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Lender’s claim for lien priority stated cause of action for equitable subrogation and was not subject to CCP §338’s 3-year statute of limitations.
Bank of N.Y. Mellon v Citibank, N.A. (Feb. 16, 2017, B262899) 2017 Cal App Lexis 128
In May 2005, the Limas obtained a $500,000 credit line from Citibank, secured by a deed of trust against the Limas’ home. In January 2006, the Limas simultaneously negotiated a refinancing of the credit line with both Citibank and Countrywide. Under the agreement, Countrywide would pay off Citibank’s credit line, obtain a reconveyance of the deed of trust, and receive a second deed of trust as security for its loan. Without Countrywide’s knowledge, the Limas then entered into an agreement with Citibank to refinance the first credit line with a new credit line up to $600,000, secured by a deed of trust. Citibank then issued a payoff statement for $508,528 without disclosing the refinance. The statement also provided that the account had been “frozen” and directed the Limas to pay off the line and sign a termination letter to close the account.
In February 2006, the Limas requested a credit line up to $1 million from Countrywide, disclosing only Citibank’s first credit line. Countrywide recorded its deed of trust on the property and subsequently disbursed the $508,568 payoff to Citibank. [The opinion does not explain the $40 discrepancy between the payoff statement and payoff amounts. - Eds] After returning the payoff amount to Countrywide’s escrow agent and closing the first credit line, Citibank issued a payoff statement for the second credit line for $612,514. After negotiating the amount, Countrywide’s escrow agent obtained a partial refund from the Limas and disbursed $599,568 to Citibank. The Limas did not sign the termination letter accompanying the payoff statement as to the second credit line, and Citibank did not close the account or reconvey the deed of trust. In 2007, the Limas borrowed $600,000 on their second credit line with Citibank. In January 2011, Citibank’s trustee issued a notice of default and election to sell.
In March 2013, Bank of New York (Mellon) (Countrywide’s successor-in-interest) sued Citibank and the Limas, seeking declaratory relief based on claims for statutory subordination, equitable subordination or subrogation, unjust enrichment, and actual and constructive fraud. Citibank demurred on grounds that each of the causes of actions was time-barred under CCP §338, which imposes a 3-year statute of limitations on claims for fraud and violations of statutory duties. Mellon argued that Citibank’s lien was discharged and, thus, there was no actual controversy until Citibank claimed priority in 2011 and Mellon first discovered the claims for fraud and unjust enrichment. Mellon further claimed that the 10- or 60-year statute of limitations under CC §882.020 applied to its equitable subrogation and subordination claims. The court eventually sustained Citibank’s demurrer as to all causes of action, and Mellon timely appealed.
The Second District Court of Appeal reversed in part. As a preliminary matter, the court rejected Mellon’s argument that its claims for declaratory relief effectively sought to quiet title and were thus not subject to any statute of limitations. Rather, the statute of limitations on a quiet title action is determined based on the underlying theory of relief. Muktarian v Barmby (1965).
Turning to Mellon’s statutory subordination claims, the court concluded that CC §2943 did not support its claim of lien priority. Citibank’s initial payoff statement related only to its first credit line. Thus, it was not required to list any amount potentially due on the second line of credit. Accordingly, the second credit line did not become unsecured based on the payoff statement issued on the first credit line. Similarly, CC §2941 does not provide for lien priority at all. The statute establishes deadlines and procedures for the reconveyance of a lien after a mortgage has been satisfied, as well as damages and penalties for violations. Here, Mellon denied seeking damages from Citibank’s failure to reconvey. Moreover, Citibank’s deed of trust on the second credit line expressly secured future loan advances and provided that the lien would be released only on payment of all obligations and termination of the agreement. The Limas never signed the payoff statement for the second credit line. Thus, Mellon’s lien priority claim could not sound in statutory subordination.
Rather, the gravamen of Mellon’s claim was an equitable subrogation claim—namely, that it should be subrogated to Citibank’s position of priority via its payoff of the second credit line and assert its rights under the deed of trust. See Simon Newman Co. v Fink (1928) 206 C 143. Here, Citibank’s demurrer, based solely on CCP §338’s 3-year statute of limitations for statutory and fraud-based claims, failed as a matter of law. Mellon’s subrogation claim was an equitable one and was not created by statute. Similarly, the claim was not based on any claim of fraud or mistake as to Mellon’s own security. Thus, the trial court erred in sustaining the demurrer as to the equitable subrogation claim.
The court of appeal also found that Mellon failed to state a claim for equitable subordination. Relevant case law provides for an equitable subordination claim when a junior lienholder has agreed to be in a junior position and should be protected from modifications in the senior lien that materially increase the risk of default. See Gluskin v Atlantic Sav. & Loan Ass’n (1973) 32 CA3d 307. Here, however, Mellon alleged that Countrywide never agreed to be in a junior position to Citibank’s senior lien, even assuming that Citibank’s refinancing constituted a replacement and modification. Rather, Countrywide bargained for retiring the lien completely and taking its priority position—allegations that supported equitable subrogation not subordination.
Similarly, the court of appeal further held that Mellon’s unjust enrichment claim was indistinguishable from its equitable subrogation claim. In essence, the claim was based on Countrywide’s refinancing of Citibank’s credit line with the expectation of lien priority, which did not materialize. Moreover, equitable subrogation may be used to “enforce restitution in order to prevent unjust enrichment.” Estate of Kemmerrer (1952) 114 CA2d 810. Were the unjust enrichment claim to be based, instead, on a constructive fraud theory, it would likely fail because there was no fiduciary or confidential relationship between Citibank and Countrywide. Moreover, any such claim would be subject to CCP §338 and thus be time-barred.
Because each of Mellon’s claims was, in fact, a variation of an equitable subrogation claim, which is not subject to CCP §338’s 3-year limitation, it could proceed only on that theory.
THE EDITOR’S TAKE: This overlong and overcomplicated decision (over 7500 words) does include a few noteworthy points:
First, it holds that the language in CC §2943—converting any amounts not included in a payoff statement into unsecured obligations—does not apply to a statement that fails to refer to a second line of credit when the payoff demand related only to the first line of credit. I wonder if that feature would be avoided by inclusion of a reference to “and any other obligations” in the payoff request, or whether such language would have caused the “statutory subordination” that the refinancing lender sought here.
Second, it seems to hold that a claim of equitable subrogation by the refinancing lender is not barred, even though made nearly 10 years after that refinancing occurred. This assertion is harder to be certain of because the opinion really only said that the 3-year limitations periods of CCP §338 did not apply because there was no statutory liability or fraud or mistake, and that any reliance on the 10-year period for foreclosing on a deed of trust had been abandoned. The decision does not exactly tell us what time period, if any, does apply (although perhaps see point four, below).
Third, it rejects application of any theory of “equitable subordination” (not subrogation) outside bankruptcy, although it then goes on to acknowledge such a doctrine when there has been a material modification of the senior lien (not the same as a failure to disclose a rival junior lien).
Fourth, it decides that a claim of unjust enrichment—based on claims of constructive fraud—for funds that the junior advanced to pay off the senior is barred by the 3-year limit in CCP §338d. This junior can at least get to trial on its priority claim, although not on its monetary one.
Refinancings remain dangerous, making good title searches always prudent.—Roger Bernhardt
39 Real Property Law Reporter 39 (Cal CEB Jan. 2017), © The Regents of the University of California, reprinted with permission of CEB.