TRUS. NAT. BANK v. DEUT. BANK, W2009-01658-COA-R3-CV (Tenn.App. 8-19-2010)

of justice." Id. at 561.

In deciding whether the complainant was entitled to equitable subrogation in Dixon, our supreme court declined to base its decision on whether the subrogee had actual or constructive knowledge of the intervening interests. See id. at 562-62. The Dixon court instead established "culpable negligence" as the only conduct sufficient to bar the application of the equitable doctrine as a matter of law. Id. at 562. The court explained that "negligence, to be culpable, necessarily implies the failure to perform some duty," id. (citing Atchison, T. S. F. R. Co. v. Plaskett, 26 P. 401, 403 (Kan. 1891)), and "[i]t is not a failure of duty to one's self, but to another, that constitutes culpable negligence." Id. The complainant in Dixon was entitled to equitable subrogation because he was not guilty of culpable negligence:

The Dixon approach is fairly unique when compared with the three approaches most other jurisdictions apply when determining whether to award equitable subrogation. "The first approach, which a majority of states follow, is that actual knowledge of an existing lien precludes the application of equitable subrogation, but constructive knowledge does not." Houston v. Bank of Am. Fed. Sav. Bank, 78 P.3d 71, 73 (Nev. 2003) (footnote omitted). "The second approach bars the application of equitable subrogation when a lien holder possesses either actual or constructive notice of an existing lien." Id. (footnote omitted). "The third approach, the view adopted by section 7.6 of the Restatement (Third) of Property: Mortgages, disregards actual or constructive notice if the junior lien holder is not prejudiced." Id. at 74 (footnote omitted). The Dixon court, however, impliedly rejected these approaches when it concluded that only culpable negligence would bar subrogation and declined to distinguish between culpable and non-culpable negligence on the basis of the subrogee's knowledge.

Here the complainant owed no duty to the bank to examine the records; the bank suffered no loss or injury by his failure to do so; neither was its position changed or its security impaired. Hence the complainant was guilty of no breach of duty towards the defendants, or of any immoral or criminal act that would constitute culpable negligence and subject him to censure.

Id. at 563. The court acknowledged that "a prudent, cautious man would carefully examine the records, and the complainant was unquestionably guilty of negligence in not doing so," but the court concluded that the complainant's ordinary negligence would not bar equitable subrogation where the defendants would suffer no prejudice as a result thereof. Id. Accordingly, the court found in favor of the complainant, decreed a lien in favor of the complainant superior to the interests of the intervening lienholders, and remanded the case to the chancery court "for the purpose of enforcing complainant's lien in the usual manner." Id.

The Tennessee Supreme Court reached a similar conclusion in Castleman Construction Co. v. Pennington, 432 S.W.2d 669 (Tenn. 1968), reh'g denied (Tenn. Oct. 25, 1968). The dispute in Castleman centered around a construction company's purchase of twenty lots in a subdivision from Dr. Edna Pennington ("Pennington") and Ernest W. Colbert ("Colbert"). Castleman, 432 S.W.2d at 672. As part of the consideration for the transaction, Pennington and Colbert contracted to provide the construction company with a title policy issued by the Attorneys Title Company. Id. The defendants complied with this obligation and the Attorneys Title Company issued two letters showing the property to be clear of encumbrances. Id. at 673. After receiving the deed to the lots at issue and at least one of the previously mentioned title letters, the construction company commenced construction of houses on the lots and invested a substantial sum of money in the project. Id. at 672. Thereafter, the construction company discovered significant defects in the title of several lots. Id. Faced with notice to vacate three of the lots, the construction company satisfied the outstanding indebtedness on the property with funds provided under the terms of the title policy, removing the existing title defects. Id.

The construction company later filed a bill of complaint against Pennington and Colbert seeking damages for breach of warranty. Id. at 671. The chancery court initially decided the case in favor of the construction company but awarded only nominal damages. Id. After the court granted a petition to rehear the case, the construction company amended its original bill of complaint to include Attorneys Title Company and American Title Insurance Company as parties to the action. Id. The title companies alleged that they were entitled to recover payments made to clear title to the property under the doctrine of subrogation. Id. at 672. After a hearing, the chancery court agreed and entered a judgment of $28,295.71 against both defendants for the use and benefit of the title companies. Id. at 671. The defendants appealed. Id.

