Sourcecorp Inc v. D norcutt/S Norcutt

SUPREME COURT OF ARIZONA
En Banc

SOURCECORP, INCORPORATED, ) Arizona Supreme Court
) No. CV-11-0269-PR
Plaintiff/Appellee, )
) Court of Appeals
v. ) Division One
) No. 1 CA-CV 10-0212
DEAN D. NORCUTT and STACEY L. )
NORCUTT, husband and wife, ) Maricopa County
) Superior Court
Intervenors/Appellants. ) No. CV2002-020676
)
)
) O P I N I O N
__________________________________)

Appeal from the Superior Court in Maricopa County
The Honorable J. Kenneth Mangum, Judge

REVERSED AND REMANDED
________________________________________________________________

Opinion of the Court of Appeals, Division One
227 Ariz. 463, 258 P.3d 281 (App. 2011)

AFFIRMED
________________________________________________________________

STEPTOE & JOHNSON LLP Phoenix
By Francis J. Burke, Jr.
Bennett Evan Cooper
Douglas D. Janicik
Attorneys for Sourcecorp, Incorporated

MARISCAL, WEEKS, MCINTYRE & FRIEDLANDER, P.A. Phoenix
By Michael R. Scheurich
Anne L. Tiffen
Robert C. Brown
And

GUST ROSENFELD, P.L.C. Phoenix
By Charles W. Wirken
Scott A. Malm
Attorneys for Dean D. Norcutt and Stacey L. Norcutt
HOLDEN WILLITS PLC Phoenix
By Michael J. Holden
Barry A. Willits
Attorneys for Amicus Curiae Arizona Builders’ Alliance

GUST ROSENFELD, P.L.C. Phoenix
By Richard A. Segal
Charles W. Wirken
Scott A. Malm
Attorneys for Amicus Curiae Land Title Association of Arizona
________________________________________________________________

B A L E S, Justice

¶1 Dean and Stacey Norcutt bought a home for cash and

satisfied the existing first mortgage. They later discovered

the home was also subject to a judgment lien far exceeding the

property’s value. We hold that the purchasers were equitably

subrogated to the mortgage lien’s priority for the amount they

paid to satisfy the mortgage.

I.

¶2 In September 2004, Sourcecorp, Incorporated obtained a

judgment exceeding $3 million against Steven and Rita Shill, who

owned residential property in Prescott. The property was

subject to a first mortgage in favor of Zions National Bank

securing a debt of nearly $689,000.1 Sourcecorp recorded a

judgment lien. In November 2004, the Shills sold the property

1
  Zions Bank held a deed of trust, but we refer to this interest
as a “mortgage” because Sourcecorp and the opinion of the court
of appeals use this term. The distinction between a mortgage
and a deed of trust is immaterial to our analysis. Cf.
Restatement (Third) of Property: Mortgages § 1.1 (1997)
(defining “mortgage” to include deeds of trust).
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to the Norcutts for $667,500 in cash. Zions Bank accepted

$621,000 of the proceeds in full satisfaction of the debt

secured by its first mortgage. Although the Norcutts purchased

title insurance from First American Title Insurance Company, the

title insurer did not discover Sourcecorp’s judgment lien.

¶3 After the Norcutts bought the property, Sourcecorp

initiated a sheriff’s sale to foreclose on its judgment lien.

The Norcutts sued to enjoin the sale. Granting relief, the

trial court ruled that the Norcutts’ interest in the property

was superior to Sourcecorp’s judgment lien. The court of

appeals reversed for reasons not before this Court. Sourcecorp,

Inc. v. Shill, No. 1 CA-CV 05-0425 (Ariz. App. Sept. 26, 2006)

(mem. decision). On remand, the Norcutts argued that they were

equitably subrogated to the position of Zions Bank in priority

over Sourcecorp. The trial court rejected this argument and

entered summary judgment for Sourcecorp. Reversing again, the

court of appeals held that the Norcutts were equitably

subrogated. Sourcecorp, Inc. v. Norcutt, 227 Ariz. 463, 471

¶ 37, 258 P.3d 281, 289 (App. 2011).

¶4 We granted review because application of the equitable

subrogation doctrine in this context is an issue of first

impression and statewide importance. Jurisdiction exists under

Article 6, Section 5(3) of the Arizona Constitution and A.R.S.

§ 12-120.24 (2009).
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 II.

