Lost Lien Priority Restored

A recent case provides a reminder about the importance of title insurance in making loans secured by real property. In JP Morgan Chase Bank, N.A. v. Banc of America Practice Solutions, Inc. (2012) 209 Cal.App.4th 855, JP Morgan Chase Bank (“Chase”) made a loan to a married couple refinancing two existing loans on their home.  Prior to making the loan, Chase obtained a preliminary title report showing the two existing deeds of trust.  Over two months later, without obtaining a lender’s policy of title insurance and without even obtaining an update to the title report, Chase made the loan and recorded its deed of trust.

Unbeknownst to Chase, prior to closing the refinancing, the husband’s professional corporation obtained a loan from Sky Bank to finance his medical practice.  Sky Bank was provided with a deed of trust on his home, which was recorded before Chase recorded its deed of trust.  As a result, Sky Bank’s deed of trust became the first deed of trust on the home when the Chase refinancing closed.

Chase later discovered that its deed of trust was junior to that of Sky Bank.  In subsequent litigation, Chase argued that the doctrine of equitable subrogation should place its deed of trust in first position, given that Chase’s loan had been used to pay off both the original first and second deeds of trust.  The trial court granted Chase’s request, and the appellate court upheld the trial court’s decision.

Though the result of the case is encouraging, and lenders may occasionally benefit from resort to equitable subrogation, the lesson for lenders is that they should never rely on a title search alone—not even an updated title search—in making a loan secured by real estate.  Lenders should always obtain a policy of title insurance, in order to insure the priority of the lender’s deed of trust.  Even though Chase was ultimately able to correct its priority problem, it only did so after costly and protracted litigation.

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