You can
search the entire site.
or go to the recent opinions, or the chronological or subject indices.
Rush v. Alaska Mortgage Group (4/25/97), 937 P 2d 647
<![CDATA[
Notice: This opinion is subject to correction before publication in
the Pacific Reporter. Readers are requested to bring errors to the
attention of the Clerk of the Appellate Courts, 303 K Street,
Anchorage, Alaska, 99501, telephone (907) 264-0608, fax (907) 264-
0878.
THE SUPREME COURT OF THE STATE OF ALASKA
LINDA SUE RUSH, )
) Supreme Court No. S-7348
Appellant, )
) Superior Court No.
v. ) 3PA-92-420 CI
)
ALASKA MORTGAGE GROUP, GERRY )
DePRIEST and MARYANNE ) O P I N I O N
DePRIEST, )
) [No. 4813 - April 25, 1997]
Appellee. )
______________________________)
Appeal from the Superior Court of the State of
Alaska, Third Judicial District, Palmer,
Dana Fabe, Judge.
Appearances: John R. Snodgrass, Jr., Palmer,
for Appellant. Tonja Woelber, Anchorage, for
Appellees.
Before: Compton, Chief Justice, Rabinowitz,
and Eastaugh, Justices. [Matthews and Fabe,
Justices, not participating.]
EASTAUGH, Justice.
I. INTRODUCTION
Linda Sue Rush entered into a real estate transaction
that inadvertently extinguished her senior security interest in the
land. As a result, Alaska Mortgage Group, which held the second
deed of trust, became the senior lienholder. We must decide
whether equitable subrogation restores the priority of Rush's
security interest. The superior court ruled against her and
granted summary judgment to Alaska Mortgage Group, Gerry DePriest,
and Maryanne DePriest. We reverse and remand.
II. FACTS AND PROCEEDINGS
In April 1976 Edward Cyrus Rush sold approximately 8.9
acres of land in the Matanuska-Susitna Borough to Thomas Norris and
Linda Norris. The Norrises executed a promissory note (Norris
Note) in favor of Rush for $23,000, the balance of the purchase
price. The Norris Note was payable at $150 per month with interest
of nine percent per year. The Norrises executed a deed of trust
(1976 Deed of Trust) on the property to secure their note. (EN1)
The Norrises sold the property to the Cunninghams in
1978. In partial payment, the Cunninghams executed a deed of trust
(1978 Deed of Trust) and note in favor of the Norrises. In 1979
Alaska Mortgage Group (Mortgage Group) purchased the 1978 Deed of
Trust and note from the Norrises.
There were three sales of the property between 1980 and
1988. (EN2) In each instance the new owner assumed the obligations
of the prior owners.
Edward Cyrus Rush died in February 1988. Linda Sue Rush,
his surviving spouse, was the personal representative of his
estate.
Fred Clingman purchased the property in early 1988.
Clingman's payments to Linda Sue Rush were irregular. As a result,
Rush hired attorney John Shaw for "help on the payments." Rush did
not then know that other deeds of trust, including the 1978 Deed of
Trust owned by Mortgage Group, encumbered the property. Her
attorney did not order a title report on the property.
In June 1988 Linda Sue Rush deeded the property to
Clingman by warranty deed, despite the fact she had no ownership
interest in it. Even though five deeds of trust encumbering the
property had been executed after the Norrises signed the 1976 Deed
of Trust, Linda Sue Rush's 1988 warranty deed contained no
exceptions for the six previous deeds of trust, including the
Norris deed of trust.
In exchange for the warranty deed, Rush received from
Clingman a deed of trust (1988 Deed of Trust) and note (Clingman
Note). The annual interest rate on the Clingman Note, nine
percent, was the same as the rate on the Norris Note; the amount of
the Clingman Note, $21,600, was less than the amount of the Norris
Note, $23,000. The Clingman Note was payable at $250 per month.
The Norris Note was payable at $150 per month. The 1988 Deed of
Trust was seventh in priority. Clingman signed the new note and
deed of trust on June 17, 1988. Rush's warranty deed and
Clingman's deed of trust were recorded on June 27, 1988.
On August 3, 1988, David McCabe, general partner of
Mortgage Group, telephoned Rush to inquire about the 1976 Deed of
Trust. On August 10 Rush gave McCabe written authorization to
review the National Bank of Alaska escrow account holding the
Norris Note and the 1976 Deed of Trust.
On October 7, 1988, Rush's attorney, Shaw, received a
packet of documents from the escrow account, including the original
Norris Note, the trustee's deed of reconveyance, and the original
request for full reconveyance signed by Edward Cyrus Rush.
