IFC Collateral Corp. v. Commercial Units, Inc.

• Decision Date: 04 May 1971
• Docket Number: No. 84,84
• Citation: 186 N.W.2d 214,51 Wis.2d 41
• Parties: IFC COLLATERAL CORP., a New York corporation, Appellant, v. COMMERCIAL UNITS, INC., et al., Respondents, Layton Park Bldg. & Loan Assn., et al., Defendants, MANLO BLDG. CORP., Third-Party Defendant-Respondent.
• Court: Wisconsin Supreme Court

Page 214

186 N.W.2d 214

51 Wis.2d 41

IFC COLLATERAL CORP., a New York corporation, Appellant, v. COMMERCIAL UNITS, INC., et al., Respondents Layton Park Bldg. & Loan Assn., et al., Defendants MANLO BLDG. CORP., Third-Party Defendant-Respondent.

No. 84.

Supreme Court of Wisconsin.

May 4, 1971.

Rehearing Denied June 25, 1971. 51 Wis.2d 110

Action to foreclose a real estate mortgage in which an issue of priority of certain judgment creditors was litigated.

The following facts in this case are undisputed and are listed in chronological order:

(1) On March 4, 1964, Emanuel S. Lozoff acquired title in his own name to an unimproved piece of property, known hereinafter as the Atrium property. At this time Lozoff was a licensed attorney and a licensed and practicing real estate broker. Lozoff was also the president and sole stockholder of a corporation known as Commercial Units, Inc.;

(2) On March 6, 1964, Lozoff conveyed title of the Atrium property to Commercial Units, Inc. Commercial Units then obtained loans and executed mortgages on the property;

(3) On April 1, 1964, Commercial Units, by Lozoff as president, conveyed title back into Lozoff's name personally;

(4) On April 29, 1966, IFC Collateral Corporation made a loan to Commercial Units for $400,000; in return Commercial Units executed a mortgage, granting IFC a security interest in the property. Prior to and at the time this mortgage was granted, Lozoff represented to IFC that title to the Atrium property was in Commercial Units. In addition, IFC relied on a title report which erroneously identified title as being in Commercial Units. In fact, title to the property at the time Commercial Units purported to convey a mortgage security interest was in Lozoff;

(5) In the month of August, 1966, the following judgment creditors docketed judgments and thereby obtained liens against Lozoff and/or Commercial Units, Inc.:

(a) Milwaukee Acceptance Corporation for $20,151.20 and $25,833.37;

(b) A.I.C. Financial Corporation for $107,005.18; and

(c) The Home Bank for $28,241;

(6) On August 30, 1966, appellant commenced this action to foreclose its mortgage;

(7) On September 20, 1966, a receiver of 'all the debts, property, equitable interests, rights and things in action' of Lozoff was appointed; and

(8) On November 22, 1966, Lozoff executed a quitclaim deed of the Atrium property to Commercial Units, Inc.

The question presented here is whose lien is to be satisfied first from the proceeds of the sale. There is no question about IFC's being entitled to foreclose.

The trial court found that the judgment creditors were entitled to priority over the security interest of the appellant. By order, dated February 16, 1970, the circuit court denied the mortgage lien priority as against the liens of the judgment creditors. IFC appeals from that part of the order.

Redford, Dill & Zillmer, Ward Dunphy, Milwaukee, of counsel, for appellant.

Charne, Glassner, Tehan, Clancy & Taitelman, Milwaukee, for respondents.

HANLEY, Justice.

The issues raised by appellant on this appeal are:

(1) Can the doctrine of relation back be applied to cut off interests acquired by strangers in the interim;

(2) Did IFC fail to use due diligence in its search for title; and

(3) Is the possibility that IFC may have a suit against the title company a proper factor for the trial court to consider?

Application of Doctrine of Relation Back.

The appellant contends that under the facts of this case it was entitled to the benefit of the equitable doctrine of relation back. Under the fiction of that doctrine, the deed from Lozoff to Commercial Units, on November 22, 1966, relates back to the original granting of the mortgage on April 29, 1966. Thus, if the doctrine is applicable, title was in Commercial Units on April 29, 1966; and, therefore, in August of 1966, when the judgments were docketed, Lozoff was no longer the owner of the Atrium property; and hence the liens of the judgment creditors could not attach to what Lozoff did not own.

The respondents contend that since they had complied with sec. 270.79(1), Stats., they were entitled to priority. This contention is premised on the fact that legal title to the Atrium property was still in Lozoff at the time the respondents docketed their judgments.

