.C. Code Ann. § 30-7-10
(2007); Regions Bank v. Wingard Props. Inc., 394 S.C. 241, 255, 715 S.E.2d 348,
355 (Ct. App. 2011) ("The recording statute found in section 30-7-10 . . . provides
that all mortgages are valid, without notice, from the day they are recorded in the
register of deeds for the county where the real property is located."). When the
recording statute was enacted, it stated,
All deeds of conveyance of lands . . . all mortgages or instruments in
writing . . . of any property . . . . shall be valid, so as to effect, from the
time of such delivery of execution, the rights of subsequent creditors or
purchasers for valuable consideration without notice, only when
recorded . . . .
1 Rev. Stat. § 1968 (1893) (current version at S.C. Code Ann. § 30-7-10).
We have recognized the equitable subrogation doctrine as an exception to the
race-notice statute.1 See, e.g., Indep. Nat'l Bank, 411 S.C. at 608, 769 S.E.2d at 665;
Matrix Fin. Servs. Corp. v. Frazer, 394 S.C. 134, 137, 714 S.E.2d 532, 533 (2011);
Dedes v. Strickland, 307 S.C. 155, 158, 414 S.E.2d 134, 136 (1992); Enter. Bank v.
Fed. Land Bank of Columbia, 139 S.C. 397, 404, 138 S.E. 146, 148 (1927);
Prudential Inv. Co. v. Connor, 120 S.C. 42, 56-58, 112 S.E. 539, 544 (1921). We
first recognized the doctrine in 1921. See Connor, 120 S.C. at 56-57, 112 S.E. at
544. We noted the "right of subrogation is essentially a creation of the court of
equity," which allows "a person who is secondarily liable for a debt, upon paying
the debt, to assume by law the place of the creditor whose debt is paid, and become
entitled to the securities and remedies of the creditor . . . ." Id. at 56, 112 S.E. at 544
(cleaned up). Decades later, we declined to invoke the doctrine for a lender that
refinanced its own mortgage but did not discover an intervening mortgage. Dedes,
307 S.C. at 159, 414 S.E.2d at 136. In a nod to the race-notice statute, we warned
lenders of their duty to conduct a proper search to ascertain the existence of other
recorded liens.
The replacement mortgage doctrine is another exception to the race-notice
statute, and many jurisdictions either recognize the doctrine or follow its logic. See,
e.g., Bowling Green Sports Ctr., Inc. v. G.A.G. LLC, 77 N.E.3d 728, 732 (Ill. App.
Ct. 2017); US Bank, N.A. v. JPMorgan Chase Bank, N.A, 398 P.3d 118, 121 (Ariz.
Ct. App. 2017); AJJ Enters., LLP v. Jean-Charles, 125 A.3d 618, 631 (Conn. App.
Ct. 2015); Nikooie v. JPMorgan Chase Bank, N.A., 183 So. 3d 424, 429 (Fla. Dist.
Ct. App. 2014); In re Allen, 520 B.R. 281, 289 (Bankr. E.D. Mo. 2014); In re Mortg.
1
This doctrine states a party may be equitably subrogated to the rights of an earlier
creditor if the party demonstrates: (1) he has paid the debt; (2) he was not a volunteer
but had a direct interest in the discharge of the debt or lien; (3) he was secondarily
liable for the debt or for the discharge of the lien; (4) no injustice would be done by
the allowance of equitable subrogation; and (5) he did not have actual notice of the
prior lien. Indep. Nat'l Bank v. Buncombe Prof'l Park, LLC, 411 S.C. 605, 608, 769
S.E.2d 663, 665 (2015).
Store, 509 B.R. 292, 297 (Bankr. D. Haw. 2014); Sovereign Bank v. Gillis, 74 A.3d
1, 5 (N.J. Super. Ct. App. Div. 2013); In re River E. Plaza, LLC, 669 F.3d 826, 831
(7th Cir. 2012); Green Tree Servicing, LLC v. United States, 783 F. Supp. 2d 243,
249 (D.N.H. 2011); CitiMortgage, Inc. v. Mortg. Elec. Registration Sys., Inc., 813
N.W.2d 332, 334 (Mich. Ct. App. 2011); Deutsche Bank Nat'l Tr. Co. v. Roberts,
233 P.3d 805, 809 (Okla. Civ. App. 2010); Sheppard v. Interbay Funding, LLC, 305
S.W.3d 102, 107 (Tex. Ct. App. 2009); Bank of Am., N.A. v. Prestance Corp., 160
P.3d 17, 27 (Wash. 2007). According to the Restatement (Third) of Property:
Mortgages, the replacement mortgage doctrine provides:
(a) If a senior mortgage is released of record and, as part of the same
transaction, is replaced with a new mortgage, the latter mortgage
retains the same priority as its predecessor, except
(1) to the extent that any change in the terms of the mortgage or the
obligation it secures is materially prejudicial to the holder of a
junior interest in the real estate, or
(2) to the extent that one who is protected by the recording act
acquires an interest in the real estate at a time that the senior
mortgage is not of record.
