Daily Development for Wednesday, April 4, 2001

MORTGAGES; SUBROGATION: Court rejects equitable subrogation to protect lender who refinanced and discharged senior lien without actual knowledge of intervening lienholder because such lender was a "sophisticated party" and had title insurance.

Wilshire Servicing Corp. v. Timber Ridge Partnership, ___ N.E.2d ___, 2001 WL

175541 (Ind.App.).

Continuing the state's tough stance on title insurance coverage, an Indiana court has refused to permit a lender to step into the lien priority of a mortgage being paid off based solely on the fact that the lender paid for title insurance, and the court assumed that the title insurer had missed the intervening judgment lien.

Underwoods mortgaged to Fleet Finance in 1991. Timber Ridge Partnership obtained a judgment lien against the home a few months later. Underwoods refinanced in

1993, again with Fleet. Fleet sold the loan to Wilshire Servicing Corp. The senior mortgage held by Fleet was discharged of record and the refinancing mortgage recorded.

Wilshire foreclosed in 1998, and named Timber Ridge as a junior party to the foreclosure. Timber Ridge claimed first position, and the trial court agreed.

Wilshire appealed, asserting equitable subrogation. Timber Ridge did not file a brief.

The lender's primary hurdle was Osterman v. Baber, 714 N.E.2d 735 (Ind.Ct.App.

1999), which held that equitable subrogation is not available to a lender with actual knowledge, or inquiry notice, of the intervening lien. In Osterman, the lender's copy of a title commitment had a handwritten note on it referring to the intervening judgment. The court refused to allow the new lender to step into the shoes of the paidoff bank.

Wilshire argued that there was no such smoking gun of knowledge in this case.

Rather than distinguish Osterman, however, the court chose to expand it:

We do not read Osterman to imply that so long as a sophisticated lender does not have actual knowledge of an intervening lien, it is entitled to assume its former priority position through the doctrine of equitable subrogation when it has mistakenly released a senior mortgage lien without finding the intervening judgment lien. The level of expertise of a sophisticated lender is central to the decision in Osterman.

The court found that the existence of title insurance was a key factor in the lender's "sophistication."

Another factor in our determination, and one which Wilshire urges us to ignore, is whether a title insurer had an opportunity to review the title and find the recorded judgment lien. That a title insurer was paid to perform precisely the function that would have revealed the Timber Ridge judgment lien is a factor within the purview of a determination of the equities. See Osterman v. Baber,

714 N.E.2d at 738; First Federal Savings, 118 F.3d at 534 (existence of title insurance a controlling factor when weighing equities in a commercial transaction: "[e]ither they insure or they don't. It is not the province of the court to relieve a title insurance company of its contractual obligation") . . .

In part, Wilshire contends that the existence of a title insurer in the process is irrelevant, and that such evidence should not be considered. We do not perceive our acknowledgement of a title insurer's role, i.e., to search for liens and other impediments or clouds on a title, as a violation of the longstanding opposition to evidence of insurance commonly associated with tort proceedings."

The court viewed the equities as being balanced between the negligent title insurer and the nonnegligent judgment creditor, rather than directly between the two lienholders.

"When distilled, Wilshire's argument merely requests that we shift the burden to do that for which it and title insurers are compensated from them to third parties who were not negligent and who were not associated with the transaction.

We agree with the observation in [Osterman] that title insurers "insure or they don't."

Finally, the court refused to view its decision as giving the judgment creditor a windfall.

"Timber Ridge will not receive a windfall due to the priority of its 1991 judgment over the 1993 mortgage; instead, it may receive that to which it is entitled."

Reporter's Comment: This last statement, of course, merely begs the question rather than answering it. Thus, the judgment creditor beat the lender without even bothering to file an appeal brief. (The reporter for this item is The Title Insurance Law Newsletter, published by Woodridge Legal Publishers and edited by J. Bushnell Nielsen.)

Editor's comment: This issue has been aired several times on DIRT before. Most commentators favor granting subrogation to the lender except where the lender had actual knowledge of the intervening lien and thus took such lien into account in making its decision to refinance. Some even argued that the lender always should be subrogated, even when it had actual knowledge of the intervening lien. The editor has been more cautious, but agrees that it does appear that the intervening lienholder gets a windfall and the title insurer takes a bath. But hey - isn't that the risk that the title insurer got paid to take? And life is full of windfalls. The editor is hoping that one will come his way any time now.

Daily Development for Wednesday, April 4, 2001

By: Patrick A. Randolph, Jr.