Attorneys Title Company apparently acted as the agent of American Title Insurance Company. See Castleman, 432 S.W.2d at 671.

Castleman explains that "the title insurance policy issued by the complainant companies to Castleman Construction Company contained a subrogation clause" and "that this clause provided that if and when the title companies had to clear an encumbrance insured against, they would be subrogated to all the rights of [the construction company]." Castleman, 432 S.W.2d at 674.

This Court affirmed the judgment against Colbert but reversed the judgment against Pennington. Id. We explained:

`It is stated in 83 C.J.S. `Subrogation', Section 2, that the object of subrogation is to promote and accomplish justice and to prevent injustice. That it is the mode which equity adopts to compel the ultimate payment of a debt by one who, in justice, equity and good conscience, should pay.

`In the early case of Greenlaw, Executor v. Pettit (Pittit) 87 Tenn. (467) ( 11 S.W. 357), in an opinion by Mr. Justice Lurton, one of the greatest judges in Tennessee history, it was said that the right of subrogation, being a pure equity, will be enforced only in favor of a meritorious claim, and where it can be done without injustice to the dobtor [sic] and his other creditors.

`In (Fecheimer-Keifer) v. Burton, 128 Tenn. 682 ( 164 S.W. 1179, 51 L.R.A., N.S., 343) (688) the Court said:

"Since subrogation is a remedy invented by courts of equity, they will move to administer it where the result will be an equitable one, but not to work an injustice to another in the defeat of an equal equity."

Id. at 673 (quoting the decision of the court of appeals).

In view of these principles, we concluded that the title companies were not entitled to subrogation with respect to the claim against Pennington because the equities of the case weighed strongly in his favor. Id. The supreme court explained our reasoning thus:

In reaching this conclusion the court [of appeals] took several factors into consideration, some of those factors being that the title companies were negligent in failing to discover the encumbrances which had been placed upon the land sold and that the defendants did not own all the lots sold by them; that all the encumbrances were upon the defendant, Colbert's, interest in the property and that the defendant, Pennington, was unaware that the encumbrances existed; that the defendant, Pennington, relied upon Colbert to attend to the details concerning the development and sale of the property; that the defendants paid for the policy of title insurance issued by the complaint [sic] companies and that the sale of the property was not consummated until the complainant companies had run a title search and indicated by letter that the defendants had a clear title to the property.

Id. at 673-74. The title companies and Colbert thereafter petitioned the Tennessee Supreme Court to grant certiorari, with the court granting only the petition of the title companies. Id. at 671.

The Tennessee Supreme Court reversed our decision and held that the title companies were entitled to rely on the doctrine of subrogation. The Court first articulated the principles of subrogation, quoting from several treatises:

In 83 C.J.S. Subrogation ss 1 and 2, the following statements are found:

`Subrogation may be defined as the substitution of another person in the place of a creditor, so that the person in whose favor it is exercised succeeds to the rights of the creditor in relation to the debt. * * *

`Subrogation does not owe its origin to statute or custom; nor is it a doctrine of the common law. It originated in equity and is a creature of equity, a doctrine of equity jurisprudence which was adopted by equity from the Roman or the civil law. * * *

`Subrogation is founded on principles of justice and equity, and its operation is governed by principle of equity. It rests on the principle that substantial justice should be attained regardless of form, that is, its basis is the doing of complete, essential, and perfect justice between all the parties without regard to form.'

The following is found in Couch on Insurance 2d, Subrogation, s 61:18

`* * * Stated simply, subrogation is a creature of equity having for its purpose the working out of an equitable adjustment between the parties by securing the ultimate discharge of a debt by the person who in equity and good conscience should pay it.'

And in s 61:20 of the same annotation it is stated:

`The doctrine of subrogation in insurance does not arise from, nor is it dependent upon, statute or custom or any of the terms of the contract; it has its origin in general principles of equity and in the nature of the insurance contract as one of indemnity. The right of subrogation rests not upon a contract, but upon the principles of natural justice.

