Centreville Car Care, Inc. v. North American Mortgage Co.

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.
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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.
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 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.

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 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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