Sometime after October 7, Shaw's secretary, Judy Scorup,
wrote "Paid June 17, 1988,"on the Norris Note. She later sent the
Norris Note and the request for reconveyance to the title company,
which recorded them on November 1, 1989. The recording of the deed
of reconveyance extinguished the 1976 Deed of Trust. At this time,
Shaw was very ill with terminal cancer; he died in May 1991.
Clingman made payments on at least three promissory notes
and the accompanying deeds of trust until 1991. In 1991 Clingman's
payments stopped, and Mortgage Group commenced a foreclosure
action. Clingman owed Mortgage Group $21,388.17 as of May 1991,
and he owed Rush $16,995.68 as of September 1991.
Rush received notification of the foreclosure sale.
Through attorney John Snodgrass Rush requested in December 1991
that Mortgage Group treat her as the senior creditor. In 1992 Rush
brought an action against all trustors, trustees, and beneficiaries
of the property, to reinstate the first priority of the 1976 Deed
of Trust. In April 1992 the trustee at foreclosure sold the
property by quitclaim deed to Mortgage Group, subject to notice of
the Rush action. Mortgage Group then sold the property to Gerry
DePriest and Maryanne DePriest.
Rush asked the court to reform the 1976 Deed of Trust and
Norris Note so that the balance owing would be identical to that of
the 1988 Deed of Trust and Clingman Note. Rush later dismissed all
defendants except Mortgage Group, the Norrises, and the DePriests.
Rush moved for partial summary judgment. Mortgage Group
opposed and cross-moved for summary judgment. The superior court
granted partial summary judgment to the Norrises and dismissed them
from the action.
The superior court denied Rush's summary judgment motion
and granted Mortgage Group's cross-motion. The court concluded
that the doctrines of mistake, unjust enrichment, and equitable
subrogation did not afford Rush relief under the circumstances.
Rush appeals.
III. STANDARD OF REVIEW
We review the superior court's grant of summary judgment
de novo. Nielson v. Benton, 903 P.2d 1049, 1052 (Alaska 1995). We
will consider any matter in the record that indicates the existence
of a genuine issue of material fact. American Restaurant Group v.
Clark, 889 P.2d 595, 597-98 (Alaska 1995). Finally, the non-moving
party is entitled to have the record reviewed in the light most
favorable to it and to have all reasonable inferences drawn in its
favor. Metcalfe Investments, Inc. v. Garrison, 919 P.2d 1356, 1360
(Alaska 1996) (citation omitted).
IV. DISCUSSION
We must decide whether the doctrine of equitable
subrogation can provide relief to a creditor who has released her
senior security interest. The superior court held that the
doctrine did not allow relief and granted summary judgment against
Rush. We conclude that the superior court erred in treating actual
notice as dispositive of the equitable subrogation doctrine, and
hold that Rush is able to make out a claim under this doctrine.
A. Equitable Subrogation
The doctrine of equitable subrogation prevents unjust
enrichment as a result of the inadvertent release of a security
interest in land. See generally 1 George E. Palmer, The Law of
Restitution sec. 3.6 (1978). In the absence of agreements or
statutes, the rule of priority is "prior in tempore, potior in
jure"(first in time, superior in right). See AS 34.35.060(a);
Nystrom v. Buckhorn Homes, Inc., 778 P.2d 1115, 1121 (Alaska 1989).
A deed of trust that is renewed or modified creates a problem for
the senior creditor if security interests attach to the property in
the period between the initial execution and the renewal. If the
senior creditor releases her deed of trust in exchange for a new
deed of trust without a new agreement regarding priority, the
junior creditor then may receive first priority. Assuming there
has been no detrimental reliance on the release, the junior
creditor would be unjustly enriched by the senior creditor's
mistake. Under certain equitable circumstances, the senior
creditor may be subrogated to and may assert the original priority
of the former encumbrance.
Under this doctrine, the senior creditor is not
subordinated to subsequent encumbrances absent either an intent to
subordinate, or "paramount equities"in favor of junior creditors
that justify subordinating the senior interest. See, e.g.,
Commercial Fed. Sav. & Loan v. Grabenstein, 437 N.W.2d 775, 777-78
(Neb. 1989); Houston Lumber Co. v. Skaggs, 613 P.2d 416, 417 (N.M.
1980); Resolution Trust Corp. v. Barnhart, 862 P.2d 1243, 1250
(N.M. App.) ("[W]e are persuaded that the better view is that
constructive notice and negligent ignorance of the intervening lien
are immaterial to whether the equitable reinstatement of a prior
lien should be allowed."), cert. denied, 862 P.2d 1223 (N.M. 1993).
