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Eastern Savings Bank, FSB v. Pappas

District of Columbia Court of Appeals

August 14, 2003


Appeal from the Superior Court of the District of Columbia (CA9061-00) (Hon. Susan R. Winfield, Trial Judge)

Before Steadman, Schwelb, and Ruiz, Associate Judges.

The opinion of the court was delivered by: Schwelb, Associate Judge

Argued April 22, 2003

Eastern Savings Bank (Eastern) brought this action for a declaratory judgment to determine the priority of secured interests in real property as between Eastern's Deed of Trust securing the payment of an indebtedness owed to Eastern by Vasiliki Pappas and a lien based on an earlier judgment against Vasiliki Pappas in favor of three judgment creditors. The trial court granted summary judgment in favor of the judgment creditors. On appeal, Eastern contends that its lien is entitled to priority over the creditors' lien pursuant to the doctrine of equitable subrogation. We agree, reverse, and remand.


In June 1980, Aphrodite Pappas, who was the owner of certain real property at 2507 33rd Street, N.W. in Washington, D.C., conveyed that property to Vasiliki Pappas in fee simple. Soon thereafter, Aphrodite Pappas died, leaving three children as heirs. *fn1 Vasiliki Pappas was named personal representative of Aphrodite Pappas' estate. In 1986, however, the Probate Court removed Vasiliki Pappas as personal representative on account of numerous improprieties on her part in exercising her fiduciary responsibilities. On April 18, 1990, Vasiliki Pappas executed a deed of trust on the 33rd Street property to secure a loan made to her by CitiBank Federal Savings Bank in the amount of $159,000.00 which was duly recorded.

In 1992, and again in 1996, the successor personal representative of Aphrodite Pappas' estate obtained judgments against Vasiliki Pappas in the Superior Court for breach of fiduciary duty. Each judgment was against Vasiliki Pappas personally, and not against her in her capacity as p ersonal representative. These judgments were duly recorded in the land records, and they became effective as judgment liens against all real property titled in the name of Vasiliki Pappas. D.C. Code §15-102 (a) (2001).

Meanwhile, Vasiliki Pappas' financial difficulties continued, and by 1998, she was in serious default on the CitiBank Deed of Trust. CitiBank instituted foreclosure proceedings. On November 3, 1998, Vasiliki Pappas secured a loan from Eastern which had the effect of refinancing the earlier CitiBank loan, and she duly executed a promissory note in the amount of $168,000.00 payable to Eastern, $153,800.00 of which was used to discharge the earlier CitiBank loan. This note was secured by a new Deed of Trust of the same date. *fn2

Certified Title Corporation (Certified) performed a title search on the property on behalf of Eastern in connection with the refinancing of the Vasiliki Pappas indebtedness. Certified discovered the first judgment, which had been secured by the Successor Representative of the E state of Aphrodite Pappas against Vasiliki Pappas in the amount of $3,461.12. Certified mistakenly understood, and incorrectly represented to Eastern, that this judgment had been entered against Vasiliki Pappas solely in her capacity as the former Personal Representative of Aphrodite Pappas' estate. A duly recorded judgment against Vasiliki Pappas in the amount of $62,397.76, which had been entered by the Probate Division of the Superior Court in 1992, apparently was not discovered, or, at least, not related to Eastern, during the initial title search. The title examinations were performed by an independent abstractor retained by Certified, and Eastern did not receive any title documents which would have imparted actual knowledge of any judgment beyond the one for $3,461.12. *fn3

Soon after executing the promissory note and Deed of Trust in favor of Eastern, Vasiliki Pappas defaulted on the Eastern loan. As CitiBank had done following Vasiliki Pappas' earlier default, Eastern instituted foreclosure proceedings. In connection with these proceedings, counsel for Eastern caused the title to be examined, and Eastern then actually learned for the first time that the judgment in favor of the heirs was against Vasiliki Pappas individually, and not in her capacity as Personal Representative of Aphrodite Pappas' estate. *fn4 It was also at this time that Eastern learned the full amount of Vasiliki Pappas' total judgment debt.

In March 1999, sixteen years after the death of Aphrodite Pappas, the Probate Court ordered the distribution to the heirs of p ortions of the judgments secured by the Successor Personal Representative against Vasiliki Pappas. On December 19, 2000, Eastern brought suit against the heirs, claiming that its lien was superior to their judgment liens under the principle of equitable subrogation. Eastern and the judgment creditors filed cross-motions for summary judgment.

