No Subrogation of Deed of Trust When Junior Creditor Had Actual Knowledge of Existing Deed of Trust

White v. Whitehead, 2020 WL 4436727 (Miss. Ct. App., June 30, 2020)(en banc). In 1994, Whitehead executed a deed of trust to Citizens Bank of Philadelphia securing a loan in the amount of $247,376. Six subsequent deeds of trust from Whitehead to the bank were recorded, each of which stated that it was a renewal and extension of the 1994 deed of trust. In 2001, Whitehead borrowed $351,978 from White. The loan was secured by a deed of trust on the same land as the bank’s deed of trust. White’s deed of trust included the following language: “SUBJECT TO EXISTING FIRST DEED OF TRUST.” In 2007, Whitehead filed for bankruptcy. During the course of the bankruptcy proceedings, White signed an agreed order, to which the bank was not a party, stating that White was the beneficiary of a second priority deed of trust and that the bank was the beneficiary of the first-priority deed of trust. The bank obtained permission from the bankruptcy court to foreclose on the land. At the foreclosure sale, the bank was the sole bidder with a bid of $566,938, which was less than Whitehead’s debt to the bank. In 2016, White filed an action in the Winston County Chancery Court claiming that her deed of trust had priority over the bank’s deed of trust by reason of equitable subrogation and unjust enrichment.  The chancery court granted the bank’s motion for summary judgment. On appeal by White, the Mississippi Court of Appeals, in an en banc opinion by Justice Lawrence, affirmed. On the issue of lien priority, Justice Lawrence wrote, “The law is clear that subsequent deeds of trust that serve as renewals or extensions of prior deeds of trust should be given the same priority date as the original deed of trust. Further, any intervening deeds of trust are subject to the lien of the original deed of trust.” White argued because the proceeds of her loan were used to pay down the bank’s loan, her deed of trust should have priority over the bank’s deed of trust under theories of equitable subrogation and unjust enrichment. On the issue of equitable subrogation, the Court of Appeals affirmed the chancellor’s finding that actual knowledge of the competing lien barred the application of equitable subordination. In this case, the language in White’s deed of trust showed that White knew that her deed of trust was second in priority. She also signed the order in the bankruptcy proceeding acknowledging the priority of the bank’s lien. On the assertion of unjust enrichment, this doctrine only applies when there is no legal contract. Justice Lawrence wrote that the agreed order signed by White in the bankruptcy should be considered a legal contract and barred her claim for unjust enrichment.

Note 1: The editors like this case in part because it clearly restates the existing law regarding the priority of renewals and extensions. It would have been interesting to know what changes in the underlying note or notes prompted these renewals and extensions; were they simply extensions of the maturity date, increases in the amount of the principal, changes in the interest rate or something else? Also, it would have been interesting to know if the bank’s original deed of trust had a future advances clause. The original amount of the loan in 1994 was $247,376. When the bank foreclosed in 2008, the amount of its bid at the sale was $566,937, which was less than its debt. So unless the note had a very high rate of interest, the bank must have made some additional advances of principal. But the Court of Appeals did not address in its opinion the nature of the changes to the underlying debt, and only looked at the recitation in the subsequent deeds of trust that they were renewals and extensions of the original deed of trust.

Note 2: The part of decision regarding equitable subrogation is clearly correct and consistent with the common law, based on White’s actual knowledge of the bank’s existing first-priority deed of trust. Mississippi law regarding equitable subrogation, however, has not always been in the mainstream. In 2014, the Mississippi Supreme Court held that a second lender who did not have knowledge of the first deed of trust was not entitled to equitable subrogation because the second lender had title insurance to protect it. Community Trust Bank v. First National Bank, 150 So. 3d 683 (Miss. 2014), which was discussed extensively in the January 2015 Real Property Section Newsletter.

Note 3: The editors are less sanguine about the chancery court finding, and the Court of Appeals affirming, that White’s unjust enrichment claim failed because the agreed order that White signed in the bankruptcy court was a “legal contract.” The editors’ reading of the law is that unjust enrichment applies when no legal contract exists between the party asserting unjust enrichment (in this case, White) and the party who is asserted to have received the unjust enrichment (in this case, the bank). The bank was not a signatory to the order that the chancery court found was a “legal contract” that barred White’s unjust enrichment claim. There are many solid reasons for finding that White was not entitled to recover under a theory of unjust enrichment, including White’s express acknowledgment in her deed of trust that her deed of trust was second in priority to the bank’s deed of trust. The editors wish that the Court of Appeals had relied on one of these other solid grounds rather that characterizing a bankruptcy court order as a “contract” for purposes of the doctrine of unjust enrichment.

Note 4: This case has not yet been released for publication.

To learn more about the co-authors, Rod Clement and Lindy Brown, visit Rod’s member profile or firm profile or Lindy’s firm profile.