First National Bank of Layton v. Palmer

2013 UT App 50
_________________________________________________________

THE UTAH COURT OF APPEALS

FIRST NATIONAL BANK OF LAYTON,

Plaintiff and Appellee,

v.

RAY WM. PALMER,

Defendant and Appellant.

Opinion
No. 20110338‐CA
Filed February 28, 2013

Seventh District, Monticello Department
The Honorable Lyle R. Anderson
No. 090700136

Craig C. Halls, Attorney for Appellant
Matthew C. Barneck and Wayne Z. Bennett, Attorneys for
Appellee

JUDGE GREGORY K. ORME authored this Opinion,
in which JUDGE WILLIAM A. THORNE JR.
and JUDGE J. FREDERIC VOROS JR. concurred.

ORME, Judge:

¶1 Ray Palmer and First National Bank of Layton dispute the
priority of their competing lien interests in a parcel of commercial
real estate. The district court certified this issue as final pursuant to
rule 54(b) of the Utah Rules of Civil Procedure, and Palmer appeals
the court’s grant of First National’s motion for partial summary
judgment and simultaneous denial of his cross‐motion for partial
summary judgment. We reverse.
First National Bank of Layton v. Palmer

BACKGROUND

¶2 In July 2003, Palmer agreed to sell a parcel of commercial
real estate to JDJ Holdings, Inc. for a purchase price of $1,950,000.
JDJ paid $190,000 cash as a down payment and obtained two loans
to finance the remainder of the purchase price. The first loan was
from First National for $1,025,000 and was secured by a note and
trust deed, with the deed being properly recorded on December 12,
2003. First National’s loan was guaranteed by the United States
Department of Agriculture (USDA) and a number of other
individual guarantors.

¶3 JDJ obtained a second loan for $780,000 from Palmer as
seller‐funded financing, which was similarly secured by a note and
trust deed. Palmer’s trust deed was recorded immediately after
First National’s trust deed, placing it in second priority position. At
the time of the transaction, First National was fully aware that
Palmer was providing seller financing, and both parties intended
and understood that First National’s lien was to be in first priority
position.

¶4 Just two months later, USDA informed First National that it
had only agreed to guarantee $975,000 of First National’s loan and
that the recorded $1,025,000 trust deed needed to be broken down
into two trust deeds—one for $975,000 and one for the remaining
$50,000—to be consistent with that agreement.1 Before reconveying
the $1,025,000 deed, First National ordered an updated title report
from the same title company that had previously recorded both
First National’s and Palmer’s trust deeds. Unbeknownst to First
National, the title company prepared an incorrect title report,
which showed First National’s trust deed as the only outstanding
lien on the property even though Palmer’s trust deed was properly

1. USDA agreed to guarantee only the money being loaned for use
as purchase money. The other $50,000 was apparently to be used
for business operations.

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First National Bank of Layton v. Palmer

recorded. Despite its awareness that Palmer had provided
financing to JDJ, First National did not take any additional action
to inquire about the potential existence of Palmer’s outstanding lien
after receiving and reviewing the title report. Relying solely on the
erroneous title report, First National reconveyed its trust deed on
March 8, 2004, and immediately recorded a new trust deed
reflecting the $975,000 guaranteed by USDA.

¶5 Nearly five years later, JDJ defaulted on the loans. Up to that
point in time, neither party was aware that, because of First
National’s 2004 reconveyance, Palmer’s trust deed had been
elevated into and currently sat in first priority position. In May
2009, however, Palmer performed a title search of the property and
discovered the change in priority. He subsequently informed First
National of his discovery and stated his intention to begin
foreclosure proceedings on the property.

¶6 In response, First National brought this action in July 2009
asking for, inter alia, equitable reinstatement and/or “subrogation”
of its trust deed back into first priority position. First National and
Palmer filed cross‐motions for partial summary judgment, and in
November 2010 the district court granted First National’s motion,
denied Palmer’s, and reinstated First National’s trust deed to first
priority position. The district court reasoned that First National
took sufficient care to discover any other outstanding liens and
thereby “preserve[d] its entitlement to equitable reinstatement.”
Pursuant to the grant of partial summary judgment and the
resulting reinstatement, First National initiated foreclosure
proceedings and sold the property. Palmer now appeals.

