Article courtesy of Jeff Dutson of King & Spalding
Lender does not qualify for equitable subrogation exception to race-notice statute. Due to lender’s failure to obtain title examination to ascertain existence of intervening liens, the equitable subrogation exception to South Carolina’s race-notice statute was inapplicable and lender did not retain its senior lien priority when it refinanced its own lien; the South Carolina Supreme Court left the question of whether to adopt the replacement mortgage doctrine as an additional exception to the race-notice statute to the General Assembly. ArrowPointe Federal Credit Union v Bailey, 438 S.C. 573 (S.C. 2023).
Lenders in South Carolina are subject to a race-notice recording statute, which prioritizes property liens by notice and date of recording. (S.C. Code Ann. § 30-7-10 (2007)). Under the statute, a party who records and provides notice of a property lien first has priority over other lienholders providing later notice and recordation. The equitable subrogation doctrine is an exception to this: it allows a person who is secondarily liable for a debt, upon paying the debt, to assume by law the place of the creditor whose debt is paid and become entitled to the securities and remedies of the creditor. However, this exception is contingent on a lenders’ duty to conduct a proper search to ascertain the existence of other recorded liens. ArrowPointe presents issues of which lienholder has senior priority and what exceptions (if any) apply to the race-notice statute.
The Baileys mortgaged their residence to Quicken Loans, the initial senior lienholder, on October 20, 2009. The Baileys then entered into an equity line of credit (LOC) with ArrowPointe Federal Credit Union, which was secured by a mortgage and recorded on November 4, 2009. The Baileys later refinanced with Quicken on November 23, 2009. During the refinancing process, the Baileys provided a ‘Title Company Client Acknowledgement’ to Quicken that failed to include the ArrowPointe LOC. Quicken conducted no other investigation or due diligence to corroborate this acknowledgement. Quicken Loan’s refinancing agreement was later assigned to U.S. Bank. The Baileys later defaulted on the ArrowPointe LOC, leading to the case at hand.
The South Carolina Supreme Court held ArrowPointe to have priority over U.S. Bank as senior lienholder under the race-notice statute as Quicken Loans (U.S. Bank) had record notice of the ArrowPointe LOC at the time of refinancing. The equitable subrogation exception was inapplicable as Quicken Loans did not conduct a diligent title search to protect its interest. The court also declined to adopt the replacement mortgage doctrine as it might alter a junior lienholder’s interest, unlike equitable subrogation. (§ 7.3 Am. L. inst. 1997 & Oct. 2022 Update). The court left that policy question to the General Assembly of South Carolina.
