The Bank of New York Mellon v Withers, COA (14-1111) filed on April 7, 2015 results from the defendants' appeal from an order for summary judgment to quiet title under the doctrine of equitable subrogation entered in Durham County Superior Court. This doctrine is well established in North Carolina, however modern courts have been reluctant to recognize its applicability in most recent cases in the face of the State's recording acts despite its seminal North Carolina case being rooted in just such an issue. As we have noted in prior articles, Peek v. Wachovia Bank & Trust Co., 242 N.C. 1, (1955) is most frequently quoted in North Carolina appellate decisions discussing the doctrine and the this opinion is no exception. The Court sets out the Peek definition entirely: "the general rule [that] 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."
The defendant's mother owned a property in Durham North Carolina and refinanced her existing mortgage with the defendant joining in as a co-borrower. The lender required: (1) that it would have a deed of trust with first position lien on the property and (2) that the defendant's mother would execute a quitclaim deed to mother and daughter as 'joint tenants" (as described in the Court's opinion). The lender instructed the closing attorney to prepare a deed accordingly and to pay the prior deed of trust in full. However, the closing attorney prepared and recorded a quitclaim deed that not only included mother and daughter as grantees, but also mistakenly included the mother's three other daughters (also defendants in this action), conveying a 1/5 undivided interest to each as tenants in common. The closing attorney recorded this quitclaim deed and the deed of trust without the other daughters and their spouses joining in the execution of the deed of trust and resulting in only a two-fifth interest in the property being encumbered instead of the entire property and paid off the prior deed of trust. The lender subsequently assigned its deed of trust to the Bank of New York Mellon ("plaintiff").
Subsequently, the plaintiff filed an action against the five tenants in common seeking to reform the deed of trust to include the portions of property held by the three other daughters, imposing a constructive trust on the entirety of the property or, alternatively, to equitably subrogate the deed of trust to the prior deed of trust paid off at closing. The defendants' mother subsequently passed away and the borrower defendant executed a quitclaim deed to plaintiff transferring the entirety of her interest in the property, including any interest obtained following the passing of her mother leaving the three remaining daughters as defendants.
The remaining parties filed cross motions for summary judgment and the trial court granted the defendants' motions for summary judgment on the issues of reforming the deed of trust and imposing a constructive trust, but also granted the plaintiff's motion for summary judgment to quiet title under the legal doctrine of equitable subrogation and the defendants appealed.
On appeal, the defendants argued that the plaintiff and the defendants never agreed that the closing attorney would use the funds to pay the prior deed of trust in full, that the plaintiff was not "excusably ignorant" of the attorney's mistake and that the plaintiff had an adequate remedy at law.
The Court of Appeals observes that equitable subrogation is a remedy that:
...applies "when one person has been compelled to pay a debt which ought to have been paid by another and for which the other was primarily liable." Trustees of Garden of Prayer Baptist Church v. Geraldco Builders, Inc., 78 N.C. App. 108, 114, 336 S.E.2d 694, 697–98 (1985) (citations omitted). ...it is based in equity and the purpose 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 Pub. Co. v. Barber, 165 N.C. 478, 487–88, 81 S.E. 694, 698 (1914). "When the equities of a case favor equitable subrogation, the party in whose favor the right of subrogation exists is entitled to all of the remedies and security which the creditor had against the person whose debt was paid." Am. Gen. Fin. Servs., Inc. v. Barnes, 175 N.C. App. 406, 409, 623 S.E.2d 617, 619 (2006) (citing Trustees of Garden of Prayer Baptist Church, 78 N.C. App. at 114, 336 S.E.2d at 698) (quotations omitted). The doctrine of equitable subrogation requires "both that the money should have been advanced for the purpose of discharging the prior encumbrance, and that [such money] should have actually been so applied." Peek, 242 N.C. at 15–16, 86 S.E.2d at 756 (internal quotations and citations omitted).
Here, the purpose of the loan was to pay off the prior deed of trust in exchange for a first lien position on the subject property. The lender provided the funds, directed the closing attorney to pay the prior deed of trust in full, and the closing attorney followed their directions regarding o paying the prior deed of trust in full. However, the closing attorney failed to follow the lender's instructions by mistakenly drafting the quitclaim deed conveying the property to the grantor and all four daughters as 'joint tenants'. As a result of this error, the deed of trust did not secure the entire property. The Court States: "Since equity requires that the funds were advanced for the purpose of discharging the prior encumbrance, equity would not allow the attorney's mistake to defeat the agreed purpose of the transaction, which was to secure a loan by granting a first position lien ... Therefore, as a matter of law, the trial court correctly applied the doctrine of equitable subrogation to allow ... plaintiff, to an equitable subrogation of their rights ... to claim a first position lien on the entire property."
The defendants also argued that even if the plaintiff satisfied all the factual requirements necessary to establish a right to the remedy of equitable subrogation, the plaintiffs should not receive an equitable benefit because there were adequate remedies at law. According traditional equity doctrine, the remedy will not apply when the party seeking equity has a full and complete remedy at law. However in this type of case, the Court notes that "the remedies defendants identify are inadequate because of the failure to account for the unique nature of real property. According to the Supreme Court of North Carolina, "[l]and is an extremely important and long-valued asset in this state and throughout this country." Powell v. City of Newton, 364 N.C. 562, 572, 703 S.E.2d 723, 730 (2010) (Martin, J. concurring). In fact, "it has long been established, both in this state and throughout this country, that land is a special and unique asset . . . ." Id. at 573–74, 703 S.E.2d at 731 (Hudson, J. dissenting). Due to land's unique nature, damage claims against individuals are an inadequate substitute for a first position lien on real property. Since land is unique and the remedies at law identified by defendants are inadequate, the doctrine of equitable subrogation applies." Thus, the Court of Appeals determined that trial court correctly granted summary judgment in favor of plaintiff as a matter of law and affirmed the trial court's order.
We have one quibble with the opinion where it references that the property was to be deeded to the mother and daughter as 'joint tenants'. That is a term of art with respect to real property and suggests that any error in drafting the deed was in fact compounded by conveying a tenancy in common to the five parties. We believe that it would have been clearer if the court had simply not characterized the deed at all.
Unlike other recent appellate cases focused on the issue of equitable subrogation, this opinion simply did not discuss the issue of 'excusable ignorance'. It would seem that the panel implicitly recognized that 'excusable ignorance' of the closing attorney's error and the resulting record of title is analogous to 'excusable neglect' on the part of a party's attorney in a Rule 60 Motion. It seems clear in an equitable remedy analysis that constructive knowledge imputed from the public record is irrelevant where the plaintiff is reasonably relying on a professional to examine and, as in this case, to create the records, there is no duty on the part of the plaintiff to independently examine the record. Where there is no duty there is no negligence. In North Carolina, the standard of care in real estate transactions calls for the engagement of an attorney to examine title, prepare documents and close transactions. That was done in this case and appears to support the decision. If this was the analysis of the Court, it would have helped clarify the muddy water stirred up by the recent opinions to which we alluded had the opinion actually addressed the issue.