`The principle of subrogation will be applied or not, according to the dictates of equity and good conscience, and to considerations of public policy, resting, as it does, upon the maxim that no one should be enriched by another's loss. In fact, subrogation is not a matter of strict right, nor does it necessarily rest on a contract, but is purely equitable in its nature, and will not be enforced when it would work injustice to the rights of those having equal equities.'

It is further stated in s 16:21:

`To entitle one to subrogation, his equity must be strong and his case clear, since it will not be enforced where the equities are equal, or the rights are not clear, or where it will prejudice the legal or equitable rights of others. Where equities are equal, there is no right to subrogation. However, subrogation will not be enforced against superior equities.'

Castleman, 432 S.W.2d at 674-75.

In articulating these principles, the Castleman court expressly declined to distinguish between subrogation that arises by contract ("conventional subrogation") and subrogation that arises by the operation of equity ("equitable subrogation") when determining whether to apply the remedy of subrogation:

We would agree with the complainants that the authorities do make a distinction between legal and conventional subrogation. However, in essentially all the authorities which we have read the distinction is made in determining whether there is a right of subrogation in the first instance, rather than in the enforcement of such right. In other words, the distinction is made in determining the source of the right rather than in applying the remedy.

Id. at 675. The court explained that it would enforce subrogation "in favor of a meritorious claim and after a balancing of the equities" in either instance. Id. at 676. The pertinent question in Castleman, therefore, was whether the title companies demonstrated that the equities of the case weighed in favor of subrogation.

Pennington argued that the court needed to look no further than the negligence of the title companies in failing to discover the title defects, which he asserted precluded subrogation. Id. at 676. The Castleman court, consistent with Dixon, rejected this suggestion and agreed that only "culpable negligence may prevent one from being afforded the equitable relief of subrogation." Id. (quoting 83 C.J.S. Subrogation s 6). The supreme court acknowledged the ordinary negligence of the title companies in failing to discover the defects but affirmed that ordinary negligence is no bar to subrogation:

We do not say that ordinary negligence of the subrogee may not be taken into consideration in ascertaining whether he be entitled to the equitable relief of subrogation. What we do say is that ordinary negligence alone will not be held as a complete bar to subrogation where in spite of such negligence the equities are still in favor of the subrogee.

Id. at 677. After analyzing the equities between the parties at some length, the court went on to conclude that the title companies were entitled to subrogation because the equities weighed in their favor. Id. at 677-78.

The principles espoused in Dixon and Castleman, as interpreted and applied in subsequent decisions, continue to guide the application of subrogation in Tennessee. This Court in Indymac Mortgage Holdings, Inc. v. Kauffman, No. W2000-01453-COA-R3-CV, 2001 WL 1683779 (Tenn. Ct. App. Dec. 21, 2001), for example, summarized the law of subrogation as follows:

Generally, liens are given priority based on the order in which they are recorded; liens recorded first typically have priority over those recorded at a later date. See Tenn. Code Ann. § 66-26-105 (1993). Subrogation is the substitution of a party in the place of a creditor, so that the party in whose favor subrogation is exercised succeeds the creditor in relation to the debt. Castleman Constr. Co. v. Pennington, 432 S.W.2d 669, 674 (Tenn. 1968). Subrogation is a creature of equity; its purpose is to provide an equitable adjustment between the parties, based on the facts and circumstances of the case. Id. at 675; Lawyers Title Ins. Corp. v. United Am. Bank, 21 F. Supp. 2d 785, 792 n. 2 (W.D. Tenn. 1998). It is not a right, but a remedy whose application depends on a balancing of the equities involved. See Lawyer's Title, 21 F. Supp. 2d at 792; Castleman Constr., 432 S.W.2d at 676. Subrogation is not appropriate where the equities of the parties are equal, where the parties' rights are not clear, or where it would prejudice the legal or equitable rights of another. Lawyer's Title, 21 F. Supp. 2d at 792. Relevant to this balancing of equities is the degree of negligence of the party seeking subrogation. Id. While ordinary negligence or mistake alone is usually not a bar to subrogation, especially where the equities weigh in the favor of the party seeking subrogation, culpable negligence will generally bar such a remedy. See Dixon v. Morgan, 285 S.W. 558, 562 (Tenn. 1926).

