Note: Consistency is Key: The Court of Appeals of North Carolina Extends Equitable Subrogation in Real Estate Purchase Transactions in U.S. Bank Nat’l Ass’n v. Estate of Wood
By Parks Noyes
I. Introduction
Equitable subrogation as a remedy has been an established common law doctrine in the United States for over a century.[i] Recognized as a “legal fiction,” equitable subrogation arises in situations “whereby an obligation, extinguished by a payment made by a third [party], is treated as still subsisting for the benefit of this third [party], so that by means of it one creditor is substituted to the rights, remedies, and securities of another.”[ii] Equitable subrogation is used “only to further an equitable result” and its use “will be denied where it would lead to an uncontemplated and inequitable result or where it would work any injustice to the right of others.”[iii] The doctrine is highly favored by courts and given a liberal application due to it being “sufficiently elastic to meet the ends of justice.”[iv] It is now applied in a variety of legal contexts and in many jurisdictions across the United States, including North Carolina. Most commonly, the doctrine is invoked in mortgage priority disputes that arise during mortgage foreclosure actions.[v] In November of 2019, a divided panel of the North Carolina Court of Appeals in U.S. Bank Nat’l Ass’n v. Estate of Wood held for the first time that a party in North Carolina could assert the doctrine of equitable subrogation in the real estate purchase transaction context, resulting in a novel expansion of the doctrine under North Carolina law.[vi]
This case note analyzes the North Carolina Court of Appeals’ decision in U.S. Bank Nat’l Ass’n v. Estate of Wood; addresses the possible implications of the case on real estate transactions in North Carolina; and highlights the potential legal outcomes that may result from the decision. This case note is divided into four parts. Following the introduction in Part I, Part II provides relevant background information on the doctrine of equitable subrogation by discussing prior applications of the doctrine of equitable subrogation in North Carolina and the most recent application of the doctrine in the Wood case. Next, Part III highlights the consistent application of equitable subrogation in North Carolina by analyzing and comparing the decision to apply equitable subrogation in the real estate purchase context in Wood with the doctrine’s historical applications provided by the courts of North Carolina and the North Carolina General Assembly.[vii] Finally, the case note concludes in Part IV with a discussion of the implications of the Wood decision on real estate transactions in North Carolina and two potential legal outcomes that could result from the decision.
II. Background of Equitable Subrogation in North Carolina
As previously mentioned in Part I, supra, North Carolina has applied the doctrine of equitable subrogation across a variety of legal contexts. North Carolina’s definition of the doctrine is similar to the national recognition of equitable subrogation and its application.[viii] This section will address how the doctrine has been previously applied in North Carolina under case law and statutory provisions.
A. Prior Case Law Applying Equitable Subrogation
In general, North Carolina courts have allowed parties to assert equitable subrogation as a remedy in contractual disputes involving property.[ix] Three North Carolina cases cited by and discussed in U.S. Bank Nat’l Ass’n v. Estate of Wood provide the legal framework for applying the doctrine of equitable subrogation in the personal property and real property contexts: Peek v. Wachovia Bank & Trust Co., Commonwealth Land Title Ins. Co. v. Miller (In re Project Homestead, Inc.), and Bank of N.Y. Mellon v. Withers.[x] These cases are discussed infra and highlight the evolution of the doctrine in North Carolina over the past sixty years. The opinions of these cases are indicative of the consistent approach followed by North Carolina courts in allowing parties to invoke equitable subrogation in the personal and real property contexts.
a. Peek v. Wachovia Bank & Trust Co.
Decided by the Supreme Court of North Carolina in 1955, the Peek case is the earliest North Carolina case that discusses the doctrine of equitable subrogation.[xi] The case applied the doctrine to personal property secured by a mortgage. While the Peek case dealt with an assortment of legal issues, this section will only address the Supreme Court’s discussion of the doctrine of equitable subrogation as applied to the personal property in the case.
On May 7, 1951, Earl Peek purchased a 1948 model diesel tractor from Carolina Garage by executing a purchase money note secured by a chattel mortgage on the tractor in the amount of $4,026.81.[xii] The mortgage was subsequently recorded a week later in the Buncombe County Registry.[xiii] Approximately one year later, Peek sold and delivered the tractor to Sherman Moffitt for $5,000.00.[xiv] Moffitt agreed to pay the remaining balance of $2,038.58 then due on the lien note held by Carolina Garage owed by Peek, as well as to execute a new purchase money note secured by a chattel mortgage to Peek.[xv] The new note was for the deferred balance of $2,961.42 to be paid by Moffitt in monthly installments provided under the note.[xvi] The new note and corresponding chattel mortgage were executed on May 19, 1952, and the chattel mortgage was recorded June 6, 1952.[xvii] On June 23, 1952, Moffitt secured a loan from Wachovia Bank and Trust Company (“Wachovia”) in the approximate amount of $1,850.00 to pay off the note from Peek to Carolina Garage, while also executing a new installment payment note to Wachovia in the amount of $2,846.37 to pay off the note between Peek and Moffitt.[xviii] A new chattel mortgage on the tractor secured the note executed between Moffitt, and and the note was recorded on June 26, 1952.[xix]
A month later, Moffitt defaulted on payments of his note to Wachovia and surrendered possession of the tractor to the bank.[xx] At the same time of the default with Wachovia, Moffitt also failed to make installment payments to Peek due under the purchase money note between them.[xxi] Peek then brought suit in the District Court of Buncombe County against Moffitt and Wachovia, asserting that he was entitled to possession of the tractor because he had the first priority lien.[xxii] The trial court granted judgment in favor of Peek as owner of the tractor due to the prior recorded lien on the tractor.[xxiii] Wachovia appealed directly to the North Carolina Supreme Court, alleging in one of its assignments of error that the trial court had refused to submit the issue of subrogation.[xxiv]
In discussing the issue of subrogation, the Peek court described the doctrine of equitable subrogation 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.[xxv]
The Peek court adopted the common law interpretation of the doctrine of equitable subrogation in which a third party can step into the shoes of another party and assert their rights, while striking a balance in allowing a third party to invoke the doctrine based on that party’s intent in providing funds to pay off a prior encumbrance. Specifically, the court noted that “one who loans money which is used in paying off a mortgage or encumbrance is not entitled, from that circumstance alone, to be subrogated to the rights of the holder of the encumbrance.”[xxvi] Applying the doctrine to the case at hand, the court found that “there is neither allegation nor proof that the Wachovia loan was made for the purpose of discharging the prior lien held by Carolina Garage.”[xxvii] The Peek court admitted that there was inferential evidence supporting this claim, but asserted that Wachovia, “having failed to show that its funds were advanced with the intent and for the purpose of extinguishing the prior encumbrance, has failed to bring itself within the principles of the doctrine of subrogation.”[xxviii] Through this reasoning, the North Carolina Supreme Court held that the trial court properly declined submitting the issue of subrogation. Thus, Peek established the legal standard for a party in North Carolina to be able to invoke the doctrine of equitable subrogation in a legal proceeding notwithstanding the inapplicability of the doctrine to the facts of the case.[xxix]
b. Commonwealth Land Title Ins. Co. v. Miller (In re Project Homestead, Inc.)
