Osterman v. Baber

• Decision Date: 28 July 1999
• Docket Number: No. 02A03-9805-CV-238.,02A03-9805-CV-238.
• Citation: 714 N.E.2d 735
• Parties: Ronald OSTERMAN and Norwest Mortgage, Inc., Appellants-Defendants, v. Ronald BABER, Appellee-Plaintiff.
• Court: Indiana Appellate Court

714 N.E.2d 735

Ronald OSTERMAN and Norwest Mortgage, Inc., Appellants-Defendants, v. Ronald BABER, Appellee-Plaintiff.

No. 02A03-9805-CV-238.

Court of Appeals of Indiana.

July 28, 1999.

David P. Irmscher, Lisa M. Dillman, Baker & Daniels, Fort Wayne, Indiana, Attorneys for Appellants.

Terry L. Cornelius, Cornelius & Weingartner, Fort Wayne, Indiana, Attorney for Appellee.

OPINION

SULLIVAN, Judge

Appellants, Ronald Osterman and Norwest Mortgage, Inc. (Norwest), appeal the denial of their summary judgment motion and the grant of Appellee, Ronald Baber's (Baber) summary judgment motion. We affirm.

The events leading to this appeal are as follows:

(1) Alan G. Orr and Vona I. Orr (Orrs)¹ were the owners of real estate (the property) in Fort Wayne, Indiana. At that time, Lincoln National Bank & Trust Company of Fort Wayne (Lincoln) maintained two separate mortgage liens on the property.

(2) January 17, 1995: In preparation for closing on the sale of the property from the Orrs to Osterman, a title search was conducted by the Columbia Land Title Company (Columbia). At that time, the search revealed no liens on the property. In reliance upon the title search, Osterman obtained a title insurance commitment on the property through Fidelity National Title Insurance Company (Fidelity), effective January 9, 1995. The title policy was to insure Osterman in the amount of $67,900.00.

(3) January 24, 1995: Baber obtained a default judgment against the Orrs, cause number 02D01-9412-CP-1862, totaling $183,304.70. On the title insurance commitment, there is a handwritten and undated notation reading: "see new judgment against Orr—02D01-9412-CP-1862." There are several Xs superimposed upon the notation and there is a question mark as well as "ok per Stan" written beside the notation. There is no evidence in the record as to the identity of Stan.²

(4) February 9, 1995: Baber's judgment lien was recorded.

(5) February 16, 1995: Osterman closed on the property and executed a note in favor of First Security Savings Bank (First Security) in the amount of $66,450.00, secured by a mortgage on the property, which note and mortgage were assigned to Norwest. Norwest paid $41,511.32 of the $66,450.00 to Lincoln to satisfy the existing mortgage liens and to secure a senior lien upon the property. At closing, the Orrs executed a warranty deed and closing affidavit, indicating that there were no liens in existence against the property.

On appeal, Norwest claims that, at the time of closing, it was unaware of the default judgment against the Orrs and that we should apply the doctrine of equitable subrogation³ to "prevent Mr. Osterman from remaining liable on his note to Norwest even after he loses the [p]roperty and Norwest from losing the money it paid to satisfy the pre-existing liens on the [p]roperty." Appellant's Brief at 6. Finally, Norwest argues that its rights should be subrogated to those of Lincoln to prevent Baber from "enjoy[ing] a windfall at the expense of innocent third parties." Appellant's Brief at 22.

Summary judgment is appropriate where there are no genuine issues of material fact, and one party is entitled to judgment as a matter of law. Ind. Trial Rule 56(C). In reviewing the grant of summary judgment, we use the same standard as the trial court in deciding whether to affirm the trial court's decision. Maudlin v. Hall (1998) Ind. App., 700 N.E.2d 469. We may affirm the trial court's ruling upon any theory which is supported by the evidence of record. Grubb v. Childers (1998) Ind.App., 705 N.E.2d 180, reh'g denied. In this instance, Norwest must carry the burden of persuading us that the trial court's decision denying it subrogation was erroneous. Id.

Equitable subrogation is applicable when a "party, not [acting as] a mere volunteer, pays the debt of another which, in good conscience, should have been paid by the one primarily liable." Loving v. Ponderosa Sys., Inc., (1985) Ind., 479 N.E.2d 531, 536 (citing National Mut. Ins. Co. v. Maryland Cas. Co. (1963), 136 Ind.App. 35, 41, 187 N.E.2d 575, 578,trans. denied). At that time, if equity permits, the party who has paid the creditor, or subrogee, becomes entitled to the legal rights and security originally held by the creditor. "Subrogation depends upon the equities and attending facts and circumstances of each case." Ticor Title Ins. Co. v. Graham (1991) Ind.App., 576 N.E.2d 1332, 1338, trans. denied. It is "a highly favored doctrine, which is to be given a liberal application." 73 AM.JUR.2D Subrogation § 7 (1974) (citations omitted). However, while ordinary negligence will not bar the application of subrogation, "[t]he remedy will not be allowed where the party is guilty of culpable negligence." Ticor, supra at 1338. Thus, a party who pays the debt of another may be substituted in place of the other if he was not acting (1) as a mere volunteer and (2) with "culpable negligence."