Indymac, 2001 WL 1683779, at *4; accord Citicorp Mortgage, Inc. v. Bancorpsouth Bank, No. W2004-00332-COA-R3-CV, 2004 WL 2715278, at *3 (Tenn. Ct. App. Nov. 19, 2004); Morgan v. Champion Roofing Remodeling, No. W2002-01941-COA-R3-CV, 2003 WL 21756699, at *9 (Tenn. Ct. App. July 29, 2003).

Trustmark and FirstBank argue, however, that this Court should entirely disregard these principles, positing that a more recent decision of this Court has effectively overruled the supreme court's holding in Dixon and ignoring the fact that it is not within the province of this Court to overturn supreme court precedent. Their principal position is that equitable subrogation is inappropriate as a matter of law under the reasoning of this Court's decision in ATS v. Kent, 27 S.W.3d 923 (Tenn. Ct. App. 1999). The relevant facts of ATS are as follows:

On October 10, 1995, ATS, Inc. (ATS) obtained a money judgment against Keith M. Canfield (Canfield) in the amount of $175,000.00. This judgment was recorded on November 17, 1995, in the Register's Office of Shelby County, Tennessee. On January 5, 1996, Canfield conveyed the piece of real property that is the subject of this lawsuit to James Curtis Kent (Kent). As part of the same transaction, Kent executed a deed of trust in favor of George V. Kinney (Kinney) and Bill R. McLaughlin (McLaughlin) as trustees for Union Planters National Bank (Union Planters). Kent's warranty deed and Union Planters' deed of trust were both recorded on January 8, 1996. On February 8, 1996, United American Bank of Memphis (United American) executed a release of a deed of trust that had been an encumbrance on the same piece of real property since February 10, 1994. This release apparently occurred because proceeds from the sale of the real property to Kent were used to satisfy the debt owed to United American. The United American release was recorded on February 13, 1996.

ATS, 27 S.W.3d at 923-24. ATS, similar to the appellees in this case, later filed a complaint to enforce its judgment through sale of the property. Id. at 924. The trial court declined to provide ATS the relief it requested and instead granted a money judgment in its favor for $15,674.75, which was the amount of money that Canfield received from the sale after the debts of prior lienholders were satisfied. Id. ATS appealed.

This Court, in the pertinent part of its decision, rejected the rationale of the trial court in denying enforcement of ATS's lien, which it described thus:

The underlying rationale of the trial court's ruling appears to have been that enforcement of the judgment lien through sale of the real property would serve to unjustly enrich ATS at the expense of Kent and Union Planters. If ATS had foreclosed on the real property before the sale to Kent, it would have had to pay $69,200.00 to prior lienholders. The debts to these prior lienholders were satisfied, however, with the proceeds of the sale from Canfield to Kent. Thus, by delaying enforcement, ATS increased its equity in the real property by $69,200.00.

Id. at 926. We reasoned that, while it was true that ATS was placed in a better position as the result of its delay, ATS had a statutorily vested right to enforce its judgment lien that it would forfeit only if the right was not exercised within the statutorily provided time for enforcement. ATS, 27 S.W.3d at 926-27. Because ATS had exercised its right within the relevant time period, we consequently held that the trial court erred when it denied ATS its right to enforce the lien, placing some reliance on the idea that "`equity follows the law. It cannot supplant a vested legal remedy." Id. at 926 (quoting Tom Denton Ford, Inc. v. Stoehr, No. 01A01-9406-CH-00288, 1995 WL 3684, at *2 (Tenn. Ct. App. Jan. 4, 1995), perm. app. denied (Tenn. May 1, 1995)).

