Bank of America, N.A. v. Felco Business Services, Inc. – 8/29/2017

September 5, 2017

Arizona Court of Appeals Division One holds that a claim of senior priority under the doctrine of equitable subrogation is not waived for failure to object to a trustee’s sale.

Two property owners took out a loan from Countrywide Home Loans secured by a deed of trust.  A few months later, they took out a second loan from a second lender, partially secured by a second deed of trust.  The following year, the borrowers refinanced the first loan with Countrywide Home Loan’s sister corporation, Countrywide Bank.  The borrowers used almost all of the refinanced loan (secured with a third deed of trust) to pay off and release the original loan from Countrywide Home Loans.

The borrowers defaulted on their loan to the second lender.  The second lender arranged a trustee’s sale and notified Countrywide Bank, which did not respond to the notice or attempt to enjoin the sale.  After the sale, Bank of America acquired all Countrywide entities.  Bank of America sued, seeking a declaratory judgment that the third deed of trust for the refinanced loan had priority over the second lender’s deed of trust under the doctrine of equitable subrogation, which allows a deed of trust to assume the priority position of an earlier deed.  The trial court held that A.R.S. § 33-811(C) required that a senior lien be asserted as a defense or objection to the trustee’s sale, such that the failure to object to the sale waived Plaintiffs’ claim of senior priority under the doctrine of equitable subrogation.

The Court of Appeals held that equitable subrogation is neither a defense nor objection to a trustee’s sale and does not constitute a waiver under A.R.S. § 33-811(C) because lien priority is a separate matter from the validity of a trustee’s sale.  Defendants could have conducted the sale even if Plaintiffs had asserted that it had a senior lien before the sale.  Because § 33-811(C)’s express language does not preclude assertions of equitable subrogation, the doctrine remained available to Bank of America after the trustee’s sale.  But because equitable subrogation is an equitable remedy and its application depends on the particular facts of a case, the Court of Appeals remanded to determine whether applying the doctrine is appropriate in this case.

Presiding Judge Howe wrote for the Court; Judges Winthrop and Thompson joined.