Bank of America, N.A. v. Felco Business Services, Inc.

         Appeal from the Superior Court in Yavapai County No. V1300CV201180303 The Honorable Jeffrey G. Paupore, Judge Pro Tempore

          Renaud Cook Drury Mesaros, PA, Phoenix By Denise J. Wachholz, Richard H. Goldberg Counsel for Plaintiff/Appellant.

          Favor & Wilhelmsen PLLC, Prescott By David K. Wilhelmsen, Lance B. Payette Counsel for Defendants/Appellees.

          Presiding Judge Randall M. Howe delivered the opinion of the Court, in which Judge Lawrence F. Winthrop and Judge Jon W. Thompson joined.

          OPINION

          HOWE, JUDGE.

         ¶1 This appeal is from a declaratory action by lienholder Bank of America, N.A. ("Bof A") against intervening lienholder Felco Business Services, Inc. 401 (K) Profit Sharing Plan and FBS Sedona, LLC (collectively, "Felco"). After Felco foreclosed on its deed of trust and sold the subject property at a trustee's sale, Bof A sued for a declaration that its deed, recorded after Felco's, was equitably subrogated to a position superior to Felco's. Felco moved for partial summary judgment, arguing that Bof A waived its equitable subrogation claim by not raising it as an objection to the trustee's sale pursuant to A.R.S. § 33-811(C). Without addressing whether equitable subrogation applied, the trial court agreed with Felco, holding that Bof A's equitable subrogation claim was a pre-trustee's sale defense or objection that it waived by not asserting it before the sale.

         ¶2 On review, we hold that an equitable subrogation claim is not a defense or objection to a trustee's sale and is therefore not waivable under A.R.S. § 33-811(C). Accordingly, we reverse the trial court's granting of partial summary judgment in Felco's favor and remand to the trial court to determine whether equitable subrogation is appropriate in this case.

         FACTS AND PROCEDURAL HISTORY

         ¶3 In 2007, two property owners borrowed $200, 000 from Countrywide Home Loans, Inc. secured by a deed of trust ("DOT 1") to property in Sedona. This deed was recorded in February 2007. A few months later, the borrowers borrowed $1.5 million from Felco to improve their Sedona property. The borrowers secured $600, 000 of this loan with a deed of trust ("DOT 2") and assignment of rents to the Sedona property. DOT 2 was recorded in June 2007.

         ¶4 The following year, Countrywide Home Loans' sister corporation, Countrywide Bank, offered to refinance the borrowers' $200, 000 loan at a lower interest rate. The borrowers accepted the offer and borrowed $204, 000 from Countrywide Bank secured by a deed of trust ("DOT 3") to the same Sedona property, which was recorded in June 2008. Although the borrowers failed to tell Countrywide Bank about DOT 2 when they refinanced their loan, DOT 3 specifically stated that it must be in the first lien position, superior to any other loans. The borrowers used $200, 000 of the refinancing loan to pay off and release the original loan. The deed of release and conveyance for DOT 1 was recorded in July 2008.

         ¶5 In the meantime, the borrowers defaulted on their payments on the Felco loan. In February 2009, Felco issued a statement of breach and notice of trustee's sale pursuant to DOT 2 to occur in May. In connection with that notice, Felco obtained a trustee's sale guarantee that revealed DOT 3, but showed that the deed was subordinate to DOT 2. Accordingly, Felco sent two notices of the trustee's sale to Countrywide Bank, which failed to respond to the notice and did not seek to enjoin the sale.

         ¶6 At the May 2009 sale, FBS Sedona successfully entered a credit bid of $974, 657.07-the exact amount it calculated was owed to it under the promissory note and DOT 2. FBS Sedona promptly recorded the resulting deed later in May 2009. Thereafter, FBS Sedona leased out the property, but paid all applicable property taxes, maintenance expenses, and insurance.

         ¶7 At some point after the trustee's sale, Bof A acquired all Countrywide entities, including Countrywide Home Loans and Countrywide Bank. In August 2009, DOT 3 was assigned to Bof A as the successor in interest to Countrywide. Four months later, FBS Sedona received a letter sent on Bof A's behalf inquiring about the status of its "junior Deed of Trust" after the foreclosure sale and notifying FBS Sedona that Bof A was investigating the notice of foreclosure sale. After completing that investigation, Bof A informed Felco that DOT 3 had seniority over DOT 2 before the trustee's sale and that the sale consequently did not extinguish the senior lien.

         ¶8 In May 2011, Bof A sued the borrowers and Felco, seeking a declaratory judgment that DOT 3 was the senior lien and a valid and enforceable encumbrance on the Sedona property through either the doctrine of equitable subrogation or replacement mortgage. Bof A also sued for any excess proceeds from the trustee's sale and asked that the ...