It is this latter statement upon which Trustmark and FirstBank now rely as demonstrating that equitable subrogation is barred as a matter of law in this case. Trustmark and FirstBank equate their alleged occupation of the first and second priority positions following the release of Ms. Turner's judgment lien with ATS's statutorily vested right to enforce its lien through judicial sale. Accordingly, the appellees argue that the doctrine of equitable subrogation cannot supplant their statutorily vested rights in the first and second priority positions. The appellees contend that to find otherwise would "eviscerate" Tennessee's race-notice recording system. We disagree with each of the above propositions.

First, the appellees' contention that equitable subrogation cannot supplant their vested statutory right to priority over the later-recorded Long Beach deeds of trust ignores the purpose and effect of the equitable subrogation doctrine. The application of equitable subrogation under the facts would effectively revive Ms. Turner's judgment lien, treating the lien as if it had never been released, and award priority to Deutsche Bank on the basis of that lien. See Blankenship v. Estate of Bain, 5 S.W.3d 647, 650 (Tenn. 1999) ("In its most basic form, subrogation means that party A is substituted for party B and is allowed to raise the rights party B had against party C."). Application of the doctrine would create a legal fiction under which the appellees never ascended to the first and second priority positions and, therefore, cannot be said to have obtained the asserted statutorily vested rights in the first and second priority positions. Under the appellees' reasoning, application of equitable subrogation would never be appropriate because the sole purpose of the doctrine is to place the subrogee in a position superior to that of intervening lienholders who have properly recorded their liens first in time. See Hicks v. Londre, 125 P.3d 452, 456 (Colo. 2005) (explaining that equitable subrogation exists to allow a subrogee to "leap-frog" over the interests of an intervening lienholder). The appellees, however, fail to recognize that equitable subrogation is a time-honored exception to the general rule determining priority between lienholders based on the "first in time, first in right" principle. See E. Boston Sav. Bank v. Ogan, 701 N.E.2d 331, 334 (Mass. 1998). Adoption of the appellees' position would effectively eliminate that exception, abrogate the doctrine of equitable subrogation in this context, and overrule the Tennessee Supreme Court's decision in Dixon. This is a position we are unwilling to take.

Although we agree that it may be in a sense "unfair" to retrospectively remove a lienholder from the priority position it reasonably believed it occupied, that is the precise purpose of subrogation. Any complaint with the alleged unfairness of the procedure should be taken up in the balancing of the equities, which may account for any prejudice suffered by an intervening lienholder in reliance of its perceived priority position.

Second, the appellees fail to recognize that our decision in ATS did not address the doctrine of equitable subrogation. The issue in ATS was whether to allow a judgment lienholder, who ascended to the first priority position as the result of the release of a prior-recorded deed of trust, to enforce its judgment lien against real property. There is absolutely no indication that the parties presented or that this Court considered the doctrine of equitable subrogation. Nothing in our decision addressed whether it would have been appropriate, if presented, to subrogate the bank to the position of the prior-recorded deed of trust, which is precisely the question in this case. Here, the application of equitable subrogation would not divest the appellees of their statutorily vested rights to enforce their judgment liens through judicial sale; rather, it would simply restore their liens to the second and third priority positions they occupied prior to the sale of the Property from Mr. Swaney to Ms. Thomas. Importantly, it would not prohibit the appellees from proceeding with the sale of the Property, albeit subject to Deutsche Bank's superior interest. Analogous facts aside, the appellees' interpretation of ATS as controlling the outcome of this case is unavailing.

By analogy, if the issue was the same in this case and Deutsche Bank had not argued that it should be equitably subrogated to the position of Ms. Turner, the sole question before this Court would be whether it would be inequitable to permit Trustmark and FirstBank to enforce their judgment liens, which the trial court determined were properly recorded and superior to Long Beach deeds of trust, where the appellees delayed in enforcing their interests and benefitted from release of Ms. Thomas's prior-recorded judgment lien. In that instance, ATS would control and the appellees would be entitled to enforce their judgment liens with priority over the Long Beach deeds of trust.