On December 30, 2001, in an eight-page order, the trial court granted the heirs' motion for summary judgment and denied Eastern's motion for the same relief. C iting, inter alia, Associated Fin. Servs. of America v. District of Columbia, 689 A.2d 1217 (D.C. 1997), the judge wrote that "the common law principle of 'first in time, first in right' governs competing creditors' claims against a property in the absence of an exception." She noted that the only statutory exception in the District is D.C. Code § 15-104 (2001), which provides that

[t]he lien of a mortgage or deed of trust upon real property, given by the purchaser to secure the payment of the whole or any part of the purchase money, is superior to that of a previous judgment or decree against the purchaser. *fn5

The judge raised, but found it unnecessary to resolve, the issue whether this statutory exception should be extended by the court to a lender like Eastern, who provides refinancing to the borrower by paying off and retiring a prior indebtedness. Relying on Associated Fin. Servs., 689 A.2d at 1222, and on Clay Properties v. Washington Post Co., 604 A.2d 890, 895 (D.C. 1992) (en banc), the judge determined that "a crucial question in deciding the competing interests of lienholders and creditors is notice." The judge went on to hold that because the judgments were recorded Eastern "was on inquiry notice of the judgment against Vasiliki Pappas," that Eastern "did not acquire creditor status for value without notice," and that "[e]quity . . . does not justify moving Eastern to a position superior to the Pappas defendants." The judge therefore granted summary judgment to the heirs. This appeal followed.


"Generally, priority of liens or security interests is determ ined according to the well-known principle of 'first in time, first in right.'" Malakoff v. Washington, 434 A.2d 432, 434 (D.C. 1981) (citations omitted). The question in this case is whether, and to what extent, this principle is affected by the doctrin e of equitable subrogation.

In G.E. Capital Mortgage Servs., Inc. v. Levenson, 657 A.2d 1170 (Md. 1995), the Maryland Court of Appeals explained that subrogation is

the substitution of one person to the position of another, an obligee, whose claim he has satisfied. . . . The basic principles underlying subrogation are the same as those in constructive trusts, prevention of merger, and equitable liens, i.e., restitution to prevent forfeiture and unjust enrichment.

G.E. Osborne, Handbook on the Law of Mortgages § 277, at 561 (2d ed. 1970) (Osborne). Although the doctrine of equitable subrogation may be applied in many contexts, one context involves the refinancing of a mortgage. Osborne states:

Where a lender has advanced money for the purpose of discharging a prior encumbrance in reliance upon obtaining security equivalent to the discharged lien, and his money is so used, the majority and preferable rule is that if he did so in ignorance of junior liens or other in terests he will be subrogated to the prior lien. Although stressed in some cases as an objection to relief, neither negligence nor constructive notice should be material.

Osborne, § 28 2, at 570.

Id. at 1172. The court stated that "[t]he great majority of case law holds that one who pays the mortgage of another and takes a new mortgage as security will be subrogated to the rights of the first mortgagee as against any intervening lienholder." Id. at 1175. See also, e.g., Caito v. United California Bank, 576 P.2d 466, 471 (Cal. 1978) (defining equitable subrogation).

In this jurisdiction, the doctrine of equitable subrogation was first applied to encumbrances on real p roperty over a century ago. See Taylor v. MacGreal, 15 App. D.C. 32, 33 (1899). Thirty eight years later, in the leading case of Burgoon v. Lavezzo, 68 App. D.C. 20, 92 F.2d 726 (1937), *fn6 the court applied the doctrine in a somewhat complex situation similar in principle to the one in the present case. The court held in Burgoon that where part of the purchase money for real property had been used to discharge an existing second mortgage, the purchaser *fn7 was entitled to subrogation of that mortgage as against the holder of an existing third mortgage which was a matter of record and of which the purchaser had constructive but not actual notice. *fn8 In reaching its decision, the court surveyed the authorities, already numerous in 1937, which had applied or refused to apply the doctrine of equitable subrogation where a lender or purchaser sought priority over intervening liens. Citing Hudson v. Dismukes, 77 Va. 242, 246-47 (1883), the court explained that subrogation "is the creature of equity, and is founded upon principles of natural justice . . . and is now applied in favor of all persons who are required to pay the debt of another to protect their own interests." 68 App. D.C. at 23, 92 F.2d at 729. The court in Burgoon was "unable to see how constructive notice to [the purchaser] of the [junior mortgagee's lien] could have anything to do with the right of the former to subrogation. . . . The question is: What is natural justice under the actual facts of the situation?" 68 App. D.C. at 24, 92 F.2d at 730 (quoting Prestridge v. Lazar, 95 So. 837, 838 (M iss. 1923)).

