A divided panel of the North Carolina Court of Appeals determined in this appeal that the doctrine of equitable subrogation would properly apply and place buyers' lender in the shoes of the seller's lien holder who was paid off at the purchase closing even though some of the grantees did not execute the deed of trust securing the loan made for the balance of the purchase price.
In 2005, John Wood agreed to purchase the subject property for $878,000. And the secured lender agreed to loan him $650,000 for the purchase conditioned upon (1) the loan being used to pay off an existing lien on the property held by one of the seller's creditors and (2) the execution of a deed of trust on the property that would give the lender a first-lien security interest therein. In his opinion on title, the closing attorney represented to the lender that those conditions would be met, and that the lender would have a first-lien security interest in the entire property.
The closing took place and according to the closing attorney, the lender made the $650,000 loan to John Wood, the loan proceeds were applied to pay off the existing lien on the property; John Wood executed a promissory note for $650,000 (the "Note"); however, the seller's general warranty deed conveyed the subject property to John and Annette Wood and to Edward Wood and, the defendant, Mary Wood. However, only John and Annette Wood executed the Deed of Trust encumbering the subject property and securing the loan.
According to the closing attorney, the Deed of Trust should have been executed by all four subsequent owners of the property, but was executed only by John and Annette Wood due to an error on the attorney's part. As a result, Edward Wood and the defendant took their one-half combined interest in the property unencumbered by the deed of trust. Subsequently, the loan went into default, and the plaintiff instituted foreclosure proceedings. John Wood later died in December 2015, and Edward Wood quitclaimed his interest in the property to the defendant in 2016 following their divorce, leaving Annette Wood and Defendant each holding a one-half undivided interest in the property.
The plaintiff lienholder filed a verified complaint seeking relief including a declaratory judgment quieting title to the property and the trial court entered an order granting the plaintiff summary judgment on its claim to quiet title to the property under a theory of equitable subrogation, granting summary judgment as to the defendant's counterclaims and granting the defendant summary judgment as to the plaintiff's other claims. The Court of Appeals deemed all of the defendant's issues but one irrelevant. The opinion states that the defendant properly appealed whether the plaintiff was entitled to summary judgment on its claim to quiet title, which the trial court granted based upon the doctrine of equitable subrogation, and the opinion analyzed that issue.
The plaintiff lienholder argued at the summary judgment hearing that it was entitled to quiet title to the property in its favor under a theory of equitable subrogation. The opinion states:
The doctrine of equitable subrogation is described as follows:
[A]s a general rule one who furnishes money for the purpose of paying off an encumbrance on real or personal property, at the instance either of the owner of the property or of the holder of the encumbrance, either upon the express understanding or under circumstances from which an understanding will be implied, that the advance made is to be secured by a first lien on the property, will be subrogated to the rights of the prior lienholder as against the holder of an intervening lien, of which the lender was excusably ignorant. . . . In order to invoke the equitable remedy of subrogation it is necessary both that the money should have been advanced for the purpose of discharging the prior encumbrance, and that it should actually have been so applied. Peek v. Wachovia Bank & Trust Co., 242 N.C. 1, 15-16, 86 S.E.2d 745, 755-56 (1955) (internal quotation marks and citations omitted).
The trial court determined that no genuine issues of material fact and that the lienholder is entitled to quiet title to the property through the doctrine of equitable subrogation as a matter of law. According to the opinion, the defendant argued that the doctrine is inapplicable because the buyers' lender did not furnish money to "extinguish any debt owed by John Wood, the borrower, but rather to extinguish the debt owed by Buchanan, the owner of the real property the lender's money was used to purchase. Stated another way, the defendant's argument is that equitable subrogation cannot apply unless the lender is providing money to a borrower to extinguish a prior debt owed by that borrower, as in a refinancing transaction.
While neither party or the Court was able to present any controlling authority expressly holding that equitable subrogation is or is not able to afford equitable relief to a lender who has furnished money to purchase of real property on the condition that the money be used to extinguish the secured debt owed by the seller of the property and that the lender gains a first position lien over the property, the Court was "persuaded, however, that equitable subrogation can apply in such a context."
The Majority opined:
Equitable subrogation is a creature of equity whose "basis is the doing of complete, essential, and perfect justice between all the parties without regard to form, and its object is the prevention of injustice." Journal Publ'g Co. v. Barber, 165 N.C. 478, 487-88, 81 S.E. 694, 698 (1914) (emphasis added). While distinguishable in that it concerned a refinancing transaction, our decision in Bank of N.Y. Mellon instructs that where a lender furnishes money on the condition that it be used to give the lender a first-position lien over a parcel of real property but an attorney's error causes the defendant to receive title to a fraction of the parcel unencumbered by the lender's lien, the defendant may be subjected to the anticipated lien via equitable subrogation. Bank of N.Y. Mellon v. Withers, 240 N.C. App. 300, 303, 771 S.E.2d 762, 765 (2015). And while not controlling, we agree with many of our sister states, as well as with federal courts applying North Carolina law, that have held that equitable subrogation is not limited to the context of refinancings and can apply in the context of purchase transactions such as the transaction here at issue. See, e.g., Gibson v. Neu, 867 N.E.2d 188, 200 (Ind. Ct. App. 2007) ("we must disagree that equitable subrogation applies only in refinance situations"); Sourcecorp, Inc. v. Norcutt, 258 P.3d 281, 288 (Ariz. Ct. App. 2011) ("equitable subrogation should not be precluded on the basis that the party seeking subrogation is a purchaser of property who has paid the existing encumbrance in connection with the purchase"); In re Project Homestead, Inc. , 374 B.R. 193, 208 (Bankr. M.D.N.C. 2007) ("The Trustee also argues that equitable subrogation is not available in these proceedings because the borrowed funds were not used to pay an obligation of the borrowers (i.e., the Purchasers), but instead were used to pay obligations of the Debtor. Neither Peek nor the other North Carolina decisions involving equitable subrogation support such a limitation. . . . Although not strictly a refinancing, this is precisely the type of situation that, under the broad equitable principles recognized in the North Carolina cases, the remedy of equitable subrogation may be invoked by the new lender in order to claim the rights formerly held by the old lender under the old lender's deed of trust.").
We therefore hold that the doctrine of equitable subrogation can apply in the context of a purchase transaction, and conclude that the trial court did not commit an error of law by denying Defendant summary judgment.
The majority determined that this holding should not be construed as a ruling that the plaintiff has established that it is entitled to be equitably subrogated in this case because it determined that there exist genuine issues of material fact as to whether Defendant suffered prejudice under the doctrine of laches because of the plaintiff's eight-year delay in bringing suit and that summary judgment was improperly granted by the trial court.
Judge Murphy dissented, opining that:
"...it is not within our authority to expand the doctrine of equitable subrogation into the context of purchase transactions like that at issue in this case.
The Majority correctly notes that there is no controlling authority to support its decision that equitable subrogation is available in the context of the underlying agreement in this case. As there is no precedent affirmatively allowing us to apply the equitable subrogation doctrine in favor of Plaintiff, doing so would allow lenders to rely upon equitable subrogation in a way in which they previously could not. However, as our State's intermediate appellate court, "this Court is not in the position to expand the law. Rather, such considerations must be presented to our Supreme Court or our Legislature[.]" Shera v. N.C. State Univ. Veterinary Teaching Hosp. N.C. App. 117, 126, 723 S.E.2d 352, 358 (2012). "This Court is an error-correcting court, not a law-making court." Id. at 127, 723 S.E.2d at 358.