Decided in 2007, In re Project Homestead, Inc. arose in the bankruptcy context and resulted in an expansion of the doctrine of equitable subrogation in North Carolina law.[xxx] Similar to the Peek case, In re Project Homestead, Inc. dealt with an assortment of legal issues, but this section will only address the United States Bankruptcy Court for the Middle District of North Carolina’s discussion of the doctrine of equitable subrogation as it is applied in the case.
Project Homestead, Inc. (“PHI”) was a North Carolina non-profit corporation engaged in the business of developing and selling affordable housing to lower income purchasers in North Carolina.[xxxi] In 2003, PHI sold six separate properties to six different purchasers, leading to the purchasers contracting with PHI and obtaining loans from various lenders in order to finance their home acquisitions.[xxxii] Closings were scheduled in early 2003, and each had the same closing attorney, Armina Swittenberg.[xxxiii] Prior to each closing, lenders wired the necessary loan proceeds for the purchasers to Swittenberg’s trust account.[xxxiv] At every closing, the purchasers wired funds to PHI in exchange for their deeds, and then they executed promissory notes along with deeds of trust to secure the notes with their lenders.[xxxv] All three documents (the deeds, notes, and deeds of trusts) were left with Swittenberg to be recorded at the register of deeds.[xxxvi] Each of the six properties involved in these transactions was encumbered by a prior deed of trust from PHI.[xxxvii] In each transaction, Swittenberg retained a sufficient amount of funds at the closing to pay off the prior deeds of trust, and she did pay off the prior deeds.[xxxviii] However, Swittenberg failed to record any of the documents from the six transactions, and PHI filed for Chapter 7 bankruptcy on January 24, 2004.[xxxix] The lenders and purchasers filed adversary proceedings on the bankruptcy to seek declaratory relief to establish the purchasers as owners of the six properties with the lenders having priority lien rights under the promissory notes.[xl] William Miller, the trustee of the bankruptcy for PHI, denied that the lenders and purchasers were entitled to relief and asserted counterclaims against them for titles to the properties.[xli]
The lenders’ and purchasers’ third claim sought declaratory judgment that lenders were equitably subrogated to the first lien position held by the previous lenders of PHI’s deeds of trust on the properties and that the lenders held a first lien on the properties.[xlii] Only four of the six properties had deeds of trust still of record, as two of the properties’ deeds of trust were cancelled and no longer constituted encumbrances for purposes of the public record.[xliii] The court noted that only the lenders of the four properties with deeds of trust of record were entitled to the remedy of equitable subrogation; and, if successful, these lenders would take priority over Miller as the trustee.[xliv] In its determination of whether the lenders could recover under equitable subrogation, the court stated that the context “in which the loans were made by the [l]enders and in which the proceeds of the loans were disbursed” is “an important circumstance to be considered.”[xlv] In reviewing the facts surrounding the property transactions, the court concluded that there was sufficient evidence indicating that the lenders’ loans to the purchasers were intended to pay off PHI’s prior deeds of trust and that the payments were “necessary to protect the [l]enders’ interests as secured lenders who were to have a first priority deed of trust on the [p]roperties.”[xlvi] Miller attempted to argue that Peek controlled and limited the application of equitable subrogation to where “the borrowed funds were . . . used to pay an obligation of the [purchasers],” but the court rejected this argument and held that the lenders were entitled to equitable subrogation as to the four properties with recorded deeds of trust.[xlvii] Thus, the U.S. Bankruptcy Court for the Middle District of North Carolina allowed the lenders to invoke equitable subrogation as applied to real property in the bankruptcy context for the first time in In re Project Homestead, Inc., expanding the doctrine in a context in which it had previously not been applied.