§ 7.3 (Am. L. Inst. 1997 & Oct. 2022 Update).
Although this Court has referenced the replacement mortgage doctrine, we
have neither adopted nor rejected it. Matrix, 394 S.C. at 138, 714 S.E.2d at 534. In
Matrix, the lender did not assert priority under the replacement mortgage doctrine;
therefore, we did not "decide whether a lender that refinances its own debt could
attain priority under" the replacement mortgage doctrine. Id. Here, U.S. Bank
asserts priority under the replacement mortgage doctrine. We agree with the court
of appeals that the question of whether to adopt the doctrine is one for the General
Assembly and not this Court.
Determinations of public policy "are chiefly within the province of the
legislature, whose authority on these matters we must respect." Fullbright v.
Spinnaker Resorts, Inc., 420 S.C. 265, 271, 802 S.E.2d 794, 797 (2017). We do not
sit as a superlegislature to second-guess the General Assembly's decisions.
Keyserling v. Beasley, 322 S.C. 83, 86, 470 S.E.2d 100, 101 (1996); see Smith v.
Tiffany, 419 S.C. 548, 565, 799 S.E.2d 479, 488 ("We are a court, not a legislative
body."). "Respect for separation of powers compels us to recognize that the General
Assembly is the author of our state's public policy . . . ." State v. Slocumb, 426 S.C.
297, 314, 827 S.E.2d 148, 157 (2019); see Tiffany, 419 S.C. at 559, 799 S.E.2d at
485 ("In honoring the separation of powers, we adhere to the principle that a court
must not reject the legislature's policy determinations merely because the court may
prefer what it believes is a more equitable result."). Accordingly, we cannot change
the meaning of a clear and unambiguous statute. Hodges v. Rainey, 341 S.C. 79, 85,
533 S.E.2d 578, 581 (2000).
U.S. Bank argues that because we adopted the equitable subrogation doctrine
as an exception to the race-notice statute, we can also adopt the replacement
mortgage doctrine. We disagree. Although there is an intervening mortgage—such
as ArrowPointe's—in both scenarios, the two doctrines have different effects. Under
the equitable subrogation doctrine, a substitute mortgagee steps into the shoes of the
original mortgagee, and the original mortgage remains intact in all respects relative
to "race-notice." The mortgage remains unsatisfied, and a new mortgage is not
recorded. In that sense, the "race" began before the substitute mortgagee stepped
into the shoes of the original mortgagee, and the junior mortgagee has not lost
anything at all. However, under the replacement mortgage doctrine, the original first
mortgage is satisfied of record and replaced with a new mortgage that is recorded
after the intervening mortgage. While the new mortgage may have similar terms as
the original first mortgage, that is not always so. For example, in the case before us,
the Quicken Refinance Mortgage contained a significantly higher principal amount.
While the replacement mortgage doctrine provides the intervening lienholder with
some relief "to the extent that any change in the terms of the mortgage or the
obligation it secures is materially prejudicial to" the intervening lienholder, we
conclude the replacement mortgage doctrine invites needless litigation that could be
avoided by a simple examination of the title to the real property.
Similarly, the replacement mortgage doctrine dilutes the importance of a
thorough title examination that is inherent in our race-notice statute, even when a
short amount of time passes between the recording of a mortgage and the refinancing
of that mortgage. Before a senior mortgagee, such as Quicken Loans, finalizes the
refinancing of its existing mortgage, it can easily ensure the priority of its lien
position by having the title to the property examined to discover the existence of
intervening liens. If the examination reveals an intervening lien, the senior
mortgagee can evaluate its options and act accordingly. Among other things, the
senior mortgagee can terminate the refinancing transaction or request the intervening
lienholder(s) to subordinate the intervening lien(s) to the new mortgage. We see no
reason to adopt a doctrine that excuses the failure to conduct such a title
examination—or, when a title examination is conducted, the failure to ascertain the
existence of an intervening lien.
Conclusion
The General Assembly has plenary authority to make policy decisions on
behalf of the state. Therefore, we agree with the court of appeals that the question
of whether to adopt the replacement mortgage doctrine is one for the General
Assembly. We also agree that because Quicken Loans was on record notice of the
ArrowPointe LOC when the Quicken First Mortgage was refinanced, our race-notice
statute awards ArrowPointe priority over U.S. Bank. Finally, we emphasize parties
must conduct diligent title searches to protect their interests under the race-notice
statute.
AFFIRMED.
KITTREDGE, FEW, JJ., and Acting Justices James E. Lockemy and
Stephanie P. McDonald, concur.