Under Indiana common law, there are no degrees of negligence. South Eastern Indiana Natural Gas Co., Inc. v. Ingram (1993) Ind.App., 617 N.E.2d 943. It is therefore difficult, at best, to place the term "culpable negligence" within an appropriate frame of reference. Suffice it to say, however, we conclude that the term contemplates action or inaction which is more than mere inadvertence, mistake or ignorance. 83 C.J.S. Subrogation § 6 (1953).

While we have found no Indiana cases dispositive of the issues in this case, we find guidance from other jurisdictions. In Universal Title Co. v. United States (1991) 8th Cir., 942 F.2d 1311, the court refused to allow a title insurance company to be equitably subrogated to the rights of a prior mortgagee, in part because of its failure as a sophisticated professional enterprise to discover an intervening Internal Revenue Service tax lien.⁴ The court in Universal Title noted its belief that Minnesota courts "impose stricter standards on professionals than lay persons in assessing whether mistakes are `excusable' for purposes of the doctrine of legal subrogation, especially when the professional relationship arises out of a commercial transaction involving consideration." Id. at 1317. Finding that other jurisdictions also impose stricter standards in similar contexts, the Eighth Circuit, quoting Coy v. Raabe (1966), 69 Wash.2d 346, 418 P.2d 728, 731, further noted that, "[i]t would be a gross misapplication of the doctrine of subrogation were we to hold that its cloak settles automatically upon one who has simply made a mistake, when it is a commercial transaction involving a consideration."⁵ See also Lawyers Title Ins. Corp. v. Capp (1977) 174 Ind.App. 633, 369 N.E.2d 672, 674-75

(quoting Coy, supra at 731, but limiting holding to "unusual factual setting" of the particular case), trans. denied.

Furthermore, we conclude that more than a simple mistake was made in this instance. Norwest failed to affirmatively protect its rights despite actual knowledge of Baber's lien. As a panel of this court recently explained:

Whatever fairly puts a reasonable, prudent person on inquiry is sufficient notice to cause that person to be charged with actual notice, where the means of knowledge are at hand and he omits to make the inquiry from which he would have ascertained the existence of a deed or mortgage. Thus, the means of knowledge combined with the duty to utilize that means equates with knowledge itself.

Keybank Nat. Ass'n v. NBD Bank (1998) Ind.App., 699 N.E.2d 322, 327 (citation omitted). The same reasoning applies to liens which are recorded. See also Altman v. Circle City Glass Corp. (1985) Ind.App., 484 N.E.2d 1296,

trans. denied. Clearly, the notation "see new judgment against Orr . . ." written at the bottom of the title insurance commitment gave Norwest, a sophisticated lender, inquiry notice. As well, Norwest certainly had the means to insist upon an updated title search to ensure that it would be the most senior lien against the property before it extinguished the Lincoln mortgages. By not having done so, Norwest put its own interests at risk.

There are no cases in Indiana pertaining to whether a party may be subrogated to another's rights when there is actual knowledge of an intervening lien. The majority of jurisdictions continue to state that actual knowledge precludes the application of equitable subrogation, while constructive knowledge does not. See, e.g., Dodge City of Spartanburg, Inc. v. Jones (1995) S.C. Ct. App., 317 S.C. 491, 454 S.E.2d 918, 920,

reh'g denied; Han v. United States (1991) 9th Cir., 944 F.2d 526, 530. Most of these courts reason that if subrogees have actual knowledge of an intervening lien, they must not have intended that their rights would be subrogated to those of the senior lienholders. However, there is an increasing trend to allow a party to subrogate where it is the intention of the parties that the subrogee will be subrogated to the senior lienholder's rights, despite actual knowledge of an intervening lien. See, e.g., Rush v. Alaska Mortgage Group (1997) Alaska, 937 P.2d 647; Chase Manhattan Bank, N.A. v. Miller (1998) V.I., 1998 WL 667790 (Not published in F.2d); see also RESTATEMENT (THIRD) OF PROPERTY § 7.6 (1997). However, we hesitate to adopt a bright-line rule in Indiana⁶ and opt instead to take guidance from the Massachusetts Supreme Court which, in East Boston Sav. Bank v. Ogan (1998) Mass., 428 Mass. 327, 701 N.E.2d 331, declined to create a clear rule on the effect of the potential subrogee's knowledge in deciding whether equitable subrogation is appropriate. Rather, the court, as we now do here, balanced the factor in its equitable analysis.⁷

See also Lawyers Title Ins. Corp. v. Feldsher (1996) Cal.Ct.App., 42 Cal.App.4th 41, 49 Cal. Rptr.2d 542, 550,

reh'g denied, review denied (holding that the party attempting to have rights subrogated having "actual knowledge of the crucial facts, combined with his negligence in allowing the transaction to close despite the absence of a subordination...