c. Bank of N.Y. Mellon v. Withers
In 2002, June Withers (“June”) was the sole owner of a piece of property located in Durham, North Carolina.[xlviii] During this year, June and her daughter, Rhonda Withers (“Rhonda”), sought a loan from Popular Financial Services (“PFS”) to refinance the prior deed of trust on the property from Accredited Home Lenders (“AHL”).[xlix] To qualify for the loan from PFS, June and Rhonda agreed to two conditions: (1) that PFS would have a first position lien on the property through a new deed of trust executed by both June and Rhonda and (2) that June would execute a quitclaim deed with June as the grantor and June and Rhonda as joint tenants.[l] In turn, PFS instructed the closing attorney, Natasha Newkirk, to prepare the quitclaim deed with these agreed-upon conditions and to pay the prior deed of trust to AHL in full.[li]
Due to a mistake by Newkirk, the names of June’s three other daughters were added to the quitclaim deed, which resulted in all five family members becoming tenants in common rather than only June and Rhonda being joint tenants.[lii] On January 10, 2003, Newkirk recorded both the erroneous quitclaim deed and the new deed of trust in Durham County. Newkirk then paid off the AHL deed of trust in full.[liii] Thereinafter, PFS assigned the new deed of trust to the Bank of New York Mellon (“Bank of NYM”).[liv]
Nine years passed before Bank of NYM pursued action on the Withers’ property. On March 6, 2012, the bank filed an action against the five tenants seeking to reform the deed of trust to include the portions of the property held by the three other daughters “so as to impose a constructive trust on the entirety of the property or, in the alternative, to equitably subrogate the deed of trust to the prior deed held by AHL.”[lv] June passed away on December 28, 2013, and shortly thereafter, Rhonda executed another quitclaim deed to Bank of NYM transferring the entirety of her interest in the property.[lvi] As a result, the only remaining defendants on the bank’s previously filed action were June’s three daughters who were mistakenly included on the erroneous quitclaim deed.[lvii] Bank of NYM and the remaining defendants each filed motions for summary judgment.[lviii] After a hearing, the trial court denied Bank of NYM’s request to reform the deed of trust and to impose a constructive trust, and then granted the defendants’ motion for summary judgment on those issues.[lix] However, the trial court granted the bank’s motion for summary judgment to quiet title under the doctrine of equitable subrogation.[lx] The defendants appealed the ruling, which resulted in the North Carolina Court of Appeals’ opinion in Bank of N.Y. Mellon v. Withers.
In a unanimous decision, the North Carolina Court of Appeals affirmed the trial court’s decision. Writing for the court, Judge Ann Marie Calabria established the standard of judicial review to be de novo for the trial court’s finding of summary judgment.[lxi] Citing the definition of equitable subrogation provided in Peek, the Withers court stated that the doctrine “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.’”[lxii] Stressing that the doctrine is an equitable remedy in which its purpose is “the doing of complete, essential, and perfect justice between all the parties without regard to form, and its object is prevention of injustice,” the court found that the bank was a “party in whose favor the right of subrogation exists” and “is entitled to all of the remedies and security which the creditor had against the person whose debt was paid.”[lxiii] In reviewing the facts of the case, the court decided that PFS had loaned June and Rhonda $63,425.00 to pay off the prior deed of trust in full to AHL for the Durham property in exchange for a first position lien on that property.[lxiv] Due to Newkirk’s mistake in drafting the quitclaim deed, the court held that “equity requires that [PFS’s] funds were advanced for the purpose of discharging the prior encumbrance.”[lxv] Thus, the court, determining an inequitable outcome had resulted, allowed equitable subrogation as a remedy for PFS to overcome the mistake of Newkirk’s drafting error. The court held that these remedies would be inadequate “due to land’s unique nature,” and rejected the defendants’ final contention that the bank had adequate remedies at law (i.e. damages).[lxvi] In allowing PFS to invoke the doctrine of equitable subrogation in Withers, the North Carolina Court of Appeals demonstrated its willingness to provide the doctrine as a remedy to parties involved in a real estate contract dispute.
B. Statutes Applying Equitable Subrogation
In addition to common law subrogation, the North Carolina General Assembly has provided contracting parties a statutory right to equitable subrogation in certain legal contexts.[lxvii] The General Assembly provided equitable subrogation rights to subcontractors and suppliers in N.C.G.S. §§ 44A-18 and 44A-23.[lxviii] These provisions are located in the Chapter 44A of the North Carolina General Statutes which governs the statutory process concerning how the parties in the construction industry can file liens to recover money owed to them under a contract for a construction project.[lxix] Due to the large number of parties involved on a construction project, issues involving payment to lower level subcontractors and suppliers typically arise due to the trickle-down nature of payments from owner to general contractor, general contractor to first-tier subcontractor, etc.[lxx] As a result of this system, lower-level subcontractors or suppliers may have completed all of their obligations under a contract, but possibly may never receive compensation for their services or materials provided on the project. Thus, the General Assembly, determining this was resulting in inequitable results to lower-level subcontractors and suppliers, provided a statutory right for them to recover monies owed to them by higher-level construction parties such as owners and general contractors by allowing them “to step into the shoes” of a higher level party by claiming a subrogated lien on the monies owed to them under their respective contract.[lxxi] Discussed further in Part IV infra, this case note will analyze whether the subrogation right provided by statute in the construction law context is consistent with the decision of the North Carolina Court of Appeals in Wood.[lxxii]
C. The Current Case: S. Bank Nat’l Ass’n v. Estate of Wood
a. Factual and Procedural Background