ISSUE AND STANDARD OF REVIEW

¶7 Palmer contends that there are disputed issues of material
fact and that, in any event, First National was not entitled to
judgment as a matter of law because First National reconveyed its
trust deed in negligent disregard of Palmer’s outstanding lien. He

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maintains that despite its blind reliance on the erroneous title
report, First National’s failure to inquire further about the potential
existence of Palmer’s junior lien—especially given First National’s
knowledge of Palmer’s seller financing—precludes equitable relief.2
“Summary judgment is appropriate when there is no issue
as to any material fact and the moving party is entitled to
judgment as a matter of law.” Dairyland Ins. v. State Farm Mut.
Auto. Ins. Co., 882 P.2d 1143, 1144 (Utah 1994). On appeal, we “give[
] no deference to the lower court’s legal conclusions and review[ ]
the issues presented under a correctness standard. Factual disputes
are viewed in the light most favorable to the nonmoving party.”
Emergency Physicians Integrated Care v. Salt Lake Cnty., 2007 UT 72,
¶ 8, 167 P.3d 1080 (internal citations omitted).

ANALYSIS

¶8 Palmer asserts that the district court’s repositioning of First
National’s trust deed back into first priority position constituted an
improper exercise of both equitable subrogation and equitable
reinstatement. He argues that because it actually knew that Palmer
had so recently provided seller financing, First National had an
obligation to do more than simply rely on a title report that showed
no other outstanding liens before reconveying its trust deed. In
doing otherwise, Palmer insists, it did so at its peril. First National
argues that the court’s equitable powers are broad enough to put
the parties back into the priority positions they intended, especially
because First National reconveyed its trust deed based on a mistake
of fact. Moreover, First National believes that allowing Palmer’s
lien to remain in first priority position will provide Palmer an

2. First National believes that this issue is moot in light of the
completed foreclosure sale. We, however, are not persuaded and
decline to dismiss this appeal on that basis. The parties are still
before the court, and it appears that the rights of the parties can be
adjusted as appropriate.

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unexpected and undeserved windfall. Palmer replies that because
any windfall to him is a result of First National’s negligent failure
to take reasonable steps to discover his trust deed, equity should
not be too quick to come to First National’s rescue.

I. Equitable Subrogation

¶9 Palmer contends that the district court essentially
subrogated First National’s trust deed into first position, even
though the court styled its remedy as a “reinstatement.” We do not
believe, however, that the doctrine of equitable subrogation has
any application here and conclude that First National’s trust deed
cannot be returned to first priority position via this doctrine.

¶10 Although there is a relative dearth of subrogation case law
in the context of real estate mortgages in Utah, our longstanding
precedent recognizes two forms of equitable subrogation: legal
subrogation and conventional subrogation. See Martin v.
Hickenlooper, 59 P.2d 1139, 1141 (Utah 1936). Legal subrogation
“arises ‘where the person who pays the debt of another stands in
the situation of a surety or is compelled to pay to protect his own
right or property.’” Id. (quoting Bingham v. Walker Bros., Bankers,
283 P. 1055, 1063 (Utah 1929)). This form of subrogation is
commonplace in insurance litigation, where an insurer will step
into the shoes of its insured to bring an action against a tortfeasor.
See, e.g., State Farm Mut. Auto. Ins. Co. v. Northwestern Nat’l Ins. Co.,
912 P.2d 983, 985 (Utah 1996) (“Utah law clearly recognizes an
insurer’s right to bring a subrogation action on behalf of its insured
against a tortfeasor.”). Legal subrogation is not applicable here
because First National is not a surety and has not stepped into the
shoes of another party. First National was not compelled to pay to
protect its rights, and there are not, in fact, any shoes, other than its
own, for First National to step into.