The court found the issue whether equitable subrogation should be liberally or restrictively applied to be a very difficult one; in the court's view, principles of "benevolent or natural justice" were pitted against the policy of the law favoring consistency and predictability. *fn9 Nevertheless, the court followed the federal *fn10 majority rule, quoting at length from Rachal v. Smith, 101 F. 159, 164-66 (5th Cir. 1900):

Since the equitable doctrine of subrogation was ingrafted on the English equity jurisprudence from the civil law, it has been steadily growing in importance, and widening its sphere of application. It is a creation of equity, and is administered in the furtherance of justice. It is applied to give the party who actually pays the debt the full benefit and advantage of such payment. It has been long settled, and it is not controverted, that the doctrine applies where a junior incumbrancer discharges the prior incumbrance, and where the surety pays the debt of his principal, and in cases of like cha racter. A just limitation of the application of the doctrine is that it does not apply to payments made by a mere volunteer or stranger. . . .

If [the lender], instead of taking a release of the two mortgages, had taken an assignment of them, the question here discussed would never have been raised. As he paid off the mortgages at the request of the debtors, they would unquestionably have been assigned to him without recourse, had he requested it. He was entitled to an assignment. . . . If it be correct that [the lender's] position was not that of a volunteer or stranger, then it is immaterial that a release, instead of an assignment, was made. Where the rights of innocent third persons have not intervened, the release will not prevent the person making the payment from becoming the equitable assignee of the claim paid.

68 App. D.C. at 29, 92 F.2d at 735. The holding in Burgoon is controlling authority in the District of Columbia and it is our duty to follow it.

With respect to the issue here presented, the decision in Burgoon is also consistent with the RESTATEMENT (THIRD) OF PROPERTY: MORTGAGES § 7.6 cmt e. (1997):

Perhaps the case occurring most frequently is that in which the payor is actually given a mortgage on the real estate, but in the absence of subrogation it would be subordinate to some intervening interest, such as a junior lien. Here subrogation is entirely appropriate, and by virtue of it the payor has the priority of the original mortgage that was discharged. This priority is often of critical importance, since it will place the payor's security in a position superior to intervening liens and other interests in the real estate. The holders of such intervening interests can hardly complain of this result, for it does not harm them; their position is not materially prejudiced, but is simply unchanged.

Many judicial opinions dealing with a mortgagee who pays a pre-existing mortgage focus on whether the payor had notice of the intervening interest at the time of the payment. Most of the cases disqualify the payor who has actual knowledge of the intervening interest, although they do not consider constructive notice from the public records to impair the payor's right of subrogation. Under this RESTATEMENT, however, subrogation can be granted even if the payor had actual knowledge of the intervening interest; the payor's notice, actual or constructive, is not necessarily relevant. *fn11

The Restatement further states, and we agree, that "[s]ubrogation will be recognized only if it will not materially prejudice the holders of intervening interests." Id.

The heirs contend that they would be materially prejudiced if equitable subrogation were applied, because they had the right to expect, under the "first in tim e, first in right" rule, that their judgment liens would advance upon the satisfaction of CitiBank's lien and would therefore be superior to Eastern's lien, which was secured later in time. This contention was, however, explicitly rejected in Burgoon:

The junior lienor had a right to advance if the prior encumbrance was paid off by one not entitled to subrogation; he had no such right if the prior lien was satisfied by one entitled to subrogation.

68 App. D.C. at 26; 92 F.2d at 732 (emphasis added). Moreover, the court emphasized, as subsequently noted in the RESTATEMENT, that the intervening creditors suffer no prejudice if equitable subrogation is applied:

The only advantage they have gained is through the money paid by [the purchaser], without any consideration whatever moving from them. They claim the benefit, solely through the mistake of [the purchaser]. The [junior lienor] does not pretend to have earned a farthing of their claim. They simply say, the cold blood of the law permits them to take . . . [the purchaser's] money.

We think that to recognize equitable assignment does not impair any rights of the junior lienor worthy of equitable recognition against the position of one who in ignorance of the junior lien advances a part of purchase price to discharge a senior lien. For the only "rights" of the junior lienor that can be said to be actually impaired are gambling "rights" to profit by a purchaser's mistake.

68 App. D.C. at 26-28, 92 F.2d 732-33 (quoting Williams v. Libby, 105 A. 855, 856-57 (Me. 1899)). *fn12

The heirs argue that the interest rate of Eastern's note is far higher than that of CitiBank's, that the terms of Eastern's loan are more exacting, and that the heirs are thereby prejudiced because any funds available to them will be incrementally depleted as a result of the refinancing. Except as reflected in footnote 13, infra, this contention is unpersuasive. Eastern concedes in its Reply Brief, and counsel repeatedly acknowledged during oral argument, that Eastern is subrogated only to the extent that it was required to pay CitiBank to satisfy Vasiliki Pappas' indebtedness to CitiBank. *fn13

In Caito, 576 P.2d at 471, the Supreme Court of California, in a decision that we view, in this respect, as consistent with Burgoon, stated that equitable subrogation is appropriate where

(1) Payment [was] made by the subrogee to protect his own interest. (2) The subrogee [has] not . . . acted as a volunteer.