In April 2005, Mr. John Wood (“John”) agreed to purchase real property in Wilmington, North Carolina from Ms. Barbara Buchanan (“Buchanan”) in the amount of $878,000.00.[lxxiii] In connection with the forthcoming transaction, Alpha Mortgage Corporation (“AMC”) agreed to loan John $650,000.00 for the transaction conditioned upon “(1) the loan being used to pay off an existing lien on the property allegedly held by one of Buchanan’s creditors and (2) the execution of a deed of trust on the property that would give AMC a first lien security interest therein.”[lxxiv]
Closing of the transaction took place on June 17, 2005.[lxxv] As agreed upon, AMC made the loan to John and the loan proceeds were applied to pay off the existing lien on the property of the previous owner, Buchanan.[lxxvi] After John executed a promissory note with AMC, Buchanan entered into and recorded a general warranty deed in the New Hanover County Register that transferred ownership of the property to John; his wife, Annette Wood (“Annette”); his brother, Edward Wood (“Edward”); and Edward’s wife, Mary Wood (“Mary”).[lxxvii] However, due to an error on the closing attorney’s part, only John and Annette signed the deed of trust for the promissory note, rather than all four parties that had executed the recorded deed.[lxxviii] Thus, Edward and Mary took their one-half combined interest in the property unencumbered by any security interest. In December 2008, the promissory note went into default, initiating the beginning of foreclosure proceedings on the property.[lxxix] Those proceeds were dismissed as inactive in July 2012.[lxxx] On October 23, 2012, AMC assigned its deed of trust “together with the note(s) and obligation therein described,” on the property to U.S. Bank National Association (“U.S. Bank”).[lxxxi]
b. Majority Opinion of the Court of Appeals
Judge Allegra Collins, with Judge Richard Dietz concurring, gave the opinion of the Court of Appeals.[xciv] The court divided its opinion into five sections for discussion: Appellate Jurisdiction, Standard of Review, Standing, Equitable Subrogation, and Laches. Noting that Mary had properly appealed whether U.S. Bank was entitled to summary judgment on its claim to quiet title, the court began its opinion establishing its own appellate jurisdiction over the claims and stating that it must apply a de novo standard of review to an order granting or denying summary judgment.[xcv]
Turning to the third issue of standing, the court found that U.S. Bank had sufficiently pled standing to quiet title to Mary’s property pursuant to .[xcvi] Citing Wells v. Clayton, the Court of Appeals stated that “a plaintiff must show that the ‘plaintiff [] own[s] the land in controversy, or ha[s] some estate or interest in it[,]’ and that ‘the defendant [] assert[s] some claim to such land adverse to the plaintiff’s title, estate, or interest.’”[xcvii] While the court agreed with Mary that U.S. Bank’s copy of the promissory note alone was insufficient for standing purposes, the court found that U.S. Bank had sufficiently alleged that it had been assigned the deed of trust from AMC and that Mary was claiming an adverse interest in the property.[xcviii] In rejecting Mary’s contention regarding the promissory note, the court noted that Mary could cite to “no authority standing for the proposition that a plaintiff’s failure to show that it was the holder of a promissory note executed along with a deed of trust in a real-estate transaction is fatal to the plaintiff’s standing to sue to quiet title to the property.”[xcix] Based on this reasoning, the court concluded that U.S. Bank had standing to sue Mary.
The court then turned to the issue of whether equitable subrogation was an available remedy to U.S. Bank to quiet title to the property. On appeal, Mary argued that the doctrine of equitable subrogation was unavailable to U.S. Bank because AMC did not provide money to terminate the debt owed by John, but rather, provided money to terminate the debt owed by Buchanan, the previous owner of the property; and, thus, equitable subrogation could not be applied in this case because the lender did not provide money to a borrower (John) to terminate prior debt owed by him. [c] Denying this argument, the Court of Appeals held that that the doctrine of equitable subrogation could apply in the context of a real estate purchase transaction and concluded that the trial did not commit an error of law by denying Mary summary judgment. Noting neither U.S. Bank nor Mary had cited to any controlling authority holding that equitable subrogation is or is not available in the real estate purchase context, the court found that case law in North Carolina and persuasive legal authority from other states indicated that the doctrine of 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.”[ci]
The final legal issue that the court addressed was whether Mary’s affirmative defense of laches was applicable in the case. Mary’s main argument was that the trial court’s finding of summary judgment for U.S. Bank would be erroneous because whether U.S. Bank’s delay in bringing the suit constituted laches would also mean that there was a genuine issue of material fact between the parties in the case. Similar to equitable subrogation, laches is a doctrine that is based in equity and “is designed to promote justice by preventing surprises through the revival of claims that have been allowed to slumber until evidence has been lost, memories have faded, and witnesses have disappeared.”[cii] To invoke the doctrine of laches as an affirmative defense in North Carolina, a party must show: (1) there was a delay of time that resulted in a change in the condition of the property or in the relations of the parties; (2) the delay was unreasonable and worked to the disadvantage, injury, or prejudice of the party seeking to invoke the doctrine of laches; and (3) the party against whom laches is sought to be invoked knew of the existence of grounds for the claim sought to be barred.[ciii] Mary argued that U.S. Bank’s delay in bringing the suit prejudiced her financially, as well as affected her ability to make her defense.[civ] Mary pointed to her inability to sell her share of the property along with making other witnesses’ testimonies, like John’s and the transaction closing attorney’s, unavailable at trial.[cv] Surprisingly, U.S. Bank conceded that it had “knowingly delayed bringing the action for more than eight years;” however, the bank stated that Mary’s allegations of prejudice were insufficient because the property’s value increased during the period of delay and Mary lived on the property without paying rent during this time.[cvi] The court decided that Mary raised genuine issues of material fact concerning the prejudice and delay she faced in U.S. Bank bringing the suit against her.[cvii] Thus, the Wood court held that the trial court had erroneously granted summary judgment to U.S. Bank.
