Daily Development for Tuesday, July 27, 2004
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin Kansas City, Missouri dirt@umkc.edu

MORTGAGES; SUBROGATION; ATTORNEY’S FEES: Although subrogation to status of old deed of trust lien is available for lender who paid that deed of trust based upon forged deed to new owner, the subrogee is not entitled to attorney’s fees and late charges pursuant to the subrogated loan, because these charges would fall upon the true owner of the property, who was not a party to the forged deed.

Heath v. NationsCredit Financial Services, 2004 WL 1178778 (Cal. App. 2 Dist. 5/28/04) (unpublished opinion).

Hughes, a convicted felon, wished to buy a home, but would have had trouble qualifying for a loan. She paid a friend, Byers, to apply for a loan in his own name as the purported buyer of the house. Byers obtained a commitment of $175,000 from Weyerhauser. Byers closed on the deal in 1996 and a deed to Byers and the Weyerhauser deed of trust were recorded. Then Heath borrowed $19,000 from another acquaintance, Hughes, and arranged with Byers to give Hughes a second deed of trust on the house. Despite the fact that the deeds of trust and ownership were in Byers’ name, Hughes lived in the house from the time of Byers’ “purchase” until she was sent to prison for an eight month stretch in 1999. Presumably she made payments on the Weherhauser note. (It is not clear whether this prison term was for her earlier felony or a later crime.)

Four years later, Hughes was about ready to be released from prison She asked Heath to arrange for Buyers to transfer the property to Heath for $10,000. Heath did so, and Byers recorded a deed to Heath. The case does not discuss what happened to the second trust deed to Heath. Arguably it was merged away in this transaction.

Hughes moved back into the house and continued to reside there. But Byers, not surprisingly, had developed some criminal tendencies of his own. With the assistance of a number of confederates, he recorded a forged deed from Heath back to Byers, and relied upon that deed in obtaining two new loans on the property from NationsCredit totaling $333,395. The proceeds of these new deeds of trust were used to pay off the Weyerhauser deed of trust and oceans of unpaid tax liabilities and liens against the property (problems that Hughes and Heath, presumably largely created and couldn’t be bothered with.). In addition, $45,000 went to one Tracie Love, who was one of those who aided Byers in his fraud. These deeds of trust were recorded.

Not surprisingly, not one ever made any payments on the NationsCredit loans.

Heath then sued to have the deeds and deeds of trust cancelled. NationsCredit responded with a claim that it at least had the right to be subrogated to the Weyherhauser trust deed which it had paid. The trial court agreed, and in addition gave to NationsCredit an award of $45,000 in attorney’s fees and late fees pursuant to the provisions of the Weyerhauser note.

On appeal, the court of appeals allowed subrogation for the amounts paid to retire the Weyerhauser note reversed the attorney’s fee and late fee award.

The court commented that it would be inconsistent with the equitable theory of subrogation to visit the sins of Byers on Heath. Although it is likely that Heath was aware of the fraud practiced earlier by Hughes, he was innocent of the fraud by which Byers had obtained the money from NationsCredit, and therefore NationsCredit had no basis to claim remedies for this fraudulent conduct through a lien against Heath’s property.

In one more twist, however, the court did permit a claim for NationsCredit in the amount of the interest that would have accrued on the Weyherhauser loan had it not been paid off. NationsCredit had not received any payment on its own note, and the accruing interest on the Weyerhauser note would have been an obligation covered by Weyerhauser’s lien against the property, had that lien not been paid by NationsCredit.

Comment 1: There was enough money at stake here to make an appeal worthwhile, and the principles applied by the court of appeals seem to be appropriate and predictable. It is understandable, however, that the trial court, smelling too much fraud from the outset, was inclined to give the innocent lender, NationsCredit, an equitable position superior to Heath. Unfortunately for NationsCredit but there simply was no evidence that the twist in the game that caught NationsCredit was part Heath’s scheme.

Comment 2: The court’s description of the application of the proceeds of the NationsCredit loan is interesting:
“Those loan proceeds were disbursed as follows: to pay off the Weyerhauser note, $178,197.35; to pay off the state Franchise Tax Board for a personal tax lien against Byers, $5,770; to pay off the Los Angeles County tax collector for a property tax sale, $10,189.25; to pay off the Los Angeles County tax collector for the 1999-2000 property taxes, $2,916.20; to pay off the hazard insurance premium that NationsCredit required as part of its loan agreement, $4,887; and to pay off a judgment lien against Byers on the Weyerhauser note, $3,638.24. Another $46,485.58 was disbursed to Byers and $65,000 went to Tracie Love, a friend of Byers who helped obtain the refinancing loans.”

Wasn’t NationsCredit entitled to subrogation to the lien of the property tax collector? What about the costs of the tax sale (presumably redeemed)? If that sale was based upon unpaid property taxes, rather than the personal tax lien against Byers, wasn’t this payment also the result of the failure of Heath and Hughes to pay property taxes, wasn’t that also a benefit that equitably should be charged against them? Even if Heath was not the record owner of the property at the time the property taxes accrued, he clearly is nothing more than a surrogate of Hughes, and Hughes was the person equitably responsible for the taxes from the time that title was recorded in Byers in 1996.

We don’t know enough about the judgment on the Weyherhauser claim to know whether this also should be laid at the feet of Hughes/Heath, but likely the answer is yes. So perhaps Hughes continued to be lucky here, although now she’ll have to deal with the subrogated lien claim. It’s unlikely she’ll be able to dodge the credit reporting issues again. Sounds like we have a house for sale in Woodland Hills.

Comment 3: The case is very fact intensive, with not much in general legal principles to discuss - just a good yarn. But the lesson is that subrogation arguments require careful analysis of where the equities lie and where they don’t. Perhaps NationsCredit could have squeezed a little more out of its position (perhaps it did, but in an unreported part of the decision).

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