¶11 Conventional subrogation is also not an appropriate
mechanism for placing First National’s trust deed back into first
priority position. Conventional subrogation “occurs where the one

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who is under no obligation to make . . . payment, and who has no
right or interest to protect, pays the debt of another under an
agreement, express or implied, that he will be subrogated to [the]
rights of the original creditor.” Bingham, 283 P. at 1063. First
National did not advance any money to pay off the original trust
deed with the understanding or agreement that its new trust deed
would be subrogated to first priority position. Instead, First
National merely released its trust deed and subsequently recorded
a new trust deed reflecting a different loan amount. No money
changed hands and none of the already existing liens were paid off.
By definition, First National’s trust deed cannot move to first
priority position on a theory of conventional subrogation because
the money secured by the second trust deed was not used to pay
off the released and reconveyed first trust deed. Because First
National is not aiming to stand in the shoes of another and did not
pay off a prior lien with the expectation of subrogating to the prior
lien’s priority position, we conclude that First National’s trust deed
is incapable of being elevated to first priority position through the
doctrine of equitable subrogation. Thus, we decline to view the
relief ordered by the district court as premised on a theory of
subrogation and turn to consider the stated basis for the district
court’s disposition.

II. Equitable Reinstatement

¶12 It is a well‐accepted principle that when a mortgage is
released by accident, mistake, or in ignorance of intervening lien
rights, a court can equitably reinstate that mortgage to its original
priority position. See 59 C.J.S. Mortgages §§ 323, 631 (2009); 55 Am.
Jur. 2d Mortgages §§ 417, 1129 (2009); 2 Baxter Dunaway, Law of
Distressed Real Estate § 26:41 (2010); Badger Coal & Lumber Co. v.
Olsen, 167 P. 680, 682 (Utah 1917) (“When a new mortgage is
substituted in ignorance of an intervening lien, the mortgage,
released through mistake, may be restored in equity and given its
original priority as a lien.”) (citation and internal quotation marks
omitted); Home Fed. Sav. & Loan Ass’n v. Citizens Bank of Jonesboro,
861 S.W.2d 321, 323 (Ark. Ct. App. 1993) (“[W]here a senior

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mortgagee in good faith and without culpable negligence satisfied
the lien of his mortgage on the record in ignorance of the existence
of an intervening mortgage on the same premises and took a
second mortgage as a substitute, equity will restore the lien of the
first mortgage, provided it can be done without working hardship
or injustice on innocent parties.”).3 Equitable reinstatement will be
denied, however, if the party seeking reinstatement was negligent
in failing to discover the lien that elevated to senior position. See 59
C.J.S. Mortgages § 323 (“A failure to exercise diligence and discover
the existence of the record constitutes sufficient negligence to bar
relief on the ground of mistake.”); 55 Am. Jur. 2d Mortgages § 417
(“[I]n particular cases, the circumstances may be such as to justify
the denial of the reinstatement of the mortgage because of the
negligence of the mortgagee in connection with the release or
discharge.”). See also Badger Coal, 167 P. at 682 (observing that a
party seeking equitable reinstatement did not substitute its

3. We are aware that section 7.3(a) of the Restatement (Third) of
Property states,
If a senior mortgage is released of record and, as part
of the same transaction, is replaced with a new
mortgage, the latter mortgage retains the same
priority as its predecessor, except (1) to the extent
that any change in the terms of the mortgage or the
obligation it secures is materially prejudicial to the
holder of a junior interest in the real estate, or (2) to
the extent that one who is protected by the recording
act acquires an interest in the real estate at a time that
the senior mortgage is not of record.
Restatement (Third) of Property: Mortgages § 7.3(a) (1997). This
particular section of the Restatement, however, was not raised
below by either party, nor has it been briefed on appeal. Moreover,
we are unaware of any decision that has specifically adopted
section 7.3(a) as part of Utah’s common law. Consequently, we
decline to address the rationale of 7.3(a) or include it in our
analysis.

