Does a lender funding the refinance of an existing trust deed take the priority position held by that trust deed when an intervening trust deed is recorded?

Facts: A lender funded the payoff of a debt evidenced by a note and secured by a first trust deed on property. On funding, the lender recorded a trust deed on the property. The lender expected the trust deed to have the same priority on title as the trust deed satisfied using the proceeds of its loan. Prior to recording the lender’s trust deed, the owner further encumbered the property with a trust deed junior to the trust deed refinanced by the lender. The owner later defaulted on the prior junior trust deed and its holder began foreclosure, asserting its priority as first in time to record. The lender sought to establish its trust deed as having priority over the previously recorded junior trust deed.

Claim: The lender claimed its trust deed has priority over the previously recorded junior trust deed since the lender funded the payoff of the debt secured by the first trust deed, that the lender intended its trust deed to take the priority position in title held by the paid off/reconveyed trust deed, and that the intent of the holder of the previously recorded trust deed was to be junior to the first trust deed paid off with funds advanced by the lender.

Counterclaim: The holder of the previously recorded trust deed claimed its trust deed was senior under California’s “first in time, first in right” system for setting priorities on title.

Holding: A California court of appeals held the lender funding the payoff of a first trust deed, and recording a trust deed with the expectation of receiving the priority position on title held by the trust deed debt satisfied by use of their funds, has priority over the previously recorded trust deed which was junior to the trust deed 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. [JPMorgan Chase Bank v. Banc of America Practice Solutions, Inc. (2012) 209 CA4th 855]

Editor’s note – Not to be mistaken as subordination, equitable subrogation entitled the refinance lender’s trust deed recording to “step into the shoes” of the original trust deed – subrogated – for purposes of priority on title. Thus, the application of the equitable subrogation doctrine placed each party’s trust deed in the senior and junior positions they expected when their trust deeds were recorded.

The initial muddling of positions occurred when the lender’s title insurer failed to properly date down their preliminary title report on the property at the time of closing. The insurer relied on its preliminary report made eight days before the junior trust deed was recorded and two months before closing and recording of the refinance lender’s trust deed. Had the recording of the junior trust deed been discovered prior to closing, the closing of the refinance would not have occurred, unless the holder of the junior trust deed first entered into a specific subordination agreement.