Third, we reject the suggestion that the potential application of equitable subrogation on remand would "eviscerate" Tennessee's race-notice recording system. The race-notice recording system was in full effect when the Tennessee Supreme Court decided Dixon. The supreme court, for example, in Wilkins v. McCorkle, 80 S.W. 834 (Tenn. 1904), had previously articulated the five leading propositions embraced in Tennessee's recording statutes:

(1) That, as between the parties themselves and their heirs and representatives, such instruments take effect and are good without regard to registration; (2) that they also take effect and are equally good as to all persons who have actual notice of them from the date of such notice, except creditors; (3) that as to creditors (that is, of the vendor) they are inoperative, ineffective, and practically nonexistent until they are noted for registration on the books of the register; (4) that as to all other persons (that is, all not embraced in the preceding classes) they are equally inoperative, ineffective, and nonexistent until so noted for registration; (5) that upon being so "noted for registration" they become at once "notice to all the world," and so effective as to all the world.

Wilkins, 80 S.W. at 835 (discussing the recording statutes set forth in Shannon's Code). The Dixon court nevertheless applied the doctrine of equitable subrogation, placing some emphasis on the fact that "the primary object of our registration laws is to protect creditors and innocent purchasers against secret and unrecorded liens." Dixon v. Morgan, 285 S.W. 558, 563 (Tenn. 1926). As our supreme court impliedly recognized, subrogation does not frustrate this principal purpose because it does not seek to establish such liens; instead, it revives the prior-recorded interest of a former encumbrancer whose rights were superior to the intervening lienholders. See id. Thus, the supreme court in Dixon impliedly rejected any suggestion that the doctrine of equitable subrogation is repugnant to Tennessee's race-notice recording system with full knowledge of analogous statutory law. We now expressly reject the same. See also Ogan, 701 N.E.2d at 336 (rejecting a similar argument). Thus, we wholly reject the appellees' principal argument that equitable subrogation is impermissible under Tennessee's race-notice recording system in light of our prior decision in ATS.

We equally reject Trustmark and FirstBank's contention that the unreported decision of Tom Denton Ford, Inc. v. Stoehr, No. 01A01-9406-CH-00288, 1995 WL 3684 (Tenn. Ct. App. Jan. 4, 1995), perm. app. denied (Tenn. May 1, 1995), demonstrates that equitable subrogation is inapplicable in this case. The judgment lienholder in Stoehr obtained and recorded a judgment against one of two owners of real property as tenants by the entirety. Stoehr, 1995 WL 3684, at *1 (citation omitted). At the time the judgment lienholder recorded the judgment, the real property at issue was already encumbered by a prior-recorded, purchase-money deed of trust held by a savings and loan institution. Id. Subsequent to the recording of the judgment, a couple ("the Stoehrs") purchased the property and arranged financing through Third National Bank to satisfy, rather than assume, the savings and loan institution's original purchase-money mortgage. Id. The purchase-money deed of trust was resultantly released, presumably elevating the judgment lienholder to the first priority position. Id. After the judgment lienholder filed an action to sell the prior owner's survivorship interest in the real estate, the Stoehrs and Third National Bank asserted, inter alia, a right to equitable subrogation. Id. In a terse opinion, this Court held in pertinent part that the defendants were not entitled to equitable subrogation because Third National Bank did not pay a debt for which another was primarily liable. Id. (citing Amos v. Cent. Coal Co., 277 S.W.2d 457, 462 (Tenn. Ct. App. 1955)).

The Stoehr opinion, however, lends no support to the position of the appellees. First, the Stoehr opinion appears to be inconsistent on its face, as Deutsche Bank points out in its brief. The facts of that opinion state that Third National Bank paid off the existing indebtedness on property for which the original owners were wholly liable; thus, the intended subrogee appears to have paid a debt for which another was primarily liable, contrary to our holding. Further, the appellees have not argued that Deutsche Bank and its predecessors did not pay a debt for which another was primarily liable when they satisfied Ms. Turner's judgment lien. This is important because this Court in Stoehr resolved the controversy regarding equitable subrogation on that single basis, precluding discussion of the remaining elements of equitable subrogation. Because Stoehr offers no additional guidance on the application of equitable subrogation, we find that decision unpersuasive on the question presented here. The appellees' reliance on Stoehr is misplaced.

