Do two lenders funding the refinance of existing trust deeds take the priority positions held by the trust deeds when a separate intervening trust deed is recorded?

Facts: Two lenders funded the payoff of debt secured by a first and second trust deed on a property. On funding, the lenders recorded two new trust deeds on the property. The lenders expected the trust deeds to have the same priority on title as the trust deeds satisfied using the proceeds of their loans. Prior to recording the lenders’ new trust deeds, the owner further encumbered the property with a third trust deed junior to the trust deeds refinanced by the lenders. The owner later defaulted on the lenders’ trust deeds and the lender holding the first trust deed began foreclosure.

Claim: The holder of the third trust deed sought to establish its trust deed as having priority over the two later recorded trust deeds, claiming its junior trust deed was senior under California’s “first in time, first in right” system for setting priorities on title.

Counter claim: The lenders claimed their trust deeds have priority over the previously recorded junior trust deed since the lenders funded the payoff of the debt secured by the first and second trust deeds, the lenders intended their trust deeds to take the priority positions in title held by the paid off/reconveyed trust deeds, and the intent of the holder of the previously recorded trust deed was to be junior to the first and second trust deeds paid off with funds advanced by the lenders.

Holding: A California court of appeals held the lenders funding the payoff of first and second trust deeds, and recording trust deeds with the expectation of receiving the priority positions on title held by the trust deeds satisfied by use of their funds, have priority over the previously recorded third trust deed which was junior to the trust deeds refinanced based on the doctrine of equitable subrogation since the previously recorded trust deed holder’s expectations of being a junior trust deed holder are not unfairly disturbed. [Branscomb v. JPMorgan Chase Bank N.A. et al. (February 5, 2014) _CA4th_]

Editor’s note – Equitable subrogation permits a lender’s newly recorded trust deed to replace the original trust deed it is refinancing—subrogation—to maintain the priority position. In this case, the use of equitable subrogation ensures each lender’s trust deed holds the position they anticipated at the time their trust deed was recorded.

For a similar recent California appeals case on the same issue of equitable subrogation, see JPMorgan Chase Bank v. Banc of America Practice Solutions, Inc.