Lender’s Seven-Year-Old Equitable Subrogation Claim Not Barred By Three Year Statute of Limitations

Bank of New York Mellon v. Citibank, 2/16/17, 2DCA/4

In 2006, borrower’s property was subject to a first trust deed, as well as a $500k second trust deed securing a line of credit with Citibank. Sneaky borrower refinanced the Citibank second for a higher amount ($600k), and almost simultaneously obtained a new line of credit for $1 million from Bank of New York’s predecessor (for ease, BNY).  BNY’s loan was supposed to be in second position, and neither borrowers nor Citibank informed BNY of the new Citibank loan, despite opportunities to do so.  It happened so quickly that BNY’s title search failed to pick up Citibank’s new trust deed.  After BNY’s loan was made, a comedy of errors ensued; ultimately BNY paid down Citibank’s new second and everything seemed right as rain.  That is, until Sneaky Borrower became Bad Borrower: It didn’t cancel the Citibank second and in 2007, it drew down $600,000 from the Citibank line of credit.  In 2011, Borrowers defaulted and Citibank commenced foreclosure proceedings; BNY sued in 2013, alleging equitable subrogation, statutory violations and various torts.  The trial granted Citibank’s demurrer without leave to amend based on Code Civ. Proc 338 three year statute of limitations.  Held: Reversed

The facts of this case are somewhat involved. The key takeaway for those who litigate equitable subrogation issues: The statute of limitations for a declaratory relief and equitable subrogation claims are the same as the legal or equitable claim on which they are based.  CCP 338(a) is a three year statute and applies to liabilities created by statute.  On the other hand, Civil Code 882.020 has a 10- or 60-year statute of limitations for enforcing a power of sale in a deed of trust.  To the extent that BNY claimed that Citibank violated a statute that required Citibank to reconvey the second trust deed once BNY paid it off, it would face a three year statute of limitations; to the extent that BNY asserted that it was equitably subrogated to Citibank’s position and its rights under the Citibank trust deed, BNY would be subject to the 10-/60 year statute. 

BNY apparently pled these theories in the alternative (it’s totally okay to plead in the alternative), and argued one or other theory with more or less force at the trial and the appellate levels. Citibank argued that BNY had waived key arguments by not making them. Nonetheless, the appellate court said that Citibank’s demurrer failed as a matter of law — BNY’s complaint had in fact alleged that BNY was equitably subrogated to Citibank’s trust deed. Thus, the demurrer should have been overruled.

A few other notes of interest:

The payoff of Citibank’s deed of trust securing a line of credit was insufficient to terminate the lien because the second expressly secured future advances.  In order to terminate the Citibank second, the borrowers would have had to sign a termination letter, which they did not do.  

The doctrine of equitable subrogation implies a right to recover from the principal debtor when the subrogee pays the debtor’s obligation to a creditor in order to protect the subrogee’s own interest.  That doctrine most often applies in insurance cases, but it applies in this context too.