After its discussion of the five legal issues present in the case, the North Carolina Court of Appeals concluded that it must dismiss some of Mary’s issues raised on appeal, while also reversing the trial court’s May 1, 2018 order and remanding to the trial court for further proceedings to resolve the issues of laches and its previous finding of summary judgment for U.S. Bank.[cviii] The court stressed that U.S. Bank “must convince the factfinder that it falls within the ambit of Peek and other decisions setting forth what a plaintiff must prove in order to avail itself of the doctrine of equitable subrogation.”[cix]
c. Dissenting Opinion of the Court of Appeals
Writing separately, Judge Hunter Murphy dissented from the court’s opinion, one that he criticized as “an expansion of our State’s common law.”[cx] In his dissent, Murphy stated that “it is not within our authority to expand the doctrine of equitable subrogation in the context of purchase transactions.”[cxi] Murphy placed emphasis on there being no controlling authority or precedent to follow in the case, so the Court of Appeals should defer until the issue is “presented to our Supreme Court or our Legislature[.]”[cxii] While agreeing with the court’s opinion of how the trial court erred in granting summary judgment to U.S. Bank, Murphy said that he would reverse the trial court’s order and hold summary judgment in favor of Mary, essentially suggesting that he would maintain the status quo of the current application of equitable subrogation under North Carolina law.[cxiii] While the dissent states that the court’s opinion would be “an expansion of our State’s common law,” he does not take into consideration nor addresses that the Peek case introduced the idea that parties can invoke equitable subrogation as a remedy under certain circumstances.[cxiv]
III. Analysis: Is the Wood Decision Consistent with Equitable Subrogation’s Prior Applications in North Carolina?
In reviewing the case law of North Carolina relating to equitable subrogation in the property and real estate context and the North Carolina General Assembly’s commitment to providing the right to equitable subrogation to legal parties, the majority’s opinion in Wood is consistent with the prior applications of equitable subrogation in North Carolina law.
A. Consistency with Prior Judicial Applications
From a judicial standpoint, the majority’s opinion in Wood is consistent with the historical applications of equitable subrogation in North Carolina case law. As mentioned in Part II, supra, the majority’s opinion in Wood relies on the legal framework outlined in the Peek, Withers, and In re Project Homestead, Inc. cases (collectively, “the Equitable Subrogation Precedent Cases”) to apply the doctrine of equitable subrogation in real estate purchase transactions for the first time. The decision in Wood is consistent with the prior applications of equitable subrogation in the Equitable Subrogation Precedent Cases in two key manners: (1) an error gave rise to the legal issue in the case and (2) the court engaged in an intensive weighing of the facts to evenhandedly balance the interests of the parties to determine if a party could invoke equitable subrogation as a remedy.
The facts of the Wood case are similar to the Equitable Subrogation Precedent Cases in that an error occurred either in the drafting and execution of the legal instruments involved in the transaction or in the proper recording of those instruments with the appropriate local government office.[cxv] If these errors had not occurred, the party seeking a remedy in each of the Equitable Subrogation Precedent Cases would not have been in a position where his/her interest in the personal or real property was disputed by the other party. However, due to these errors, each party’s options in seeking a remedy were limited. Thus, the doctrine of equitable subrogation allowed a party to essentially undo the error and be placed into the legal position in which the party would have been “but-for” the error. In Wood, an error by the closing attorney in leaving two parties off of the deed of trust caused the legal issue. Without the error, Mary would not have an unencumbered one-half interest in the property, and U.S. Bank could have foreclosed on the property after the default. Thus, the error in Wood affected U.S. Bank’s available legal remedies.
After deciding an error occurred that gave rise to the legal issue in the case, a court must then weigh the facts to determine if a party can successfully invoke the doctrine of equitable subrogation. In each of the Equitable Subrogation Precedent Cases, the presiding court attempted to balance the interests of both parties by undertaking a rigorous factual inquiry of the outcome that gave rise to the dispute to determine if the outcome was truly equitable for all parties. This inquiry undertaken by the courts is essential to promoting the fairness and impartiality of the doctrine of equitable subrogation by only allowing a party to successfully invoke the doctrine under the proper circumstances. In balancing the interests of both parties in the inquiry, a court must engage with any other equitable principles or doctrines that may apply to any party involved in the case.
The majority in the Wood decision judiciously engaged in this intensive inquiry in its opinion. Similar to the courts in Withers and In re Project Homestead, Inc., the Wood court found that, based on the facts, allowing the party (U.S. Bank) to invoke the doctrine of equitable subrogation was necessary in order to prevent injustice to it. If U.S. Bank were unable to invoke the doctrine, Mary would have essentially received a windfall living on the property for years without making the agreed-upon mortgage payments. However, unlike the Withers and In re Project Homestead, Inc. courts, the Wood court, in engaging in its weighing of the facts, determined that the other party (Mary) also had her own equitable doctrine (laches) as a viable defense to U.S. Bank’s claim of equitable subrogation. Thus, by engaging in the inquiry, the court balanced the interests of both parties and found that each party had an available right to assert competing equitable doctrines. As mentioned in Part II, supra, this finding by the court ultimately led to their decision to allow U.S. Bank to invoke the doctrine of equitable subrogation while also reversing the finding of summary judgement in U.S. Bank’s favor. The majority’s opinion in Wood, in identifying an error and engaging in an in-depth weighing of the facts and circumstances of the case, applied equitable subrogation in a new legal context in a manner that was consistent and comparable with the prior judicial applications of equitable subrogation in North Carolina.
B. Consistent with Prior Legislative Applications
Furthermore, the majority’s opinion in Wood is consistent with the North Carolina General Assembly’s demonstrated commitment to providing equitable remedies, including equitable subrogation, to a party who may not have another viable claim of action against an opposing party. As mentioned in Part II, supra, the General Assembly has provided equitable subrogation rights by statute to parties involved in the construction industry as a means of recovering money owed to them under the contract.