Some courts have held the mortgagee "not to be entitled
to protection, particularly where the earlier mortgage is
discharged with knowledge of the existence of the intervening
lien." 55 Am. Jur. 2d Mortgages sec. 402, at 119 (1996) (citing
cases). The superior court's decision followed the proposition
that equitable subrogation will be denied to a renewing senior
lender who releases her deed of trust with actual knowledge of the
junior encumbrance. We think that overstates the significance of
actual knowledge. Most cases and commentators find that actual
knowledge is not dispositive of equitable subrogation and at most
would be evidence of the creditor's intent to subordinate. See,
e.g., Grabenstein, 437 N.W.2d at 777 (stating that "[o]rdinarily,
it is presumed that one must have intended to keep alive his
mortgage title, where it was essential to his security against an
intervening title"); Auto Acceptance & Loan Corp. v. Taus, 137
N.W.2d 452, 454-55 (Wis. 1965). Cf. Robert Kratovil & Raymond J.
Werner, Mortgage Extensions and Modifications, 8 Creighton L. Rev.
595, 602-03 (1975) ("It is unfortunate that some courts have
stressed the point that the mortgagee was unaware of the existence
of intervening liens when he released his mortgage and accepted a
substitute . . . . The more realistic approach is that priority is
simply not lost by substitution unless that is the intent of the
parties.").
The superior court denied equitable subrogation relief,
because it held that Rush had actual notice of other encumbrances
on August 3, 1988, before the transaction was complete, and
therefore could have prevented release of the 1976 Deed of Trust.
As explained above, however, the two main considerations
in deciding whether an equitable subrogation claim restores the
original priority are (1) whether there was an intent to
subordinate the new deed of trust and (2) whether paramount
equities favor the junior creditor.
1. Intention to subordinate
Rush maintains that the refinancing of the Norris Note
was completed before she became aware of Mortgage Group's interest
in the property. Rush claims that the transaction was completed
June 27, 1988, when the Clingman Note and 1988 Deed of Trust were
recorded, thus requiring the inevitable reconveyance of the 1976
Deed of Trust. As of June 27, 1988, Rush was committed to
releasing the 1976 Deed of Trust even though it was not in fact
released until 1989. Therefore, Rush implies that she had no
intent to subordinate the 1988 Deed of trust.
The record provides little evidence to support a
conclusion that Rush harbored any intent to subordinate. She
accepted the Clingman Note in June 1988, before she had actual
knowledge of Mortgage Group's interest, and she affied that she was
not aware of any other deeds of trust on the property. She
received higher monthly payments from Clingman (a circumstance
found important by the superior court), but the interest rate on
the Clingman Note was the same as for the Norris Note and the
principal did not increase. Therefore, the Clingman Note seems to
merely modify the payments on the original debt.
The superior court inferred that Rush intended to
subordinate the 1988 Deed of Trust based on her receipt of actual
knowledge before the 1976 Deed of Trust was reconveyed and given
the larger payments on the Clingman Note:
Equity is not moved to relieve plaintiff of
the consequences of her actions taken with
actual knowledge, as plaintiff's position is
effectively indistinguishable from that of any
other person who makes the business decision
to favor higher monthly payments over lower
monthly payments with a higher security
interest.
The superior court drew this inference in granting
summary judgment against Rush, the non-moving party. All
reasonable inferences of fact from proffered materials must be
drawn against the moving party and in favor of the non-moving
party. Wright v. State, 824 P.2d 718, 720 (Alaska 1992). In
addition, "[s]ummary judgment is generally inappropriate where a
party's state of mind is at issue." Wilcox Assocs. v. Fairbanks N.
Star Borough, 603 P.2d 903, 906 (Alaska 1979).
Although Rush did not expressly state in her affidavit
that she had no intention of subordinating her new security
position, she affied she did not know or understand that anyone
else had a deed of trust on the property. She also affied:
Mr. Shaw said he would handle the matter, and
he did not tell me that I could lose my money
by working with Mr. Clingman. Mr. Shaw did
not explain about other deeds of trust or
anything like that and I have never understood
these matters. I left the whole matter to
him.
These assertions reasonably support the inference that
she did not intend to subordinate her priority of interest. If she
did not know of subsequent deeds of trust, she could not have
intended to subordinate her senior security position to holders of
subsequently-executed deeds of trust. In considering the motion
seeking summary judgment against her, it cannot be affirmatively
inferred that she intended to subordinate her senior interest.
Absent evidence establishing Rush's intent beyond genuine dispute,
it was error to grant summary judgment against Rush on this issue.
