942 F.2d 1311 (8th Cir. 1991), 89-5330, Universal Title Ins. Co. v. United States

Docket Nº:89-5330.
Citation:942 F.2d 1311
Party Name:UNIVERSAL TITLE INSURANCE COMPANY, a Minnesota corporation, Appellee, v. UNITED STATES of America, Appellant.
Case Date:August 27, 1991
Court:United States Courts of Appeals, Court of Appeals for the Eighth Circuit

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942 F.2d 1311 (8th Cir. 1991)

UNIVERSAL TITLE INSURANCE COMPANY, a Minnesota corporation, Appellee,


UNITED STATES of America, Appellant.

No. 89-5330.

United States Court of Appeals, Eighth Circuit

August 27, 1991

Submitted May 17, 1990.

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William Estabrook, argued (Shirley D. Peterson, Gary R. Allen and Barbara I. Hodges, on brief), Washington, D.C., for appellant.

John M. Koneck, argued (Jon C. Nuckles, on brief), Minneapolis, Minn., for appellee.

Before McMILLIAN and ARNOLD, Circuit Judges, and FRIEDMAN, [*] Senior Circuit Judge.

McMILLIAN, Circuit Judge.

The government appeals from a final judgment entered in the United States District Court for the District of Minnesota in

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favor of Universal Title Insurance Company ("Universal"), finding that Universal was entitled to be equitably subrogated to the rights of lienholders who were senior to a federal tax lien, which the insurer failed to discover in performing a title search incident to issuing two insurance policies. Universal Title Insurance Co. v. United States, No. 3-87-835 (D.Minn. Apr. 26, 1989) (Universal Title ). For reversal, the government argues that the district court erred in subrogating Universal to the position of the prior lienholders because Universal has not met the prerequisites for asserting this equitable doctrine under Minnesota law. For the reasons discussed below, we reverse the judgment of the district court and remand the case to the district court to enter judgment in favor of the government.


The facts of the instant case are undisputed. On April 29, 1985, Rodney and Martha Hjelms purchased residential property, located in Richfield, Minnesota, from Diane Warner by way of warranty deed. At the time of purchase, the property was encumbered with the following liens: (1) a mortgage lien in favor of Midwest Federal Savings and Loan Association dated January 31, 1974, in the amount of $26,920.82; (2) a judgment lien in favor of Dwain W. Warner Jr. filed July 30, 1979, in the amount of $22,590.16; (3) county real estate taxes in the amount of $810.34; (4) a water and sewer charge lien in the amount of $379.81; and (5) a United States tax lien filed September 14, 1981, in the amount of $31,027.54. The Hjelmses borrowed the purchase money from Investors Savings Bank ("Investors"), which secured the loan by a mortgage deed. Prior to the sale, Universal conducted a title search of the property, but failed to discover the properly recorded federal tax lien, and the Hjelmses and Investors had no knowledge of the tax lien prior to closing. At the direction of the Hjelmses, Investors and Diane Warner, all of the liens and encumbrances, except the federal tax lien, were satisfied at the time of closing. After payment of consideration, Universal issued two title insurance policies, one to the Hjelmses insuring clear title and another to Investors insuring its first mortgage. Under the policies, Universal is responsible for the removal of the tax lien. The policies also provide that if Universal paid to remove claims or liens from the title, Universal would be subrogated to the rights of its insureds (the Hjelmses and Investors).

The day after closing, the Hjelmses received notice from the Internal Revenue Service ("IRS") advising them of the existence of the tax lien against their property. Universal offered the IRS $12,865.01 as full payment of the lien, an amount equal to the seller's net proceeds, or, in other words, the purchase price minus the amounts paid to satisfy the prior liens and closing expenses. The IRS stipulated that it had a practice of releasing its tax liens if it is paid all of the seller's proceeds after payment of prior liens and customary closing costs. However, the IRS refused to accept Universal's tender of payment equal to the amount of the seller's net proceeds in the instant case. The IRS and Universal agreed that Universal would deposit $76,000, the full market value of the property, into an escrow account in exchange for release of the tax lien. The parties also agreed that their rights and claims against the property would be transferred to the escrow account, pending resolution of their dispute by a court of competent jurisdiction.

On December 14, 1987, Universal filed a complaint in the United States District Court for the District of Minnesota, seeking a ruling that it was entitled to a full release of the federal tax lien upon payment of $12,865.01, the net proceeds of the sale paid to Diane Warner. Universal argued that the practice of the IRS was to accept the seller's net proceeds from the sale in exchange for full release of the lien, that the IRS would be unjustly enriched if it received an amount greater than the net proceeds, and that Universal was entitled to be equitably subrogated to the rights of the prior senior lienholders, which the Hjelmses and Investors paid off at the time of closing. Following a bench trial, the

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district court concluded that Universal was "equitably subrogated to the rights of the owners of the prior mortgage liens and encumbrances," and that the government was entitled to $12,865.01 of the escrowed funds, with the balance distributed to Universal. Universal Title, slip op. at 5. This appeal followed.


We note initially that, although we defer to the district court's findings of fact, setting them aside only if "clearly erroneous," Fed.R.Civ.P. 52(a), we review its conclusions of law de novo. SEC v. Comserv Corp., 908 F.2d 1407, 1411 (8th Cir.1990). "Rule 52(a) does not inhibit an appellate court's power to correct errors of law, including those that may infect a so-called mixed finding of law and fact, or a finding of fact that is predicated on a misunderstanding of the governing rule of law." Bose Corp. v. Consumers Union of United States, Inc., 466 U.S. 485, 501, 104 S.Ct. 1949, 1959, 80 L.Ed.2d 502 (1984). In addition, we engage in an independent review of the district court's interpretation of the appropriate state law, which in the instant case is Minnesota law. Salve Regina College v. Russell, --- U.S. ----, 111 S.Ct. 1217, 1221, 113 L.Ed.2d 190 (1991). Finally, we note that neither party has presented controlling precedents for our consideration, and this court has found none that exactly match the unusual factual setting of this case.

On appeal, the government argues that the equitable doctrine of subrogation is inapposite to the instant case for three reasons. First, the government claims that Universal made no payment that would entitle it to subrogation. Second, the government contends that Universal is precluded from the equitable remedy of legal subrogation because its failure to discover the properly recorded federal tax lien was not an "excusable mistake of fact." Finally, the government argues that Universal is not entitled to be subrogated to the rights of the senior lienholders because an insurer's subrogation rights extend only to one causing the loss to its insureds, in this case Diane Warner, the seller of the property who breached her warranty of good title. 1 We agree, and will address each point in turn.

In addition to its substantive arguments with respect to each of the issues raised by the government, Universal argues that the government should be precluded from raising all but its second argument on appeal because they were not raised before the district court. See American General Finance Corp. v. Parkway Bank & Trust Co., 520 F.2d 607, 608 (8th Cir.1975). The government counters that its argument before the district court, which essentially addressed the issue of whether the equities supported Universal's claim for subrogation, was broad enough to...

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