In noticing issues concerning if the statute was truly leading to equitable results, the General Assembly passed Session Laws 2012-158 and 2012-175 in July 2012, which resulted in significant changes to North Carolina’s mechanic’s lien statutes as they are applied to parties in construction law.[cxvi] These statutes provide a means of legal recourse to contractors, subcontractors, or suppliers to recover funds owed to them for services or materials rendered on construction projects.[cxvii] Among other provisions, the amendments to the lien statutes require owners to designate a lien agent for any private construction projects valued at $30,000.00 or more and in which contractors, subcontractors, and suppliers must comply with additional notice requirements to parties on the construction project to perfect their claims of liens.[cxviii] The General Assembly passed the laws “in an attempt to fix the so-called ‘hidden’ lien problem,” as well as “to address the ‘double payment’ issue often faced by general contractors on public projects.”[cxix] By acknowledging that the construction industry was experiencing issues with the current lien laws resulting in inequitable results to owners and contractors, the General Assembly further demonstrated its commitment to promote equitable principles; it amended the statutes to provide fair procedures for all parties involved in attempts to pay and receive monies owed under the construction contract. Similar to the General Assembly’s approach in continually refining the statute by balancing parties’ interests equitably, the majority’s decision in Wood placed an emphasis on reviewing the outcome for all parties of a contractual dispute in order to determine whether all parties are put in a fair position. While some may argue that the bargaining power of these lenders in the real estate context is greater than the subcontractors or suppliers in the real estate context, the statutory intent of the General Assembly, similar to the Wood court in its opinion, was to evenhandedly weigh the interests and equity of the parties involved in a contractual dispute and to allow a party to invoke equitable subrogation to remedy an inequitable outcome. Thus, the decision in Wood is consistent with prior legislative applications of equitable subrogation in North Carolina in the construction law context.
IV. Conclusion: The Implications of the Wood Decision
The Court of Appeals’ decision in Wood leaves more questions unanswered than answered in terms of its implications on real estate transactions in North Carolina. The Court of Appeals did not address whether the doctrine of equitable subrogation could be invoked in commercial real estate transactions, rather than just residential ones like the property in Wood. However, the analysis, on its face, would be no different than the Court of Appeals in Wood. Other state courts such as Indiana and Arizona that have allowed equitable subrogation to be invoked in real estate purchase transactions have not limited its application to just residential, but rather, have allowed it to be invoked in the commercial context, as well.[cxx] The majority opinion of the Court of Appeals specifically points to these states as persuasive authority; thus, making it probable that the Wood court agrees with a broader applicability of the doctrine. Some critics of the doctrine’s application in Wood may argue that there are other legal remedies available for lenders to pursue, making their invocation for an equitable remedy inappropriate in such cases. However, due to the complexity of the facts and parties involved in these cases, legal remedies would be inadequate because lenders would be required to bring in insurance companies to invoke the legal remedies, which would prolong litigation through extensive discovery and trial proceedings and could possibly impact the lenders’ recovery not making them “whole” under the law. Therefore, equitable subrogation provides a remedy to lenders that promotes judicial efficiency and places them in the best position to recover monies owed to them.
There are two outcomes likely to result from the decision in Wood: one that is judicial and one that is legislative. Either outcome would satisfy Judge Murphy’s dissent, as it would require action by the Supreme Court of North Carolina or the North Carolina General Assembly. Mary moved for an extension of time to file a brief in the North Carolina Supreme Court after the Court of Appeals decision, signaling a possible appeal to North Carolina’s highest court.[cxxi] However, the two parties settled in an undisclosed settlement in February 2020, indicating that the active appeal will soon be dismissed as a condition of settlement.[cxxii] This settlement between parties likely means that the issue raised in Wood concerning the application of the doctrine of equitable subrogation in real estate purchase transactions will remain unresolved. To ensure consistency in the doctrine’s application, the North Carolina Supreme Court should hear a case involving equitable subrogation in a real estate purchase transaction to make a final determination. Furthermore, the Court of Appeals’ application of the doctrine in the real property context is consistent with other equitable principles and doctrines like specific performance and reformation promoted under North Carolina law by the state courts.[cxxiii] Once the North Carolina Supreme Court hears a case similar to the facts of Wood, the court should uphold the Court of Appeals’ decision to maintain a consistent application of equitable subrogation in the personal and real property contexts in North Carolina. In allowing a party to invoke equitable subrogation in a real estate transaction, the Supreme Court of North Carolina would establish controlling precedent on all North Carolina state courts and hopefully resolve questions regarding the legal extent of the doctrine’s application in the real property context. The Supreme Court could look to Indiana and Arizona to understand how the doctrine has impacted real estate transactions within those states in order to craft a standard that works best for all parties involved in real estate transactions, further demonstrating the North Carolina courts’ dedication to promoting equitable principles in their decisions.
If the North Carolina Supreme Court declines to hear another case involving the applicability of equitable subrogation in a real estate purchase transaction or if the Supreme Court were to overturn the Court of Appeals ruling in Wood in a future decision, the North Carolina General Assembly could step in and pass a new statute providing equitable subrogation rights in the real estate purchase context, similar in effect to N.C.G.S. § 44A-18 or N.C.G.S. § 44A-23, discussed supra in Part III. This legislative change would be consistent with the General Assembly’s desire to provide more equitable legal outcomes to parties involved in contractual disputes. Similar to the lien subrogation statutes and parties in the construction industry, the General Assembly could amend a statute providing equitable subrogation in the real estate purchase transaction context to ensure and promote equitable results for all parties involved in real estate transactions. For example, the General Assembly could impose a statute of limitations on such legal actions invoking equitable subrogation.
