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Smith and Stevenson v. First American Title Ins. Co. (In re Stevenson)

No. 14-7048 : Stevenson v. First Am. Title Ins. Co. (D.C. Cir., 2015)
Affirming the Bankruptcy and District Courts that mortgagor, with actual knowledge of flaws in its execution of the controlling documents, is entitled to equitable subrogation as a matter of D. C. law.
Procedural context:
Pro se Debtor and deeded co-owner (her son) asserted that a refinancing terminated co-owner's responsibility for the mortgage and prevented foreclosure. The Bankruptcy court held the District's laws supported equitable subrogation under these facts and found the mortgage lien to be valid. Debtor's defenses were truncated by poor pleading and a bar was asserted based on creditor's knowledge that co-owner had not endorsed, nor approved of, the new mortgage and was thereby outside the mortgage lien. Upon review, the District Court reached the same conclusion that equitable subrogation was appropriate.
Debtor and co-owner had a Wells Fargo mortgage which Debtor later refinanced under a "cash-out" of equity. The new HSBC mortgage increased both the principal amount and interest rate causing co-owner to refuse to participate in the loan or endorse any associated documents. With full knowledge of this refusal, HSBC moved forward to funding the loan and recording the obligation against the debtor's half-interest in the property. Upon Debtor's filing bankruptcy and ending her payments on the mortgage, HSBC sought a remedy of equitable subrogation under D. C. law to initiate foreclosure proceedings. HSBC asserted its lien rights to the extent of the earlier-in-time rights held by Wells Fargo in its previous mortgage, as endorsed by both owners. Applying the five-part test for equitable subrogation in the District, the Court found that equitable subrogation is not barred by the actual knowledge of the refusal by the co-owner, and restored HSBC to a secured position in the real estate BUT at the principal amount and terms of the prior Well Fargo mortgage. The Court distilled this corollary on "actual knowledge" with relation to the five-point test as no D. C. Court of Appeals holding is directly on point. Emphasis is placed on the equitable nature of the relief and that supporting holdings focus on a "liberal application of the doctrine of subrogation. The Court found that the co-owner would reap a windfall without the remedy as his prior obligation had been fully satisfied and he would then be in the position of maintaining his half-interest debt-free. Further, HSBC could have requested Wells Fargo to assign its prior lien upon the refinance of the property, placing co-owner in the same position achieved by the claim for equitable subrogation. The holding also discusses the rejection and procedural waivers of certain other defenses as claimed by the pro se debtor and co-owner, finding the courts correctly limited the application to these facts. Affirmed all prior holdings.
Senior Circuit Judge David B. Sentelle, Circuit Judges Thomas B. Griffith and Brett N. Kavanaugh. The Opinion for the Court filed by Judge Kavanaugh.

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