¶5 Equitable subrogation is “the substitution of another

person in the place of a creditor, so that the person in whose

favor it is exercised succeeds to the rights of the creditor in

relation to the debt.” Mosher v. Conway, 45 Ariz. 463, 468, 46

P.2d 110, 112 (1935). This equitable remedy is “designed to

avoid a person’s receiving an unearned windfall at the expense

of another.” Restatement (Third) of Property: Mortgages § 7.6

cmt. a (1997) (“Restatement”); see Mosher, 45 Ariz. at 468, 46

P.3d at 112 (noting that purpose of doctrine is to prevent

injustice). “The general rule is that a person having an

interest in property who pays off an encumbrance in order to

protect his interest is subrogated to the rights and limitations

of the person paid.” Id. at 472, 46 P.2d at 114; see also

Restatement § 7.6(a) (providing that “[o]ne who fully performs

an obligation of another, secured by a mortgage, becomes by

subrogation the owner of the obligation and the mortgage to the

extent necessary to prevent unjust enrichment”).

¶6 Mosher concerned “paving liens” on residential lots

assessed for street improvements. Under the statutory scheme,

the city could auction liens for delinquent assessments to

private parties. If the property owner or a “party in interest”

did not redeem the lien within a year, the purchaser would

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obtain the property free of encumbrances. 45 Ariz. at 465-67,

46 P.2d at 111-12. In Mosher, one lot was subject to three

liens, which were sold separately. Applying equitable

subrogation, this Court held that the second purchaser was

subrogated to the positions of the first and third purchasers

when he redeemed their liens, even though the property owner

ultimately redeemed all of the liens. The owner could not

complain about this result because it merely required her to pay

one person rather than another to release the liens. Id. at

471, 46 P.2d at 113.

¶7 Mosher said that “no general rule can be stated which

will afford a test [for equitable subrogation] in all cases.”

Id. at 468, 46 P.2d at 112. Instead, “[w]hether it is

applicable or not depends upon the particular facts and

circumstances of each case as it arises.” Id., 46 P.2d at 112.

Noting “the modern tendency” to extend the doctrine’s use, id.,

46 P.2d at 112, the Court also observed that

[A] mere volunteer, who has no rights to protect, may
not claim the right of subrogation, for one who,
having no interest to protect, without any legal or
moral obligation to pay, and without an agreement for
subrogation or an assignment of the debt, pays the
debt of another, is not entitled to subrogation, the
payment in his case absolutely extinguishing the debt.

Id. at 470, 46 P.2d at 113. The Court immediately added that

“when one, to protect his own interest, pays a debt which he

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honestly believes must be paid to accomplish that purpose, . . .

he cannot be held to be a mere volunteer.” Id., 46 P.2d at 113.

¶8 Because the Court declined to adopt a bright-line test

in Mosher and has not revisited the issue, the court of appeals

has developed guidelines for applying equitable subrogation. In

1965, the court of appeals stated that subrogation would occur

if (1) a third person discharges an encumbrance on the property

of another; (2) the person is not a volunteer; and (3) there is

an express or implied agreement “that he will be substituted in

place of the holder of the encumbrance.” Peterman-Donnelly

Eng’rs & Contractors Corp. v. First Nat’l Bank of Ariz., 2 Ariz.

App. 321, 325, 408 P.2d 841, 845 (1965).

¶9 Nearly forty years later, the court of appeals

described several tests for equitable subrogation. See Lamb

Excavation, Inc. v. Chase Manhattan Mortg. Corp., 208 Ariz. 478,

480-82 ¶¶ 8-14, 95 P.3d 542, 544-46 (App. 2004). Reviewing

cases from different jurisdictions, the court said the “majority

approach” requires four primary elements: (1) the party claiming

equitable subrogation has paid the debt; (2) the party was not a

volunteer; (3) the party was not primarily liable for the debt;

and (4) no injustice will be done to the other party by allowing

subrogation. Id. at 480 ¶ 8, 95 P.3d at 544.

¶10 Lamb Excavation explained, however, that the

Restatement has adopted a more expansive standard. Id. at 481
6
¶ 10, 95 P.3d at 545; Restatement § 7.6. Under this test, a

person who “fully performs an obligation of another, secured by

a mortgage, becomes by subrogation the owner of the obligation

and the mortgage to the extent necessary to prevent unjust

enrichment.” Restatement § 7.6. Such equitable relief may be

appropriate, for example, if the person seeking subrogation

“expected to receive a security interest in the real estate with

the priority of the mortgage being discharged.” Id.

