Highmark Federal Credit Union v. Wells Fargo Financial South Dakota, Inc.

#26127-r-LSW

2012 S.D. 38

IN THE SUPREME COURT
OF THE
STATE OF SOUTH DAKOTA

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HIGHMARK FEDERAL
CREDIT UNION, Plaintiff and Appellant,

v.

WELLS FARGO FINANCIAL
SOUTH DAKOTA, INC., Defendant and Appellee,

and

NEIL R. WOOD, KIMBERLY M. WOOD,
WELLS FARGO FINANCIAL BANK,
AAA COLLECTIONS, CITIBANK (SD) NA,
and CREDIT COLLECTIONS BUREAU, Defendants.

****
APPEAL FROM THE CIRCUIT COURT OF
THE FOURTH JUDICIAL CIRCUIT
BUTTE COUNTY, SOUTH DAKOTA

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THE HONORABLE JOHN W. BASTIAN
Judge

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RODNEY C. LEFHOLZ
Rapid City, South Dakota Attorney for plaintiff and
appellant.

DAVID C. PIPER of
Mackoff Kellogg Law Firm
Dickinson, North Dakota Attorneys for defendant and
appellee.

****
ARGUED ON MARCH 21, 2012

OPINION FILED 05/23/12
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WILBUR, Justice

[¶1.] This foreclosure action involves a dispute between two creditors, Wells

Fargo Financial South Dakota, Inc. (Wells Fargo) and Highmark Federal Credit

Union (Highmark), about the priority of their respective mortgage liens against a

property. Both parties assert that they are entitled to first priority. The trial court

found that, despite Highmark’s statutory priority, under the doctrine of equitable

subrogation, Wells Fargo was entitled to first priority and granted Wells Fargo’s

motion for summary judgment. We reverse.

FACTS AND PROCEDURAL BACKGROUND

[¶2.] Neil and Kimberly Wood purchased a home in Belle Fourche. To

finance the purchase of their home, the Woods borrowed $120,290 from First

Franklin Financial Corporation (First Franklin). To secure the loan, First Franklin

filed a lien against the home. Approximately two years later, the Woods obtained a

home equity line of credit from Highmark. Highmark also filed a lien against the

home to secure the line of credit. The Woods later refinanced their home with Wells

Fargo and received a $168,708.35 loan. The Woods used the proceeds from the loan

to pay off both First Franklin and Highmark. First Franklin’s lien against the

Woods’ home was subsequently discharged.

[¶3.] Although the Woods used the proceeds to pay their entire outstanding

balance with Highmark, Highmark’s lien was not discharged. Because Highmark’s

lien was a collateral real estate mortgage, under SDCL 44-8-26, even when the

balance of the real estate mortgage was reduced to zero, the law provides that the

lien continues because of the potential of future advances. Specifically, SDCL 44-8-

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26 provides that a collateral real estate mortgage can only be discharged when the

outstanding balance is zero and the mortgagor “demand[s] in writing that the

mortgage be satisfied.” Although Wells Fargo paid the Woods’ outstanding loan

balance with Highmark, the Woods did not make a written demand that the

mortgage be satisfied. Nor did Wells Fargo ask or require the Woods to make this

demand. Thus, Highmark’s lien continued and, because it was created first, took

statutory priority over Wells Fargo’s newly created lien. See SDCL 44-2-1 (“Other

things being equal, different liens upon the same property have priority according to

the time of their creation.”).

[¶4.] Also, because the line of credit remained open, the Woods were able to

draw on the account and borrowed an additional $24,000 from Highmark.

Eventually, Wells Fargo provided Highmark a writing signed by Mr. Wood which

asked Highmark to close the line of credit. At this time, Highmark stopped making

further advances to the Woods. However, because the balance of the mortgage was

not zero when the Woods delivered the written demand, Highmark’s lien against

the home continued.

[¶5.] When the Woods defaulted on their mortgage with Highmark,

Highmark brought a foreclosure action and joined Wells Fargo as a co-defendant

because of its lien against the Woods’ home. Subsequently, Highmark and Wells

Fargo each brought motions for summary judgment. The competing motions asked

the trial court to conclude that the respective moving party had first priority on the

proceeds from the sale of the Woods’ home. Highmark argued that it had priority

under the South Dakota recording statutes because it recorded its mortgage prior to

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the date Wells Fargo recorded its mortgage. Wells Fargo argued it had priority

under the doctrine of equitable subrogation because it paid the Woods’ outstanding

balance with First Franklin in full and was therefore entitled to assume First

Franklin’s priority position. The trial court agreed with Wells Fargo and granted

its motion. Highmark appeals the trial court’s application of equitable subrogation.