Professor of Law

UMKC School of Law

Of Counsel: Blackwell Sanders Peper Martin

Kansas City, Missouri

prandolph@cctr.umkc.edu

MORTGAGES; SUBROGATION: Court rejects equitable subrogation to protect lender who refinanced and discharged senior lien without actual knowledge of intervening lienholder because such lender was a "sophisticated party" and had title insurance.

Wilshire Servicing Corp. v. Timber Ridge Partnership, ___ N.E.2d ___, 2001 WL

175541 (Ind.App.).

Continuing the state's tough stance on title insurance coverage, an Indiana court has refused to permit a lender to step into the lien priority of a mortgage being paid off based solely on the fact that the lender paid for title insurance, and the court assumed that the title insurer had missed the intervening judgment lien.

Underwoods mortgaged to Fleet Finance in 1991. Timber Ridge Partnership obtained a judgment lien against the home a few months later. Underwoods refinanced in

1993, again with Fleet. Fleet sold the loan to Wilshire Servicing Corp. The senior mortgage held by Fleet was discharged of record and the refinancing mortgage recorded.

Wilshire foreclosed in 1998, and named Timber Ridge as a junior party to the foreclosure. Timber Ridge claimed first position, and the trial court agreed.

Wilshire appealed, asserting equitable subrogation. Timber Ridge did not file a brief.

The lender's primary hurdle was Osterman v. Baber, 714 N.E.2d 735 (Ind.Ct.App.

1999), which held that equitable subrogation is not available to a lender with actual knowledge, or inquiry notice, of the intervening lien. In Osterman, the lender's copy of a title commitment had a handwritten note on it referring to the intervening judgment. The court refused to allow the new lender to step into the shoes of the paidoff bank.

Wilshire argued that there was no such smoking gun of knowledge in this case.

Rather than distinguish Osterman, however, the court chose to expand it:

We do not read Osterman to imply that so long as a sophisticated lender does not have actual knowledge of an intervening lien, it is entitled to assume its former priority position through the doctrine of equitable subrogation when it has mistakenly released a senior mortgage lien without finding the intervening judgment lien. The level of expertise of a sophisticated lender is central to the decision in Osterman.

The court found that the existence of title insurance was a key factor in the lender's "sophistication."

Another factor in our determination, and one which Wilshire urges us to ignore, is whether a title insurer had an opportunity to review the title and find the recorded judgment lien. That a title insurer was paid to perform precisely the function that would have revealed the Timber Ridge judgment lien is a factor within the purview of a determination of the equities. See Osterman v. Baber,

714 N.E.2d at 738; First Federal Savings, 118 F.3d at 534 (existence of title insurance a controlling factor when weighing equities in a commercial transaction: "[e]ither they insure or they don't. It is not the province of the court to relieve a title insurance company of its contractual obligation") . . .

In part, Wilshire contends that the existence of a title insurer in the process is irrelevant, and that such evidence should not be considered. We do not perceive our acknowledgement of a title insurer's role, i.e., to search for liens and other impediments or clouds on a title, as a violation of the longstanding opposition to evidence of insurance commonly associated with tort proceedings."

The court viewed the equities as being balanced between the negligent title insurer and the nonnegligent judgment creditor, rather than directly between the two lienholders.

"When distilled, Wilshire's argument merely requests that we shift the burden to do that for which it and title insurers are compensated from them to third parties who were not negligent and who were not associated with the transaction.

We agree with the observation in [Osterman] that title insurers "insure or they don't."

Finally, the court refused to view its decision as giving the judgment creditor a windfall.

"Timber Ridge will not receive a windfall due to the priority of its 1991 judgment over the 1993 mortgage; instead, it may receive that to which it is entitled."

Reporter's Comment: This last statement, of course, merely begs the question rather than answering it. Thus, the judgment creditor beat the lender without even bothering to file an appeal brief. (The reporter for this item is The Title Insurance Law Newsletter, published by Woodridge Legal Publishers and edited by J. Bushnell Nielsen.)

Editor's comment: This issue has been aired several times on DIRT before. Most commentators favor granting subrogation to the lender except where the lender had actual knowledge of the intervening lien and thus took such lien into account in making its decision to refinance. Some even argued that the lender always should be subrogated, even when it had actual knowledge of the intervening lien. The editor has been more cautious, but agrees that it does appear that the intervening lienholder gets a windfall and the title insurer takes a bath. But hey - isn't that the risk that the title insurer got paid to take? And life is full of windfalls. The editor is hoping that one will come his way any time now.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 1‑6, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Maria Tabor at the ABA. (312) 988 5590 or mtabor@staff.abanet.org

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