¶11 In Lamb Excavation, the court of appeals distinguished

Peterman-Donnelly from the “majority approach,” 208 Ariz. at

480-81 ¶¶ 7-8, 95 P.3d at 543-44, and observed that Arizona’s

approach “appears consistent with the Restatement.” Id. at 482

¶ 13, 95 P.3d at 546. In the instant case, the court of appeals

cited the “primary elements” of the “majority approach,” noted

other factors considered in Arizona cases, and quoted Lamb

Excavation’s comment about the Restatement. 227 Ariz. at 466-

67, 469 ¶¶ 14, 25, 258 P.3d at 284-285, 287.

¶12 There is thus some ambiguity in Arizona case law

regarding the test for equitable subrogation. For reasons

explained below, we adopt the Restatement approach because it is

most consistent with the rationale for equitable subrogation.

III.

¶13 Absent equitable subrogation, once the debt to Zions

Bank was fully satisfied by the Norcutts, Sourcecorp’s judgment
7
lien advanced in priority. Sourcecorp claims that it is

entitled to execute on its $3 million judgment lien through a

sheriff’s sale. The Norcutts would receive nothing from such a

sale, but would likely have a claim against their title insurer

for failing to discover Sourcecorp’s lien. In contrast, the

Norcutts argue that they are subrogated to the position of Zions

Bank and therefore have a priority over Sourcecorp’s judgment

lien.

¶14 Relying on Mosher and other cases, Sourcecorp argues

that equitable subrogation is not appropriate because the

Norcutts acted as mere volunteers in purchasing the property.

Alternatively, Sourcecorp contends that subrogation is not

available because there was no agreement, express or implied,

that the Norcutts would be subrogated. Finally, Sourcecorp

contends that equitable considerations preclude subrogation. We

consider these arguments in turn.

A.

¶15 Mosher and later cases state that a “mere volunteer”

cannot claim equitable subrogation. But Mosher also explained

that a person who pays a debt to protect the person’s interests

is not a volunteer. 45 Ariz. at 470, 46 P.2d at 113. Mosher is

thus consistent with the Restatement, which does not use the

term “volunteer” as a talisman, but instead recognizes that a

8
person who has paid a debt to protect his or her own interests

may seek equitable subrogation. See Restatement § 7.6.

¶16 We agree with the Restatement that equitable

subrogation should not turn on whether the person invoking the

doctrine is labeled a volunteer. “[T]he meaning of the term

‘volunteer’ is highly variable and uncertain, and has engendered

considerable confusion.” Restatement § 7.6 cmt. b. Instead,

the Restatement appropriately focuses on other circumstances of

the party seeking to invoke subrogation, including whether the

party has paid a preexisting obligation to protect the party’s

interest in the property. See Restatement § 7.6; see also

Dietrich Indus., Inc. v. United States, 988 F.2d 568 (5th Cir.

1993) (permitting equitable subrogation without discussing

whether purchaser was a volunteer); Grant S. Nelson & Dale A.

Whitman, 2 Real Estate Finance Law § 10.7 (5th ed. 2010) (“[T]he

issue is only whether the payor expected that the payment would

free the property; if this was the grantee’s understanding,

subrogation should be available.”).

¶17 The Norcutts paid the preexisting debt to Zions Bank

to protect their concurrently acquired interest in the property.

The Norcutts thus had a sufficient interest to allow them to

seek equitable subrogation. Cf. Han v. United States, 944 F.2d

526, 530 (9th Cir. 1991) (purchasers paid off mortgagee’s

interest “to establish and protect their own interest” and
9
therefore were not volunteers); E. Boston Sav. Bank v. Ogan, 701

N.E.2d 331, 336 (Mass. 1998) (same).

B.

¶18 Quoting Herberman v. Bergstrom, Sourcecorp also argues

that “[f]or equitable subrogation to apply, there must be an

agreement . . . that the subsequent lender will be substituted

for the holder of the prior encumbrance.” 168 Ariz. 587, 590,

816 P.2d 244, 247 (App. 1991). Other decisions of the court of

appeals contain similar language. See Lamb Excavation, 208

Ariz. at 482 ¶ 13, 95 P.3d at 546 (requiring an “express or

implied agreement” to subrogate); Peterman-Donnelly, 2 Ariz.

App. at 325-26, 408 P.2d at 845-46 (same).