Sec. 270.79(1), Stats., provides in part as follows:

'Lien of judgment; priority; statute may be suspended. (1) Every judgment, when properly docketed, and the docket gives the judgment debtor's place of abode and his occupation, trade or profession shall, for 10 years from the date of the entry thereof, be a lien on the real property (except the homestead mentioned in s. 272.20) in the county where docketed, of every person against whom it is rendered and docketed, which he has at the time of docketing or which he acquires thereafter within said 10 years. * * *'

The trial court, in finding that the judgment creditors were entitled to priority over the security interest of the appellant, made the following conclusions of law:

(1) That IFC failed to use due diligence in its search for title at the time the mortgage was executed;

(2) That it was the 'agent or agents' of IFC who caused the mistake as to title; and, therefore, IFC was not entitled to equitable relief;

(3) That whether Emanuel Lozoff was mistaken as to title to the property or whether he deliberately misrepresented the proper title to the property to the plaintiff were matters involved in the plaintiff's negotiations with Lozoff and Commercial Units, Inc., that gave rise to the mistake and that, therefore, as between the innocent parties in this action, the plaintiff is not entitled to the equitable relief;

(4) * * *

(5) That as to the defendants, Emanuel Lozoff, Elaine Lozoff and Commercial Units, Inc., equitable title to the Atrium Building vested in Commercial Units, Inc., from April 29, 1966; and, as to the defendants, A.I.C. Financial Corporation, Milwaukee Acceptance Corporation and The Home Bank, title to the Atrium Building vested in Commercial Units, Inc., from November 22, 1966, at the time that a deed was given from Lozoff to Commercial Units, Inc.; and

(6) That the lien of plaintiff's mortgage is effective from April 29, 1966, as against all parties, except A.I.C., Milwaukee Acceptance Corporation and The Home Bank; and, except as to those mechanic's lien claimants having filed liens for work performed and material furnished prior to April 29, 1966.

The trial court gave three reasons why the appellant was not entitled to the doctrine of relation back. The trial court first stated that his understanding of the law was that the doctrine of relation back can only be applied in a suit between the parties to the transaction (in this case, a conveyance) and that it cannot be applied to cut off interests acquired in the property by strangers to the transaction during the interim. Secondly, the trial court found that even if the doctrine could be applied to the prejudice of strangers, it should not be so applied here because it was an equitable doctrine and IFC's lack of diligence in searching for title disqualified it for the aid of equity. Thirdly, the trial court was of the opinion that if IFC lost in this suit, then it would have an action against the title company which supplied it with the faulty title report.

In concluding that the doctrine of relation back can never be applied when it would extinguish the rights of strangers acquired in the interim, the trial court relied primarily on the case of Evans v. Crawford County Farmers' Mutual Inc. Co. (1906), 130 Wis. 189, 109 N.W. 952.

The trial court's reliance on Evans is misplaced, and he draws from it a rule much broader than the one actually enunciated therein. The trial court felt that Evans held that the doctrine of relation back may not be applied to prejudice interests acquired by strangers in the interim. We do not agree. The husband in Evans was certainly a stranger to the deal between his wife and the purchaser of his property. But he was not one who required an interest in the property during the interim between the oral agreement and the completion of the sale. His interest was in existence before any transaction between his wife and the buyer. In addition to the above distinction, the Evans Case had nothing to do with the question of creditors' priorities.

One who obtains an equitable interest for value given, which later ripens into a legal interest is entitled to priority over a judgment creditor who dockets his judgment in the interim period. ¹

An equitable mortgage arises when, for value received, one party attempts to convey a security interest in his land to another and such attempt fails because of some error or omission in the documents which prevents the transaction from being denominated a legal mortgage. Osborne, p. 50, sec. 32.

Equitable mortgages can be turned into legal mortgages by supplying the omission or correcting the error which prevented the mortgage from being a legal one in the first instance. And, generally, the correction will be held to relate back to the date of the original transaction, so that the mortgagee will be deemed to have had a legal mortgage from the time of the creation of the equitable mortgage. Persons acquiring interests in the property during the interim (between the date of the equitable mortgage and the date on which it was corrected into a legal mortgage) are usually subordinated to the interest of the mortgagee in the property. The well-recognized exception to this rule is the bona fide purchaser for value without notice who acquires his interest in the property during the interim. A judgment creditor who obtains a lien on the land by docketing his judgment is not a purchaser for value. Main v. Bosworth (1890), 77 Wis. 660, 46 N.W. 1043; Blaha, Lewis and Mueller, supra. The fact that a judgment creditor may be without notice of a prior equitable interest when he dockets is not sufficient...