Citizens State Bank v. Raven Trading Partners Inc

• Decision Date: 22 July 2010
• Docket Number: No. A08-1560.,A08-1560.
• Citation: 786 N.W.2d 274
• Parties: CITIZENS STATE BANK, Appellant,v.RAVEN TRADING PARTNERS, INC., et al., Respondents.
• Court: Minnesota Supreme Court

786 N.W.2d 274

CITIZENS STATE BANK, Appellant,v.RAVEN TRADING PARTNERS, INC., et al., Respondents.

No. A08-1560.

Supreme Court of Minnesota.

July 22, 2010.

Syllabus by the Court

An unexplained 38-day delay in resubmitting a mortgage to the county recorder's office for recording after the mortgage was returned by the county recorder's office unrecorded is not a justifiable or excusable mistake of fact that warrants applying equitable subrogation.

Michael L. Brutlag, Matthew R. Doherty, Brutlag, Hartmann & Trucke, P.A., Minneapolis, MN, for appellant.

Daniel W. Stauner, Plymouth, MN, for respondents.

Bradley N. Beisel, Kevin J. Dunlevy, Michael E. Kreun, Beisel & Dunlevy, P.A., Minneapolis, MN, for amicus curiae Minnesota Land Title Association.

OPINION

BARRY G. ANDERSON, Justice.

This appeal involves a dispute about the priority of two mortgages on the same property. At issue is whether appellant Citizens State Bank should be equitably subrogated to the position of two prior mortgagees and a mortgage held by Citizens given priority over a mortgage held by respondent Raven Trading Partners, LLC. Citizens brought an action in district court seeking an order declaring that, based on equitable subrogation, the Citizens mortgage recorded on May 9, 2005, has priority over a mortgage held by Raven that was recorded on April 29, 2005. The district court applied equitable subrogation and gave the Citizens mortgage priority over the Raven mortgage. Raven appealed, and the court of appeals reversed and remanded. Because we conclude that Citizens' negligence in waiting 38 days to resubmit the mortgage to the county recorder's office for recording was not an excusable or justifiable mistake of fact that warrants applying equitable subrogation, we affirm and remand.

On February 16, 2005, Feyereisen Enterprises, Inc., entered into a loan agreement with Citizens to borrow $165,000, and Feyereisen gave Citizens a mortgage on real property located in Hennepin County as security for the loan. The loan proceeds were applied to the balance due on two prior mortgages on the property. On February 21, 2005, Land Title, Inc., acting on behalf of Citizens, sent the Citizens mortgage to the county recorder's office to be recorded. But on March 14, 2005, the county recorder's office returned the mortgage to Land Title, Inc., unrecorded because the check for the mortgage registration tax was not for the proper amount.

On April 7, 2005, Feyereisen executed a mortgage on the property in favor of Raven, and the mortgage referenced the two prior mortgages on the property that had been satisfied by the loan from Citizens.¹ The Raven mortgage was recorded on April 29, 2005. On April 20, however, the Citizens mortgage was returned to the county recorder's office for recording. On May 9, 2005, subsequent to the recording of Raven's mortgage, the Citizens mortgage was recorded.

Two years later, Citizens filed a complaint in district court seeking declaratory judgment. Citizens argued that it should be equitably subrogated to the positions of the two prior mortgagees, because the Citizens loan was used to satisfy the prior mortgages, and thus the Citizens mortgage should be given priority over the Raven mortgage. The district court granted Citizens' motion for summary judgment and denied Raven's cross-motion for summary judgment.

The district court noted that Raven's mortgage was recorded prior to the Citizens mortgage and would normally take priority based on Minn.Stat. § 507.34 (2008). But the district court reasoned that equitable subrogation should apply for several reasons. Raven knew its mortgage would be subordinate; when Raven received its mortgage, it did not know of the Citizens mortgage, but believed that there were two other mortgages on the property, to which the Raven mortgage was junior. In addition, the court reasoned that if it did not apply equitable subrogation, Raven would receive a windfall. The court also noted that Raven had security in an additional piece of property. Further, the district court viewed Citizens' delay in recording as excusable, and concluded that it would be unjust to give Raven priority over Citizens.

Raven appealed, and the court of appeals reversed and remanded. Citizens State Bank v. Raven Trading, Partners, Inc., No. A08-1560, 2009 WL 1515585, at *1 (Minn.App. June 2, 2009). The court of appeals stated that a professional lender is held to a higher standard than an unsophisticated party, and Citizens' delay in failing to timely record its mortgage is not a “ ‘justifiable or excusable mistake’ ” that should trigger application of equitable subrogation. Id. at *2. Therefore, the court held that the district court abused its discretion by granting Citizens summary judgment. Id. The concurring opinion agreed with the result based on the application of Ripley v. Piehl, 700 N.W.2d 540 (Minn.App.2005), but questioned the wisdom of Ripley. Citizens, 2009 WL 1515585, at *2-9 (Crippen, J., concurring). We granted Citizens' petition for review.