¶19 Mosher, however, did not require an “agreement” in

holding that the purchaser of paving liens was equitably

subrogated to the positions of other lienholders. See 45 Ariz.

at 471, 46 P.2d at 113. Moreover, to the extent that the court

of appeals has required an “agreement,” it has adopted a very

elastic notion of the concept. In Lamb Excavation, property

owners obtained a construction loan secured by a deed of trust.

After several subcontractors served preliminary notices of

mechanics’ liens, see A.R.S. § 33-992.01, the owners obtained

permanent financing and satisfied the construction loan. The

court of appeals concluded that the permanent lender was

equitably subrogated to the prior lien position of the
10
construction lender. See 208 Ariz. at 483 ¶ 16, 95 P.2d at 547.

In reaching this conclusion, the court found “at least an

implied agreement to subrogate” based on statements in the

permanent loan documents and closing instructions that the new

lender would have a first lien. Id.

¶20 The Restatement and case law from other jurisdictions

do not require an agreement as a condition for equitable

subrogation. See Restatement § 7.6 cmt. a; Han, 944 F.2d at 529

(listing five factors justifying the use of equitable

subrogation without requiring an agreement). The requirement of

an “agreement” for subrogation – like the disqualification of

“volunteers” - has been subject to varying interpretations.

Compare Citizens’ Mercantile Co. v. Eason, 123 S.E. 883, 886

(Ga. 1924) (holding that a purchaser was not entitled to

equitable subrogation because he did not pay “debts under an

agreement, express or implied, . . . that he would be

subrogated”), with In re Mortgages Ltd., 459 B.R. 739, 742

(Bankr. D. Ariz. 2011) (“Arizona case law seems to hold that the

subsequent lender’s intent to obtain first lien priority is

sufficient evidence, standing alone, to satisfy the agreement

requirement.”).

¶21 We adopt the Restatement approach and reject any

requirement of an “agreement” as a condition for equitable

subrogation. To be sure, parties may achieve subrogation by
11
agreement, such as through an assignment of a promissory note

and related mortgage. See Restatement § 7.6 cmt. a

(distinguishing “conventional subrogation” by assignment or

agreement from equitable subrogation). Equitable subrogation,

however, does not turn on contractual principles, but instead on

the concern to prevent unjust enrichment. That goal is served

by allowing subrogation when a party pays a mortgage to protect

an interest in the property, irrespective of an express or

implied agreement that the party will succeed to the position of

the prior lienholder.

C.

¶22 Finally, Sourcecorp argues that because the Norcutts

obtained title insurance from which they could recoup any

losses, equitable considerations preclude subrogation.

Sourcecorp contends that neither the Norcutts nor the insurer

should benefit from the insurer’s negligence in failing to

discover the recorded lien.

¶23 Accepting these arguments, however, would require us

to ignore the key concern underlying equitable subrogation and

would unjustly enrich Sourcecorp. Before the Norcutts purchased

the home, Sourcecorp had a second lien on the property, which

was worth less than the outstanding mortgage debt of $689,000.

The Norcutts satisfied the first lien by paying Zions Bank

$621,000 in cash. Sourcecorp contends that the result –
12
unintended by the Norcutts – was that Sourcecorp obtained a

first lien on property that had just sold for $667,500, and the

Norcutts were left with nothing but a claim against their

insurer.

¶24 Denying subrogation here, therefore, would give

Sourcecorp a windfall independent of whether the Norcutts were

insured or had constructive notice of the judgment lien. (There

is no suggestion the Norcutts had actual notice of the lien, and

we need not address whether a purchaser with actual notice could

ever be equitably subrogated.) Moreover, there is no general

requirement that a person seeking subrogation lack notice in

order to obtain equitable relief. In Lamb Excavation, for

example, the permanent lender was subrogated to a first lien

position even though various subcontractors had served twenty-

day notices of mechanics’ liens. 208 Ariz. at 484 ¶ 20, 95 P.3d

at 548 (observing that “constructive notice is not an element of

equitable subrogation under Arizona law”); see also Restatement

§ 7.6 cmt. e (noting that “the payor’s notice, actual or

constructive, is not necessarily relevant. The question in such

cases is whether the payor reasonably expected to get security

with a priority equal to the mortgage being paid.”). We also

agree with the court of appeals that it would be anomalous to

deny equitable subrogation merely because a party had been

13
diligent in obtaining title insurance. 227 Ariz. at 471 ¶ 35,

258 P.3d at 289.

¶25 Sourcecorp further argues that subrogation would

prejudice its interests by preventing it from moving up in

priority as a lienholder after the satisfaction of the mortgage

debt to Zions Bank. “Subrogation will be recognized only if it

will not materially prejudice the holders of intervening

interests.” Restatement § 7.6 cmt. e. We do not accept,

however, that subrogation would materially prejudice Sourcecorp.