To not provide equitable subrogation in the real estate purchase transaction context would result in a legal paradox involving the General Assembly and the courts of North Carolina, leaving them at odds with previous applications of the doctrine in North Carolina. This paradox creates uncertainty for the future prospects of contractual disputes between lenders and purchasers involving real estate within North Carolina, and either the General Assembly or the Supreme Court of North Carolina must resolve it with further action.
[i] See James M. Mullen, The Equitable Doctrine of Subrogation, 3 Md L. Rev. 201, 201 (1939).
[ii] 83 C.J.S. Subrogation § 5 (2010).
[iii] Id. at § 34.
[iv] 73 Am. Jur. 2d Subrogation §§ 7-8 (2012).
[v] See Russell M. Finestein & Glenn Berman, The Doctrine of Equitable Subrogation: Should Actual Knowledge Bar Its Application? N.J. Law. (Apr. 2014).
[vi] 836 S.E.2d 270 (N.C. Ct. App. 2019).
[vii] One of the cases discussed (In re Project Homestead, Inc.) was decided by a federal bankruptcy court located in North Carolina. For this reason, I include this court as a “North Carolina court.”
[viii] See 27 N.C. Index Subrogation § 5 (4th ed. 2020); see also 2 Edmund T. Urban et al., N.C. Real Estate § 21:88 (3d ed. 2019).
[ix] See, e.g., Bank of N.Y. Mellon v. Withers, 240 N.C. App. 300, 771 S.E.2d 762 (2015).
[x] See U.S. Bank Nat’l Ass’n, 836 S.E.2d at 275–76.
[xi] See Peek v. Wachovia Bank & Trust Co., 242 N.C. 1, 86 S.E.2d 745, 1955 N.C. LEXIS 455 (1955).
[xii] Peek, 1955 N.C. LEXIS at 455. Complete facts of the case are only found in the Lexis Prior History.
[xiii] Id.
[xiv] Id.
[xv] Id.
[xvi] Id.
[xvii] Id. at 455–56.
[xviii] The $2,846.37 covered under the note included the loan, plus insurance premiums and prepaid interest charges. Id. at 456.
[xix] Id.
[xx] Id.
[xxi] Id.
[xxii] Id.
[xxiii] Id. at 467.
[xxiv] Id. at 10, 86 S.E.2d at 752, 1955 N.C. LEXIS at 477.
[xxv] U.S. Bank Nat’l Ass’n, 836 S.E.2d at 274 (citing Peek v. Wachovia & Trust Co., 242 N.C. 1, 15–16, 86 S.E.2d 745, 755–56 (1955) (internal quotation marks and citations omitted)).
[xxvi] Peek, 242 N.C. at 15, 86 S.E.2d at 755, 1955 N.C. LEXIS at 488.
[xxvii] Id. at 16, 86 S.E.2d at 755, 1955 N.C. LEXIS at 489.
[xxviii] Id. at 16, 86 S.E.2d at 755, 1955 N.C. LEXIS at 490.
[xxix] Some scholars might argue that the holding in Peek recognizing equitable subrogation is dicta. Dicta as defined by the North Carolina Supreme is “language in opinion not necessary to the decision . . . and later decisions are not bound thereby.” Trs. of Rowan Tech. Coll. v. Hammond Assoc., 313 N.C. 230, 242, 328 S.E.2d 274, 281 (1986). The Peek court recognized the doctrine but declined to apply it in the case.
[xxx] See In re Project Homestead, Inc., 374 B.R. 193 (Bankr. M.D.N.C. 2007).
[xxxi] Id. at 198.
[xxxii] Id.
[xxxiii] Id.
[xxxiv] Id.
[xxxv] Id.
[xxxvi] Id.
[xxxvii] Id.
[xxxviii] Id. at 198–99.
[xxxix] Id. at 199.
[xl] Id.
[xli] Id.
[xlii] Id. at 205.
[xliii] Id. In footnote 3, the court notes that “[t]he fact that the indebtedness secured by the deeds of trust was satisfied has no effect upon whether equitable subrogation may be obtained because equitable subrogation treats the satisfied obligation ‘as still subsisting for the benefit of [the provider of the funds that satisfied the obligation], who is thus substituted to the rights, remedies, and securities of another.’” Id. at n.3 (quoting Peek, 242 N.C. at 15, 86 S.E.2d at 755).
[xliv] Id.
[xlv] Id. at 206.
[xlvi] Id. at 207.
[xlvii] Id. at 207–08.
[xlviii] Bank of N.Y. Mellon v. Withers, 240 N.C. App. 300, 300, 771 S.E.2d 762, 763 (2015).
[xlix] Id. at 300–01, 771 S.E.2d at 763.
[l] Id. at 301, 771 S.E.2d at 763.
[li] Id.
[lii] Id. at 301, 771 S.E.2d at 764.
[liii] Id.
[liv] Id.
[lv] Id.
[lvi] This also included any interest obtained by Rhonda following the passing of June. Id.
[lvii] Id.
[lviii] Id.
[lix] Id.
[lx] Id.
[lxi] Id. at 302, 771 S.E.2d at 764.
[lxii] Id. (quoting Trs. 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)).
[lxiii] Id. (quoting Journal Pub. Co. v. Barber, 165 N.C. 478, 487–88, 81 S.E. 694, 698 (1914); Am. Gen. Fin. Servs., Inc. v. Barnes, 175 N.C. App. 406, 409, 623 S.E.2d 617, 619 (2006).
[lxiv] Id. at 302, 771 S.E.2d at 765.
[lxv] Id. at 303, 771 S.E.2d at 765.
[lxvi] Id. at 304, 771 S.E.2d at 765. The court does not address why money damages would not be an adequate remedy for a lender. Presumably, the lender would only be concerned with recouping the money to repay their loan, rather than acquiring the land and its “unique nature.”