2. Paramount equities
The other factor to be considered under the doctrine of
equitable subrogation is whether junior creditors are favored by
paramount equities that justify subordinating the senior creditor's
security interest. See Barnhart, 862 P.2d at 1248-49. See
generally 1 Grant S. Nelson & Dale A. Whitman, Real Estate Finance
Law sec. 9.4, at 815 (3d ed. 1993). This consideration often
turns on whether the junior creditors detrimentally relied on the
apparent discharge of the senior encumbrance. Id.
Rush claims that Mortgage Group has not asserted any paramount equities in its
favor because it did not rely on the reconveyance of the 1976 Deed of Trust and because
reinstatement would not worsen its position.
The record before us gives no indication that Mortgage Group detrimentally relied
on the release of the 1976 Deed of Trust. Mortgage Group did foreclose on its deed of trust,
but only after it was given notice of Rush's claims. There is no evidence that Mortgage Group
was prejudiced in any way by the transaction that Rush attempted. Therefore, no paramount
equities in favor of Mortgage Group would defeat, as a matter of law, Rush's equitable
subrogation claim for reinstatement. Mortgage Group's summary judgment cannot be sustained
on a paramount equities theory.
B. Necessary Parties for Equitable Subrogation
Mortgage Group asserts that, should we reverse the grant
of summary judgment, Rush has not joined parties needed for just
adjudication, making Rush's proposed remedy of subrogation
impossible. Mortgage Group claims that since the obligors on the
Norris Note are not parties to this case, the court is unable to
reinstate Rush's original priority.
Rush counters that since Mortgage Group has foreclosed on
the property and sold it to the DePriests, Mortgage Group and the
DePriests are able to give Rush complete relief. She argues that
reinstating the priority of her security interest would give
Mortgage Group and the DePriests the option of paying off Rush or
losing the property to Rush. Norris, as the maker of the Norris
Note, and others who assumed the note are not needed to give relief
to Rush.
We agree with Rush's arguments that Mortgage Group and
the DePriests can afford complete relief to Rush under equitable
subrogation. The superior court dismissed Norris because Rush's
main theory of equitable subrogation would lead to a disgorgement
of unjust enrichment, which only Mortgage Group and the DePriests
arguably received. The individuals liable on the Norris Note have
received no benefit as a result of Rush's transaction with
Clingman, unlike Mortgage Group and the DePriests. Because they
were not unjustly enriched, Shaw's estate, Clingman, and other
individuals liable on the Norris Note are not necessary parties to
the equitable subrogation claim. (EN3)
Additionally, Mortgage Group is confused about the remedy
equitable subrogation will provide. The intervening deed of trust
(in this case, the 1988 Deed of Trust) will be subrogated to the
original deed of trust (the 1976 Deed of Trust). Because the
original deed of trust had first priority, equitable subrogation
will place the 1988 Deed of Trust in first priority. See Smith v.
State Sav. & Loan Ass'n, 223 Cal. Rptr. 298, 301 (Cal. App. 1985)
("The whole theory of equitable subrogation in such situations is
that the junior encumbrancer . . . is left in exactly the same
junior position he had before."). The remedy does not revive the
original note.
Mortgage Group assumes that the Norris Note with all of
its obligors and the 1976 Deed of Trust must be revived in order to
place the parties in the positions they occupied before the
Clingman-Rush transaction occurred. However, equitable subrogation
will not revive the Norris Note or the 1976 Deed of Trust. Because
Norris is no longer personally liable to Rush and is not in
possession of the land, Norris is not an indispensable party. The
parties will be placed in the positions they would have occupied if
the Clingman-Rush transaction had not affected Rush's first
priority position.
Therefore, under the equitable subrogation doctrine, Rush
needed to join only the parties who were unjustly enriched by her
mistaken transaction.
V. CONCLUSION
We REVERSE the superior court's grant of summary judgment
for Mortgage Group and REMAND for further proceedings consistent
with this opinion. (EN4)
ENDNOTES:
1. There were no encumbrances on the property prior to the 1976
Deed of Trust.
2. The Carlsons bought the property from the Cunninghams in 1980.
The Thompsons bought the property from the Carlsons in 1983. Fred
Clingman bought the property in 1988.
3. Mortgage Group argues that attorney Shaw committed malpractice
and that his estate is consequently a necessary party. This
argument is irrelevant to Rush's equitable subrogation claim. Even
assuming Shaw acted negligently, he was not unjustly enriched.
4. Given our holding, it is unnecessary to consider Rush's
alternative theories of quasi-contract/unjust enrichment or
mistake.
]]>
