Sourcecorp, Inc. v. Norcutt – 8/8/2011

August 8, 2011

Arizona Court of Appeals Division One Holds That Property Purchasers Who Pay Off an Existing Encumbrance as Part of the Purchase Price Are Entitled to Succeed to the Priority Rights of the Creditor Whose Encumbrance They Paid.

Plaintiff recorded a money judgment against owners of a home in Prescott (the “Property”) and later sought a Writ of General Execution to proceed with a forced sale of the Property in partial satisfaction of the judgment.  Homeowners had purchased the Property after the judgment was recorded but had failed to discover the judgment lien against the Property.  Homeowners intervened and sought to prevent the forced sale of the Property.

Following a remand from the Arizona Court of Appeals, the Superior Court granted summary judgment in favor of Plaintiff.  The trial court rejected the Homeowners’ argument that they were equitably subrogated to the priority lien position that had been held by the Bank, whose loan they paid off upon their purchase of the Property.  

Homeowners appealed.  Resolving a question of first impression in Arizona, and one on which other jurisdictions have split, the Court of Appeals reversed. 

Equitable subrogation is the substitution of a person in the place of a creditor such that the person succeeds to the rights of the creditor in relation to the debt.  The doctrine allows a person who pays off a superior encumbrance to be substituted into the priority position of that primary lienholder despite the recordation of an intervening lien.  Equitable subrogation requires proof of four elements: (1) the party asserting subrogation has paid the debt but (2) was neither a volunteer nor (3) primarily liable for the debt and (4) no injustice will be done to the other party by allowing subrogation.

Some jurisdictions have denied application of equitable subrogation under similar facts, reasoning that the property buyer acts as a “volunteer” in paying off the priority encumbrance and should not escape the consequences of a negligent failure to discover all liens affecting the property.

The Arizona Court of Appeals, however, adopted the contrary position.  The Court reasoned that Homeowners did not voluntarily pay off the Bank’s priority encumbrance, but rather did so to protect their concurrently acquired interest in the Property.  The Court found that, for equitable subrogation to apply, the interest to be protected need not preexist the transaction (here, the purchase of the Property) by which the priority encumbrance is satisfied.  Because the Homeowners acted to protect their concurrently acquired interest by ensuring clear title to the Property, they did not act as mere volunteers.

Homeowners were therefore entitled to be equitably subrogated to the lien position of the Bank.  The Court of Appeals reversed and remanded with instructions to the Superior Court to enter judgment in favor of the Homeowners. 

Judge Winthrop authored the opinion; Presiding Judge Hall and Judge Thompson concurred.