Late this summer, the Arizona Court of Appeals in Bank of America, N.A. v. Felco Business Services, Inc. ruled that a claim of senior priority under the doctrine of equitable subrogation is not waived for failure to object to a trustee’s sale.

Two owners took out a loan and deed of trust from Countrywide. Months later, they took out another loan and deed of trust from a different lender. Then they refinanced the first loan and deed of trust with a new bank. The owners used the refinanced loan (secured with a third deed of trust) to pay off and release the original loan from Countrywide.

Then they defaulted on their loan to the second lender. The second lender noticed a trustee’s sale and notified Countrywide. Countrywide, a poster child for fraud and incompetence, did nothing. After the sale, Bank of America acquired all Countrywide assets in a bailout. Bank of America sued saying the third deed of trust for the refinanced loan had priority over the second lender’s deed of trust under the doctrine of equitable subrogation, which allows a deed of trust to assume the priority position of an earlier deed. The trial court held that A.R.S. § 33-811(C) required that a senior lien be asserted as a defense or objection to the trustee’s sale, such that the failure to object to the sale waived Plaintiffs’ claim of senior priority under the doctrine of equitable subrogation.

The Arizona Court of Appeals ruled that equitable subrogation is not a defense to a trustee’s sale and does not constitute a waiver under A.R.S. § 33-811(C) because lien priority is a separate matter from the validity of a trustee’s sale. Defendants could have conducted the sale even if Plaintiffs had asserted that it had a senior lien before the sale. A.R.S. § 33-811(C)’s express language does not preclude assertions of equitable subrogation. This law remained available to Bank of America after the trustee’s sale. Because equitable subrogation is an equitable remedy and its application depends on the particular facts of each case, the Arizona Court of Appeals remanded the matter back to determine whether applying the doctrine is applicable.

The card deck is very stacked in Arizona for the lender/bank/note holder. You must be very careful when borrowing and twice as careful when a default occurs under a loan. Feel free to give Arizona attorney Bill Miller a call (602-319-6899) if you are in a situation with a bank or lender that requires a second set of eyes.

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