U.S. Bank, N.A. v. JPMorgan Chase Bank, N.A. (6/29/2017)

July 10, 2017

Arizona Court of Appeals Division One holds that, under doctrines of replacement and equitable subrogation, new mortgage retains priority of senior mortgage only to the extent new proceeds were used toward repayment of senior mortgage.

Borrowers obtained a home equity line of credit (“HELOC”) from JPMorgan Chase Bank’s (“JPMC”) predecessor.  In 2004, borrowers executed a note and deed of trust (“2004 Note”) in favor of US Bank’s (“USB”) predecessor, and JPMC’s predecessor executed a subordination agreement.  In 2005, borrowers executed another note and deed of trust (“2005 Note”) in favor of US Bank’s predecessor, using the proceeds to release the 2004 Note and allocated the remaining amount to the HELOC, which was not released because it had an outstanding balance.  Borrowers continued to take advances on the HELOC and defaulted on the 2005 Note.  USB then filed an action in superior court seeking, among other things, declaratory relief regarding lien priority between the HELOC and 2005 Note.  USB moved for summary judgment and JPMC cross-moved.  The superior court granted USB’s motion, holding that the 2005 Note was entitled to higher priority than the HELOC under the doctrines of replacement and equitable subrogation and awarded USB attorney’s fees.

The Court of Appeals affirmed on the issue of replacement, a doctrine under which a new mortgage retains the same priority as a senior mortgage released in the same transaction.  Because the 2004 Note was paid with proceeds from the 2005 Note, the 2005 Note obtained priority over the HELOC to the extent funds were used to satisfy the 2004 Note.  The Court of Appeals reversed, however, on the issue of equitable subrogation because the HELOC was not entirely discharged by the proceeds from the 2005 Note.  Accordingly, the HELOC retained priority over the 2005 Note for any amounts beyond those used to satisfy the 2004 Note.

Judge Johnsen authored the opinion; Judges Thumma and Norris concurred.