¶26 Generally, the satisfaction of a superior lien results

in subordinate lienholders advancing in priority, but preventing

this result in certain circumstances is precisely the aim of

equitable subrogation. As the Restatement notes:

One who fully performs an obligation of another,
secured by a mortgage, becomes by subrogation the
owner of the obligation and the mortgage to the extent
necessary to prevent unjust enrichment. Even though
the performance would otherwise discharge the
obligation and the mortgage, they are preserved and
the mortgage retains its priority in the hands of the
subrogee.

Restatement § 7.6(a) (emphasis added). Thus, preventing a

junior lienholder from advancing in priority is an intended

consequence of equitable subrogation. See Lamb Excavation, 208

Ariz. at 483 ¶ 18, 95 P.3d at 547 (“We fail to comprehend the

nature of the perceived prejudice or inequity, as it appears the

lienholders would remain in the same position they occupied
14
before subrogation . . . .”); Restatement § 7.6 cmt. e (“The

holders of . . . intervening interests can hardly complain

[about subrogation]; their position is not materially

prejudiced, but is simply unchanged.”). Indeed, insofar as the

Norcutts are subrogated only for the amount they paid to

discharge the first mortgage, see infra ¶ 29, Sourcecorp is

somewhat better off, because this amount was less than the

outstanding debt to Zions Bank of $689,000.

¶27 Sourcecorp also argues that if the Norcutts are placed

in the position of Zions Bank, they could eliminate Sourcecorp’s

judgment lien by a collusive refinancing followed by a

foreclosure by the new first mortgage holder. Cf. Centreville

Car Care, Inc. v. N. Am. Mortg. Co., 559 S.E.2d 870, 874 (Va.

2002) (noting concern about “friendly foreclosure” if purchaser

were subrogated to position of first mortgage). This concern,

however, is addressed by the limits to the equitable remedy. As

a result of paying the obligation owed to Zions Bank, the

Norcutts only “become[] by subrogation the owner of the

obligation and the mortgage to the extent necessary to prevent

unjust enrichment.” Restatement § 7.6(a) (emphasis added).

¶28 In determining the extent to which the Norcutts are

subrogated to the prior position of Zions Bank, we note that

they are cash purchasers rather than creditors looking to the

property to secure a debt. With respect to creditors,
15
“[o]rdinarily one who is entitled to subrogation is permitted to

enforce both the mortgage and the secured obligation.”

Restatement § 7.6 cmt. a. Fee owners are in a different

situation, because the merger doctrine generally holds that if

they acquire a mortgage on their own property, the lien is

extinguished because the lesser interest “merges” into the

greater. See Mid Kansas Fed. Sav. & Loan Ass'n v. Dynamic Dev.

Corp., 167 Ariz. 122, 129, 804 P.2d 1310, 1317 (1991) (noting

that equitable considerations may preclude merger).

¶29 Recognizing that equitable subrogation depends on the

facts of the particular case, see Mosher, 45 Ariz. at 468, 46

P.2d at 112, we conclude that it is not appropriate to confer on

the Norcutts a right to “foreclose” on the interest to which

they are subrogated. Instead, the purposes of equitable

subrogation are fully served by deeming the Norcutts to have a

priority to proceeds from any sale of the property in the amount

they paid to satisfy the debt, $621,000. Cf. Lamb Excavation,

208 Ariz. at 483 ¶ 19, 95 P.3d at 547 (noting that payor is

subrogated only to the extent funds are applied toward payment

of prior lien). Applying equitable subrogation in this manner

does not eliminate Sourcecorp’s judgment lien. To the extent

that lien adversely affects the Norcutts’ equity or renders the

property less marketable, we neither address nor foreclose any

claims the Norcutts might have against their title insurer.
16
 IV.

¶30 For the reasons stated, we affirm the opinion of the

court of appeals and remand to the superior court for entry of

summary judgment in favor of the Norcutts consistent with this

opinion. We deny the requests for attorneys’ fees.

_____________________________________
W. Scott Bales, Justice

CONCURRING:

_____________________________________
Rebecca White Berch, Chief Justice

_____________________________________
Andrew D. Hurwitz, Vice Chief Justice

_____________________________________
A. John Pelander, Justice

_____________________________________
Robert M. Brutinel, Justice

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