[lxvii] See, e.g., N.C. Gen. Stat § 44A-18 (2013).
[lxviii] See N.C. Gen. Stat § 44A-18 (2013); N.C. Gen. Stat § 44A-23 (2013).
[lxix] See N.C. Gen. Stat § 44A, et seq.
[lxx] See David A. Senter, Payment in Construction Law 369, 369–98 (William Allensworth et al. eds., 2009).
[lxxi] See N.C. Gen. Stat § 44A-18 (2013); N.C. Gen. Stat § 44A-23 (2013).
[lxxii] See N.C. Gen. Stat § 44A, et seq.
[lxxiii] U.S. Bank Nat’l Ass’n, 836 S.E.2d at 272.
[lxxiv] Id.
[lxxv] Id.
[lxxvi] Id.
[lxxvii] Id.
[lxxviii] Correy E. Stephenson, COA expands subrogation to purchase transactions, N.C. Laws. Wkly. (Nov. 19, 2019).
[lxxix] U.S. Bank Nat’l Ass’n, 836 S.E.2d at 272.
[lxxx] Id.
[lxxxi] See Assignment of Deed of Trust, New Hanover Register of Deeds (October 29, 2012, 3:53 PM), https://search.newhanoverdeeds.com/view_image.php?file=2012037457-00&type=pdf&filesavename=B5683-P2963; see also U.S. Bank Nat’l Ass’n, at 275 (quoting Restatement (Third) of Prop.: Mortgages § 5.4(b) (1997)).
[lxxxii] Chris Burti, U.S. Bank Na’tl Ass’n v. Wood (18-1259) 11/5/2019 Equitable Subrogation Applicable in Purchase Transaction, Statewide Title (Dec. 1, 2019). Quitclaim is defined as “to convey all of one’s interest in (property), to whatever extent one has interest.” Quitclaim, Black’s Law Dictionary (11th ed. 2019).
[lxxxiii] U.S. Bank Nat’l Ass’n, at 273.
[lxxxiv] Id.
[lxxxv] Id.
[lxxxvi] Id.
[lxxxvii] Id.
[lxxxviii] Id.
[lxxxix] Id.
[xc] Id.
[xci] Id.
[xcii] Id.
[xciii] Id.
[xciv] Id.
[xcv] Id. at 273–74 (citing Variety Wholesalers, Inc. v. Salem Logistics Traffic Servs., LLC, 365 N.C. 520, 523, 723 S.E.2d 744, 747 (2012)).
[xcvi] Id. at 274.
[xcvii] Id.
[xcviii] Id. at 274–75.
[xcix] Id. at 274.
[c] Id. at 275.
[ci] Id. at 276.
[cii] Id. (quoting Stratton v. Royal Bank of Can., 211, N.C. App. 78, 88–89, 712 S.E.2d 221, 230 (2011)).
[ciii] See MMR Holdings, LLC v. City of Charlotte, 148 N.C. App. 208, 209–10, 558 S.E.2d 197, 198 (2001).
[civ] U.S. Bank Nat’l Ass’n, at 276.
[cv] As previously mentioned in this section, John Wood died in December 2015. However, even though the closing attorney for the transaction was alive during the trial, he said that he could not recall the details of the transaction. Id. at 276–77.
[cvi] Id. at 277.
[cvii] Id.
[cviii] Id.
[cix] Id. at 276.
[cx] Id. at 277.
[cxi] Id.
[cxii] Id. (quoting Shera v. N.C. State Univ. Veterinary Teaching Hosp., 219 N.C. App. 117, 126, 723 S.E.2d 352, 358 (2012)).
[cxiii] Id.
[cxiv] Id. at 277; see Peek, 242 N.C. at 15, 86 S.E.2d at 755, 1955 N.C. LEXIS at 488.
[cxv] None of the Equitable Subrogation Precedent Cases explain the role of legal malpractice insurance or title insurance as a practical remedy apart from equity. Presumably the attorneys all had legal malpractice insurance for negligence. Likewise, presumably the lenders had title insurance. It is not known what role insurance played behind the scenes in these cases.
[cxvi] Jason T. Strickland, SPECIAL BULLETIN: North Carolina’s New Mechanic’s Lien Law – The Ground Has Shifted, Ward & Smith, P.A. (Oct. 11, 2012), https://www.wardandsmith.com/articles/north-carolinas-new-mechanics-lien-law-the-ground-has-shifted.
[cxviii] See N.C. Gen. Stat. § 44A-7, et seq.
[cxix] Drew Chapin, Legislature Makes Significant Changes to North Carolina’s Lien and Bond Law, Conner Gwyn Schenck PLLC (July 2012), https://cgspllc.com/legislature-makes-significant-changes-to-north-carolinas-lien-and-bond-law/.
[cxx] See Gibson v. Neu, 867 N.E.2d 188 (Ind. Ct. App. 2007), Sourcecorp, Inc. v. Norcutt, 227 Ariz. 462 (Ariz. Ct. App. 2011).
[cxxi] See U.S. Bank Nat’l Ass’n v. Wood, 2020 N.C. LEXIS 10 (order granting motion for extension of time to file brief).
[cxxii] Telephone interview with Robert Shields, Attorney, Manning Fulton & Skinner P.A. (Feb. 24, 2020); Telephone Interview with Susan Keelin, Attorney, Susan M. Keelin, PLLC (Feb. 27, 2020).
[cxxiii] See Knott v. Cutler, 224 N.C. 427 (1944) (holding that a party is entitled to specific performance as an equitable remedy); see also Nationstar Mortg., LLC v. Dean, 820 S.E.2d 854 (N.C. Ct. App. 2018) (holding that a party is entitled to reformation as an equitable remedy).