On appeal from summary judgment, such as here, we must determine whether there are any genuine issues of material fact and whether a party is entitled to judgment as a matter of law. Wensmann Realty, Inc. v. City of Eagan, 734 N.W.2d 623, 630 (Minn.2007). Where the material facts are not disputed, we review the district court's application of the law de novo. Id. We have previously said, however, that “[g]ranting equitable relief is within the sound discretion of the trial court [and] [o]nly a clear abuse of that discretion will result in reversal.” Nadeau v. County of Ramsey, 277 N.W.2d 520, 524 (Minn.1979); accord City of Cloquet v. Cloquet Sand & Gravel, Inc., 312 Minn. 277, 279, 251 N.W.2d 642, 644 (1977) ( “The standard of review in nuisance cases and others involving equitable relief is whether the trial court has abused its discretion.”). Therefore, for this appeal, we review the district court's application of equitable subrogation for abuse of discretion.² Under an abuse of discretion standard, we may overrule the district court when the court's ruling is based on an erroneous view of the law. Montgomery Ward & Co. v. County of Hennepin, 450 N.W.2d 299, 306 (Minn.1990). A party that invokes an equitable doctrine has the burden of proving applicability of equity. See Heidbreder v. Carton, 645 N.W.2d 355, 371 (Minn.2002).

Citizens argues that a strict application of the Minnesota Recording Act, Minn.Stat. § 507.34, would lead to an inequitable result by giving Raven priority over Citizens, and contends that the district court's application of equitable subrogation was proper. The Minnesota Recording Act gives protection to those who purchase property in good faith, for valuable consideration, and who first record their interests, by providing that

[e]very conveyance of real estate shall be recorded in the office of the county recorder of the county where such real estate is situated; and every such conveyance not so recorded shall be void as against any subsequent purchaser in good faith and for a valuable consideration of the same real estate ... whose conveyance is first duly recorded.

Minn.Stat. § 507.34.³ A “good faith purchaser” is someone “who gives consideration in good faith without actual, implied, or constructive notice of inconsistent outstanding rights of others.” Anderson v. Graham Inv. Co., 263 N.W.2d 382, 384 (Minn.1978). The priority of a mortgage is based on the date of recording. See Minn.Stat. §§ 386.41, 507.34 (2008). The purpose of the Minnesota Recording Act is to protect recorded titles against the gross negligence of those who fail to record their interests in real property. See

Akerberg v. McCraney, 141 Minn. 230, 233, 169 N.W. 802, 803-04 (1918). The Minnesota Recording Act has existed in some form since Minnesota's territorial days. See Act of Mar. 4, 1854, ch. 22, § 1, 1854 Minn. Laws 62, 62.

At the time Raven recorded its mortgage, Citizens had already paid the two prior mortgages on the property, but Citizens had not recorded its own mortgage. Raven did not have actual, implied, or constructive notice of the Citizens mortgage, and Raven recorded its mortgage on the property prior to Citizens. It is undisputed that Raven was a good faith purchaser and that under Minn.Stat. § 507.34 Raven has priority over Citizens. The only question is whether we should apply equitable subrogation ⁴ to reverse that priority. To answer the question, we review the history of equitable subrogation in Minnesota, and determine its applicability to this case.

Under equitable subrogation, when a person has discharged the debt of another with respect to real property, that person may, “when justice requires, ... be substituted in place of a prior encumbrancer and treated as an equitable assignee of the lien.” First Nat'l Bank of Menahga v. Schunk, 201 Minn. 359, 363, 276 N.W. 290, 292-93 (1937). In other words, that person may be substituted to the rights and position of the prior creditor. “Although [equitable] subrogation is a highly favored doctrine, it is not an absolute right, but rather, one that depends on the equities and attending facts and circumstances of each case.” Universal Title Ins. Co. v. United States, 942 F.2d 1311, 1315 (8th Cir.1991); accord Am. Sur. Co. v. State Farm Mut. Auto. Ins. Co., 274 Minn. 81, 85, 142 N.W.2d 304, 307 (1966). Equitable subrogation will not be applied when the parties' equities are equal or rights are unclear. S. Sur. Co. v. Tessum, 178 Minn. 495, 502, 228 N.W. 326, 329 (1929). We have also said that equitable subrogation “will be applied in the interest of substantial justice ... where one party has provided funds used to discharge another's obligations if (a) the party seeking subrogation has acted under a justifiable or excusable mistake of fact and (b) injury to innocent parties will otherwise result.” Carl H. Peterson Co. v. Zero Estates, 261 N.W.2d 346, 348 (Minn.1977).

Equitable subrogation has a long...