STANDARD OF REVIEW

[¶6.] Whether or not the trial court used the correct legal standard in

determining lien priority is a question of law. However, if the trial court applied the

correct legal standard in determining lien priority, its findings are reviewed under

the clearly erroneous standard and its application of the doctrine of equitable

subrogation is reviewed for abuse of discretion. See Clarkson & Co. v. Cont’l Res.,

Inc., 2011 S.D. 72, ¶ 10, 806 N.W.2d 615, 618 (applying the same standard of review

in the context of laches, an equitable defense). Because Highmark only contests the

trial court’s application of the doctrine of equitable subrogation to overcome

Highmark’s statutory priority, the resolution of this case turns on whether the trial

court abused its discretion in applying the doctrine.1

1. Wells Fargo argues in its brief that we should not reach the merits of
Highmark’s appeal for two reasons. First, according to Wells Fargo,
Highmark did not timely file its appeal within the 30 days of a judgment or
order as required by SDCL 15-26A-6. Wells Fargo waived this argument
during oral arguments.

Second, Wells Fargo argues the record does not show that Highmark
questioned the applicability of the doctrine of equitable subrogation and
therefore Highmark is precluded from raising the argument now on appeal.
However, the only issue argued on appeal is that of lien priority in a
mortgage foreclosure. This is the precise issue presented before the trial
court, and thus, Highmark has not waived the issue.

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ANALYSIS AND DECISION

[¶7.] This Court has not addressed equitable subrogation in the context of

real property since our decisions in Buhl v. McDowell, 60 S.D. 22, 242 N.W.2d 638

(1932) and Bank of Ipswich v. Brock et al., 13 S.D. 409, 83 N.W.2d 436 (1900).2

However, we have recently applied equitable subrogation in the context of

insurance. In doing so, we have recognized that “[a] court of equity is not at liberty

to disregard the contract of the parties in this respect where deliberately made and

clearly expressed, for equity follows the law and will neither make a new contract

for the parties nor violate that into which they have freely and advisedly entered.”

Met Life Auto & Home Ins. Co. v. Lester, 2006 S.D. 62, ¶ 19, 719 N.W.2d 385, 388-

89. A similar logic applies to statutes: “While equity has the power to pierce rigid

statutory rules to prevent injustice, where substantial justice can be accomplished

by following the law, and the parties’ actions are clearly governed by rules of law,

equity follows the law” and “[a]ccordingly, under the doctrine, courts of equity

cannot modify or ignore an unambiguous statutory principle in an effort to shape

relief.” 30A C.J.S. Equity § 128 (2012).

[¶8.] Here, equity did not require the trial court to pierce the South Dakota

recording statutes. Under SDCL 44-8-26, Wells Fargo had the option to protect its

security interest in the Woods’ home but did not fulfill the statutory requirements.

Pursuant to SDCL 44-8-26, Wells Fargo could have required the Woods to both

2. In Buhl and Ipswich, this Court used the term “legal subrogation.” Legal
subrogation, in this context, is synonymous with equitable subrogation. See
Restatement (Third) of Restitution & Unjust Enrichment § 24 (2011) (“The
claim described in this section, usually known as ‘equitable subrogation,’ may
also be called ‘legal subrogation’ or ‘equitable assignment.’”).
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satisfy its mortgage with Highmark and “demand in writing that the mortgage be

satisfied” when it refinanced the Woods’ mortgage. Although Wells Fargo provided

the Woods with the funds to satisfy its loan with Highmark, despite the statutory

directive, Wells Fargo did not simultaneously require the Woods to make the

written demand of Highmark to satisfy the Woods’ mortgage. Rather, Wells Fargo

did not require the Woods to make the written demand until after Highmark had

loaned the Woods additional money against the line of credit. At this point, it was

too late to satisfy the clear requirements of SDCL 44-8-26, as the balance on the

collateral loan was no longer zero.

[¶9.] Wells Fargo’s failure to make written demand, be it willful,

inadvertent, or negligent, is sufficient reason, in this circumstance, for this Court to

refuse to set aside a statute and invoke an equitable remedy.3 Thus, because

Highmark filed its lien on the Woods’ home prior to Wells Fargo, we reverse the

grant of summary judgment and hold that Highmark has priority under SDCL 44-2-

1.

[¶10.] GILBERTSON, Chief Justice, and KONENKAMP, ZINTER, and

SEVERSON, Justices, concur.

3. In reaching this conclusion, we recognize that courts in other jurisdictions
have recently applied the doctrine of equitable subrogation to overcome
statutory priority in certain situations. In doing so, these courts have
applied an assortment of different legal standards. See Bank of Am., N.A. v.
Prestance Corp., 160 P.3d 17, 21 (Wash. 2007) (en banc) (detailing the
different approaches courts have taken). Under the facts presented here, we
decline to recognize equitable subrogation as being applicable. Whether this
Court should ever apply the doctrine to overcome statutory priority under
SDCL 44-2-1 is a question for another day.
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