The Court of Appeal of California, First Appellate District, Division Four, recently overturned a lower court's summary judgment decision against a bank for claims of equitable mortgage and equitable subrogation. See HSBC Bank USA, N.A. v. Goldstein, 2021 BL 348985 (Cal. App. 1st Dist. Sept. 15, 2021). In 2006, Option One Mortgage Corporation ("Option One") made a loan to Andrew Goldstein ("Goldstein"), and Goldstein executed a deed of trust to Option One as security on the loan. This loan paid off a previous loan made by Long Beach Mortgage Company ("Long Beach"). About two months before Option One loaned Goldstein the money, it obtained a title report erroneously stating that title to the property was vested solely in Goldstein, while in fact it was vested in Goldstein and his wife Donna ("Donna" and collectively "the Goldsteins") as community property. In 2011, the Goldsteins filed for bankruptcy, and in 2013, HSBC received an assignment of the deed of trust. HSBC sued Donna in 2018, alleging, among other causes of action, equitable mortgage and equitable subrogation. Donna moved for summary judgment, arguing that section 338(d) of the California Code of Civil Procedure barred the action because undisputed evidence showed that Option One had information that would have put a reasonable person on inquiry notice of mistake more than three years before the filing of the complaint. The trial court agreed and ruled that section 338(d) barred the suit, finding that information available to Option One about title to the property would put a reasonable person on inquiry that Donna had an interest in the property which was senior to the deed of trust, and that since the section 338(d) statute of limitations therefore began to run on March 23, 2007 – when Option One first learned of Donna's interest – and expired three years thereafter on March 23, 2010, prior to the filing of the bankruptcy action.
The Court of Appeal sought to determine the nature of the cause of action and, while agreeing with the trial court as to dismissal pursuant to section 338(d)'s three-year statute of limitations of HSBC's other claims, it reversed with regard to its equitable mortgage and equitable estoppel claims. As to the equitable mortgage claim, the Court wrote that an equitable mortgage is granted to carry out the parties' intent, but only as incidental to enforcement of the original obligation. The Court found that the "original obligation" was Option One's written loan, and that a claim to enforce that obligation was not governed by section 338(d), but instead by other provisions of California law, which provide a four-year and six-year statute of limitations on actions to enforce an obligation to pay a note payable at a definite time and would have been tolled during the bankruptcy. As to the equitable subrogation claim, the Court found that section 338(d) only applies if the original creditor was a victim of fraud or mistake. The Court noted that the equitable subrogation doctrine allows a lender who pays off a borrower's debt to a creditor "to succeed to the rights and remedies of the creditor so paid," and relied on a 2017 California case (Bank of New York Mellon v. Citibank, N.A. 8 Cal.App.5th 935 (2017)) which found that a plaintiff's claim was not time-barred under section 338(d) because its equitable subrogation theory was "not in the nature of relief from . . . fraud or mistake," in that the creditor to whose position plaintiff sought to be subrogated was not "the alleged victim of fraud or mistake as to its own security." The Court held that because HSBC sought to be subrogated to Long Beach's position of priority because of Option One's payment of the Long Beach loan, and because HSBC's rights under the 2005 deed of trust is not in the nature of relief from fraud or mistake, the trial court erroneously ruled that section 338(d) bars HSBC's equitable subrogation claim.
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