Nevada Real Estate Law: The Equitable Subrogation Doctrine

Posted by: on Wed, Oct 03, 2012

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In 2003, the Nevada Supreme Court, in Houston v. Bank of America, 78 P.3d 71 (2003), adopted the rule found in Restatement (Third) of Property (Mortgages) (1997) at §7.6, which indicates that a lender whose loan proceeds were used to pay off the balance of a prior note and lien is equitably subrogated to the former lender’s priority lien position, so long as any intervening lien holder is not materially prejudiced.

The Restatement of Property (Mortgages) reasons that holders of intervening interests and liens cannot complain about the application of the so-called Equitable Subrogation Doctrine because the intervening lien holder is “no worse off than before the senior obligation was discharged.” Restatement (Third) of Property: Mortgages §7.6.

The doctrine of equitable subrogation recently came before the Nevada Supreme Court again in 2010. In this case, entitled American Sterling Bank v. Johnny Management LV, 245 P.3d 545 (Nev. 2010), the Nevada Supreme Court again addressed the application of the doctrine of equitable subrogation in a situation where a refinancing mortgage due date was accelerated (here the new note contained a balloon payment due in just 6 months). The trial court found that the junior lien holder had been prejudiced by the material differences in the loan terms.

On appeal, the Nevada Supreme Court indicated that it was going to consider whether an intervening lien holder suffers an injustice or prejudice, which would preclude application of the equitable subrogation doctrine where the terms, including the maturity date, of the refinancing loan, are materially different than the terms and maturity date contained in the original senior obligation that had been satisfied.

The Court concluded as follows:

“We conclude that material differences in interest rates and payment terms do not cause prejudice to the intervening lien holder because equitable subrogation generally limits the paying lender’s priority to the amount and terms of the retired senior obligation. However, a materially accelerated maturity date for the paying lender’s loan can, and did in this case, prejudice the intervening lien holder, precluding equitable subrogation. We therefore affirm.”

See case here:

http://www.leagle.com/xmlResult.aspx?xmldoc=In%20NVCO%2020101028302.xml&docbase=CSLWAR3-2007-CURR

The court explained that the equitable subrogation doctrine permits a person who pays off an encumbrance to assume the same priority position as the holder of the previous encumbrance. In other words, it acts as an exception to modern recording statutes and enables a later filed lien holder to ”leap-frog” over an intervening lien holder. However this is not an absolute right, and will not be granted or recognized if it will result in injustice or prejudice to an intervening lienor.

About the Authors: The law firm of Albright, Stoddard, Warnick & Albright is an A-V Rated Nevada-based full-service law firm having attorneys licensed in Nevada, California and Utah. Our firm’s practice includes a strong emphasis on real estate, secured finance and litigation.

Note: This article, and any other information you obtain at this website, is not offered as legal advice, nor should it be relied upon as such, nor is it a solicitation for legal services. Only a licensed attorney can advise you with respect to your specific legal needs. We welcome your contacting our firm to discuss such representation. Contacting us does not create an attorney-client relationship. Please do not send any confidential information to us until such time as an attorney-client relationship has been established.

About the Authors: The law firm of Albright, Stoddard, Warnick & Albright is an A-V Rated Nevada-based full-service law firm having attorneys licensed in Nevada, California and Utah. Our firm’s practice includes a strong emphasis on personal injury accidents. Call us at 702-384-7111.

Note: This article, and any other information you obtain at this website, is not offered as legal advice, nor should it be relied upon as such, nor is it a solicitation for legal services. Only a licensed attorney can advise you with respect to your specific legal needs. We welcome your contacting our firm to discuss such representation. Contacting us does not create an attorney-client relationship. Please do not send any confidential information to us until such time as an attorney-client relationship has been established.

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