(3) The debt paid [was] one for which the subrogee was not primarily liable. (4) The entire debt [has] been paid. (5) Subrogation [would] not work any injustice to the rights of others.

See also Han v. United States, 944 F.2d 526, 529 (9th Cir. 1991). Each of these conditions has been satisfied in this case. Eastern made the payment in its own interest. It did not act as a volunteer. *fn14 Eastern was not "primarily liable," or for that matter, liable at all for Vasiliki Pappas' debt to CitiBank. It satisfied CitiBank's entire debt. For the reasons stated in detail in Burgoon, in Bennett, supra note 12, 46 A.2d at 361, and in the RESTATEMENT, see pages 11-12, supra, subrogation would work no injustice to the judgment-creditor heirs, who would retain the precise security interest that they possessed at the time Eastern redeemed the indebtedness to CitiBank.


Relying on the opinion of the trial court, the heirs also contend that D.C. Code § 15-104, quoted on page 5, supra, which accords priority to "the lien of a mortgage or deed of trust upon real property, given by the purchaser to secure the payment of the whole or any part of the purchase money" (emphasis added), provides the sole exception in this jurisdiction to the principle "first in time, first in right." There is dictum in District of Columbia v. Franklin Inv. Co., 404 A.2d 536, 540 (D.C. 1979), which lends some support to the heirs' contention; the court in that case described it as "axiomatic that a prior lien gives a prior legal right ('f irst in time, first in rig ht'), except where statute varies the common law rule." (Emphasis added; citations om itted.) But the Franklin Investment case did not involve equitable subrogation, and the court made no mention at all of Burgoon. We do not think that the Franklin Investment dictum is controlling here, or that the court had in mind a situation like the o ne now before us.

Section 15-104 addresses an issue materially different from the question presented in equitable subrogation cases. The statute has to do with the debts of the purchaser of real property, and provides that when a purchaser gives a purchase money mortgage to secure all or part of the purchase price, the lien on that property takes priority over pre-existing liens held by other creditors of the purchaser which would otherwise attach to the property as soon as the buyer receives title, an d which, under the m axim of first in time, first in right would outrank the purchase money lien.

Equitable subrogation, on the other hand, addresses the priority of liens held by creditors of the owner of property. The doctrine is applied where the subrogee effectively stands in the shoes of the original lienholder, and w here the failure to apply it would unjustly enrich prior jud gment creditors at the subrogee's expense. This purely equitable issue does not arise in cases governed by § 15-104.

Because the statute and the equitable doctrine address distinctly different issues, the courts that sustained equitable subrogation in the decisions discussed in this opinion did not mention the existence of § 15-104 or of its analogue in other jurisdictions. When Burgoon was decided, for example, D.C. Code § 24-328 (1929) - the predecessor of § 15-104 -provided that "the lien of the [purchase money mortgage] or deed of trust on the property shall be superior to that of a previous judgment or decree against the purchaser." The statute did not address the issue presented in Burgoon, and the court consequently did not address or discuss, or even cite the statute. Similarly, when the Maryland Court of Appeals held in the G.E. Capital Mortgage Services case that a refinancing mortgage lender without actual notice of the liens of earlier judgment creditors had priority over those creditors' liens, 652 A.2d at 1172, a Maryland statute analogous to § 15-104 provided that a purchase money mortgage "shall be preferred to any previous judgment or decree for the payment of money which is obtained against the purchaser." MD. CODE ANN., REAL PROPERTY § 7-104. A s in Burgoon, the court had no occasion to discuss this statute, which concerned prior judgments against the purchaser, while describing and applying equitable subrogation as between the mortgage lender and the seller's judgment creditors.

In essence, the heirs seek to apply the Latin maxim of "expressio unius est exclusio alterius" to the provisions of § 15-104. They argue, in substance, that the statutory exception to "first in time, first in right" is, by implication, the only such exception. However, "[t]he expressio unius maxim . . . must be applied with a considerable measure of caution." Council of the District of Columbia v. Clay, 683 A.2d 1385, 1390 (D.C. 1996) (citation omitted). Because the doctrine of equitable subrogation is concerned with an issue that does not arise under the statute, and because the doctrine and the statute have co-existed in this and other jurisdictions for many decades without any suggestion that the statute implicitly limits the equitable doctrine in any way, we conclude that this contention on behalf of the heirs cannot carry the day.


For the foregoing reasons, the judgment of the trial court is reversed, and the case is remanded for further proceedings consistent with this opinion.

So ordered.

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