Lamb Excavation, Inc. v. Chase Manhattan Mortgage Corp
In Lamb Excavation, Inc. v. Chase Manhattan Mortgage Corp., 208 Ariz. 478, 480,6, 95 P.3d 542, 544 (App. 2004), to satisfy an earlier loan for construction of a home, the Torrejons obtained permanent financing from Chase Manhattan Mortgage Corporation ("Chase"). Id. at2.
Lamb, a contractor, and others filed mechanics' liens against the property, and Lamb sought to foreclose its lien. Id. at 2-3.
Chase moved for summary judgment, asserting it should be subrogated to the prior lender's lien position. Id. at3.
The trial court granted summary judgment to Lamb, finding that Chase was "a sophisticated lender" that had constructive notice of the potential for the filing of a mechanic's lien against the property when Chase made the loan. Id. at 479-80,4, 95 P.3d at 543-44.
On appeal, this court considered the various approaches to applying equitable subrogation, found Arizona's approach consistent with the Restatement, and stated that "the question is whether a subsequent mortgagee reasonably expected a security interest with the same priority as that of the mortgage being discharged." Id. at 481-82,10-13, 95 P.3d at 545-46.
The court noted that an implied agreement to subrogate existed in the form of the loan documents, and further found that Arizona law did not require the denial of equitable subrogation where the subsequent creditor had actual or constructive knowledge of intervening liens or when the subsequent creditor was a sophisticated lender. Id. at 482-83,15-16, 95 P.3d at 546-47.
The Court clarified the appropriate legal standard for assessing whether equitable subrogation should apply. Id.
Noting that Arizona's approach is consistent with the Restatement (Third) of Property (Mortgages), we held "the doctrine will apply when there is an express or implied agreement to subrogate, . . . and when an intervening lien claimant suffers no prejudice." Id.6, 13.
A subsequent creditor's knowledge, actual or constructive, of an intervening lien is irrelevant in deciding whether equitable subrogation should apply. Id.15.
However, the second loan must be made by a different lender than the holder of the first deed of trust, because, by definition, one cannot be subrogated to one's own previous deed of trust.
Restatement 7.6 cmt. e; see also Sun Valley Fin., 212 Ariz. 495,18, 134 P.3d at 404 (subrogation is "substitution of another person in the place of a creditor"), citing Mosher v. Conway, 45 Ariz. 463, 468, 46 P.2d 110, 112 (1935).
Section 7.6(a) of Restatement (Third) of Property (Mortgages) provides in pertinent part:
One who fully performs an obligation of another, secured by a mortgage, becomes by subrogation the owner of the obligation and the mortgage to the extent necessary to prevent unjust enrichment.
Even though the performance would otherwise discharge the obligation and the mortgage, they are preserved and the mortgage retains its priority in the hands of the subrogee.