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mortgage in ignorance of an intervening lien because “[h]e could
easily have ascertained just what the facts were . . . , but he did not
take the trouble to ask [either of the intervening lienholders]”).
Negligence in this context “is an omission of something that a
prudent and honest person would do.” 59 C.J.S. Mortgages § 323.

¶13 Given its possession of documents stating that a “second
trust deed [was to be] held by the seller,” we conclude that First
National was at the very least on inquiry notice of Palmer’s trust
deed and was, consequently, negligent in failing to inquire about
the potential existence of Palmer’s outstanding lien after the title
report did not disclose it. In determining whether a party is on
inquiry notice, we first perform “a subjective inquiry to determine
what actual knowledge” the subsequent party in interest had. See
Pioneer Builders Co. v. KDA Corp., 2012 UT 74, ¶ 26, 292 P.3d 672.
We then “conduct an objective inquiry to determine whether those
facts would lead a reasonable person to inquire further.” Id.

¶14 It is a long‐standing practice in the real estate industry for
sellers to secure any financing they extend with a recorded trust
deed against the property being sold, and the facts here would not
prompt a reasonably prudent party in First National’s position to
conclude that Palmer planned to secure his loan any differently or,
even less likely, to be content with an unsecured promise to pay.
The record is replete with documents evidencing First National’s
awareness of the financing provided by Palmer. Most notably, the
HUD settlement statement from the initial loan closing and the
commercial credit summary, the latter of which was prepared on
First National stationary, both clearly state that Palmer would
provide $780,000 in seller financing. Simply put, First National had
actual knowledge of Palmer’s loan and, at a minimum, it should
have known of the substantial likelihood that a trust deed securing
that financing would be recorded.4

4. Palmer cites to twenty documents as evidence that First National
had actual notice of Palmer’s trust deed and not just the loan he
(continued...)

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¶15 Under more typical circumstances, a lender’s sole reliance
on a title report might not be considered negligent. For example, a
title report issued two decades later and showing no interest of
record in favor of the seller would not be noteworthy. One would
readily assume that the indebtedness secured by the seller’s trust
deed had been retired. But when a title report following so soon on
the heels of the original transaction does not list a trust deed the
lender would expect to see, the lender cannot simply turn a blind
eye to what it knows, has reason to know, or has a duty to inquire
about further. Accordingly, when the title report showed nothing
but First National’s $1,025,000 lien, it should have immediately
piqued First National’s attention and prompted further
investigatory effort. A simple phone call to the real estate agent or
to Palmer would have almost certainly revealed Palmer’s
outstanding lien, and it is likely that such a phone call would have
averted this problem altogether. Instead, First National ignored
what should have been an obvious problem and negligently failed
to act. In our view, First National’s decision to sweep its knowledge
of Palmer’s seller financing under the rug and proceed in blind
reliance on what proved, not surprisingly, to be an erroneous title
report was negligent and is the proximate cause of First National

4. (...continued)
extended. We do not see anything within those twenty documents
to indicate that First National actually knew about the recordation
of Palmer’s trust deed. Of those documents, only three were
generated after Palmer’s trust deed was recorded. Two of the three
are the erroneous title commitment and ensuing title policy. The
third is a letter from USDA informing First National about the
discrepancy in the first trust deed and the actual amount that
USDA agreed to guaranty. That letter says nothing of Palmer’s
second trust deed. Regardless, though, of whether First National
had actual notice of the recorded trust deed, many of the
documents demonstrate that First National had ample reason to
know of the likelihood that Palmer’s loan would be secured by a
trust deed recorded against the property.

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losing its first lien position. Such negligence forecloses equitable
reinstatement.

CONCLUSION

¶16 Equitable subrogation is not applicable to the circumstances
of this case. First National was on inquiry notice, requiring it to go
beyond the deficient title report and to investigate the potential
existence of Palmer’s lien. Because it negligently failed to do
anything other than rely on the erroneous title report, First
National is not entitled to equitable relief. We consequently reverse
the district court’s grant of partial summary judgment to First
National and remand for further proceedings consistent with this
opinion.

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