July 17, 2019

Colorado Supreme Court: Actual Knowledge of Preexisting Liens Generally Precludes Application of Equitable Subrogation

The Colorado Supreme Court issued its opinion in Joondeph v. Hicks on June 28, 2010.

Derivative Equitable Subrogation—Effect of Actual Knowledge—Equities Among the Parties Before the Court—Conveyance of Subrogation Rights—Exception to Race-Notice Recording System—Lien Priority.

This case involves a dispute over the priorities of liens encumbering property located in Englewood. Respondent Donald Hicks attempted to foreclose a lien on the property and to obtain a declaratory judgment regarding his lien’s priority. Petitioners, purchasers Shirley and Brian Joondeph and their mortgage company, CitiMortgage, Inc., sought to be equitably subrogated to the senior priority position that the property’s prior owners and mortgage company had themselves obtained through equitable subrogation.

The court of appeals held that petitioners would not be permitted to obtain the senior priority of the prior owners and mortgage company through equitable subrogation. Applying Colorado Supreme Court case law, the court of appeals noted that because petitioners had actual knowledge of Hicks’s preexisting lien, they were not entitled to equitable subrogation. Equitable subrogation by its nature addresses the equities of the parties before the court. The court of appeals also found no precedent for recognizing “derivative” equitable subrogation, which would have allowed the conveyance of the prior owners’ subrogation rights to the petitioners via warranty deed.

The Supreme Court affirmed the judgment of the court of appeals. The Court reiterated that actual knowledge of preexisting liens generally precludes the application of equitable subrogation. Here, petitioners had actual knowledge of Hicks’s prior lien and were not operating under a mistaken assumption that their lien would have senior priority status. Thus, they were not entitled to equitable subrogation. The Court declined to recognize a doctrine of derivative equitable subrogation: in Colorado, equitable subrogation addresses only the equities of the parties before the court, and it remains a narrow exception to the normal order of priority established by Colorado’s race-notice recording system.

Summary and full case available here.

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