The South Carolina Court of Appeals rejected the replacement mortgage doctrine on November 25, 2020 and maintained a priority home equity line of credit over a subsequent mortgage that secured the refinancing of a mortgage ahead of time and senior to the HELOC. Inside ArrowPointe Federal Credit Union v. Bailey, linked here, the Court of Appeals relied on South Carolina’s statutory run notification framework to determine that the equity lender had priority because it registered its collateral before the second mortgage was made and registered. The Appellant filed a motion to reconsider on December 9, 2020, and no action was taken until December 30, 2020.
The replacement mortgage doctrine allows the lender to refinance and satisfy a senior mortgage and maintain the same priority as the mortgage being replaced. The Court of Appeals held that the replacement mortgage doctrine “is an equitable and minority approach” and that the adoption of the doctrine was a matter for the General Assembly. Watch Op. No. 5784, 2020 WL 6937879, at * 5-6 (SC Ct. App. November 25, 2020). The Court of Appeals therefore affirmed the priority of the home equity mortgage and the decision of the special arbitrator to allow foreclosure of the property by the home equity line lender.
The case arose from the following series of mortgage loans:
- Borrowers obtained a $ 256,500 first-rate mortgage that was registered on October 20, 2009 (“Original Mortgage”).
- A week after the original mortgage was registered, borrowers obtained a $ 99,000 credit line for their own home (“HELOC”). HELOC was secured by a mortgage registered on November 4, 2009.
- Less than a month later, borrowers obtained a $ 296,000 mortgage from the original mortgage lender. The $ 296,000 mortgage (“Refinancing Mortgage”) paid off the Original Mortgage and withdrew the equity. The lender then released the Original Mortgage and, on December 15, 2009, registered the Refinancing Mortgage.
The original mortgage lender had no real knowledge of HELOC when it originated the refinancing mortgage. When borrowers obtained the Refinancing Mortgage, they stated that “there [were] no pending home renovation loans, mortgages, fiduciary acts or capital lines of credit, registered or unregistered. ” I would go. (changes to the original). And, according to the opinion, the parties to the transaction wanted HELOC to be junior in priority to the Original Mortgage.
Defaulting borrowers at HELOC, and home equity lender ArrowPointe, filed foreclosure action. During the process, the Appellant abandoned his argument of equitable subrogation and relied on the replacement mortgage doctrine. The Applicant also argued below that “even if ArrowPointe was impaired, it was impaired only to the extent that the Second Mortgage was greater than the First Mortgage.” The Special Arbitrator considered the replacement mortgage doctrine “was not the law of the state of South Carolina” and considered it “as a matter of law, [Refinancing Mortgage] has no priority over the [HELOC]. “ I would go. (citing the order of the Special Referee).
The Appellant argued that customary South Carolina law supports the application of the replacement mortgage doctrine as set out in Property Reinstatement (Third Party) (Mortgages) § 7.3 (1997 and June 2020 update). Watch I would go. at 3. According to the update, a second mortgage would replace the first mortgage with priority over a collateral registered between the first and second mortgages if the first mortgage is released as part of the same transaction that creates the second mortgage, unless the second mortgage materially harms a junior holder, or unless a subsequent guarantee is registered before the first mortgage is registered. I would go. The Court of Appeals disagreed, based on South Carolina’s race warning status, SC Code Ann. § 30-7-10 (2007), and considered that the creditor’s constructive warning about the HELOC is decisive.
The argument in favor of the replacement mortgage test was based in part on South Carolina’s previous precedent, signaling an openness to consider this doctrine. Inside Matrix Financial Services Corp. v. Frazer, 394 SC 134, 714 SE2d 532 (2011), in denying equitable subrogation, the South Carolina Supreme Court noted that section 7.6 (Third) Reformulation of Property (Mortgages) (and South Carolina jurisprudence) did not support equitable subrogation in this case, but that court expressly “did not decide whether a creditor who refinances its own debt could obtain priority under the replacement and modification theory illustrated in section 7.3 of the Recast. . . . ” I would go. (citing Matrix in 138, 714 SE2d in 534). The Court of Appeals recognized that “a significant number of courts have adopted the recast or followed its logic.” The court left the issue of the replacement mortgage doctrine to the General Assembly.