In Continental Lighting & Contracting, Inc. V. Premier Grading & Utilities, LLC, the Arizona Court of Appeals sorted out the differences between the doctrines of equitable subrogation and “replacement.” The grievance in the appeal before the court dealt with priority of liens. The lender, which had refinanced an earlier loan, had argued for priority by invoking each of the doctrines of equitable subrogation and replacement. The Court of Appeals held that where a single-lender refinancing transaction is involved, the doctrine of equitable subrogation does not place the refinancing lender ahead of the mechanic in the lienholding priority race. Instead, the Court of Appeals said, under the Restatement (Third) of Property-Mortgages, where an original deed of trust is refinanced by the same lender, priorities are determined under principles of replacement and modification of mortgages. Thus, when a senior lien held by a lender is released and concurrently is replaced by a new security instrument, the latter lien retains the same priority as that lender’s preceding lien – unless, that is, any change in the terms of the security instrument or of the underlying debt secured materially prejudices the junior lienholder’s interest in the real property. (This material prejudice sounds, of course, a bit like equity.) The court here found that a 2007 deed of trust assumed first priority (replacing a 2005 deed of trust), to the extent of the remaining balance of the replaced 2005 loan. The court also noted that a modification, where the senior lienholder and debtor agree to modify the terms of the senior deed of trust or the loan for which it serves as security, will be treated the same way, so long as the original deed of trust remains of record and the modification is reflected in an amendment agreement that also is recorded. The lender practice tip, therefore, is that in a modification, make sure that the modification agreement references the original security instrument in the text, and that such modification agreement is recorded also. The Opinion is No. 2 CA-CV 2010-0109 (Division 2, May 31, 2011).
17 Jun 2011 at 16:23
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