The appellees' remaining arguments are equally unpersuasive. Trustmark and FirstBank contend that equitable subrogation is barred as a matter of law because Deutsche Bank and its predecessors were guilty of culpable negligence. Trustmark and FirstBank submit that the undisputed facts show Deutsche Bank and its predecessors obtained their interests in the Property despite having actual knowledge of the appellees' intervening judgment liens. Even if we equate actual knowledge with culpable negligence, the undisputed facts fail to establish that Deutsche Bank had actual knowledge of the appellees' intervening liens. Nothing in Trustmark or FirstBank's statements of undisputed facts or attached evidentiary materials establishes that Deutsche Bank and its predecessors had actual knowledge of the appellees' intervening liens. Further, we reject Trustmark's suggestion that boilerplate language in the Long Beach deeds of trust stating that the deeds were subject to "encumbrances of record" demonstrates actual knowledge. Although inclusion of this language supports the idea that Deutsche Bank and its predecessors were negligent if they did not perform a title search prior to obtaining their interests in the Property, it hardly demonstrates actual knowledge of the appellees' intervening liens. Trustmark and FirstBank must therefore rely solely on the undisputed fact that Deutsche Bank and its predecessors had constructive knowledge of the appellees' judgment liens as demonstrating culpable negligence. The degree of negligence attributable to an intended subrogee's failure to discover prior liens despite constructive knowledge, however, is insufficient in and of itself to preclude equitable subrogation, even if the subrogee is a sophisticated party. See Castleman Constr. Co. v. Pennington, 432 S.W.2d 669, 676-77 (Tenn. 1968). We therefore conclude that the appellees have clearly failed to present undisputed facts demonstrating culpable negligence on the part of Deutsche Bank and its predecessors. Trustmark and FirstBank are not entitled to summary judgment on this basis.

We express no opinion on whether a subrogee's actual knowledge of intervening liens equates to culpable negligence. Trustmark and FirstBank suggest that this Court's decisions in Bankers Trust Co. v. Collins, 124 S.W.3d 576, 579 (Tenn. Ct. App. 2003), and Citicorp Mortgage, Inc. v. Bancorpsouth Bank, No. W2004-00332-COA-R3-CV, 2004 WL 2715278 (Tenn. Ct. App. Nov. 19, 2004), demonstrate that an intended subrogee with actual knowledge of an intervening lien cannot rely on the doctrine of equitable subrogation. Our supreme court in Dixon, however, does not appear to have drawn the dividing line between "culpable" and "ordinary" negligence on the basis of whether the subrogee has actual or constructive knowledge of intervening liens. As this Court has previously explained,

The Tennessee Supreme Court in Dixon noted that some courts hold that a party is precluded from an equitable subrogation action where he has actual notice and that other courts hold that a party is precluded when he has constructive notice of a junior lien holder. Instead of following either of these rules, the court held that a party guilty of culpable negligence would be precluded from asserting a claim based on equitable subrogation.

Assocs. Home Equity Servs., Inc. v. Franklin Nat'l Bank, No. M2000-00516-COA-R3-CV, 2002 WL 459007, at *7 (Tenn. Ct. App. Mar. 26, 2002), perm. app. denied (Tenn. Oct. 21, 2002). In Dixon, the subrogee established a right to subrogation because he owed no duty to the bank to perform a title search, to discover pending liens, et cetera. It may follow that a subrogee with actual knowledge of intervening liens, who similarly owes no duty to intervening lienholders, is likewise not guilty of culpable negligence if it extinguishes a debt under the impression it will receive first priority. We need not decide this question, however, because it is not dispositive of the present appeal.

Likewise, the undisputed facts do not demonstrate that Deutsche Bank and its predecessors failed to act upon a mistaken belief that they would occupy first position after extinguishing Ms. Turner's judgment lien. See Collins, 124 S.W.3d at 579 (finding that an intended subrogee that did not pay a prior indebtedness through fraud or mistake was not entitled to subrogation to the position of the former encumbrancer). Rather, one of the appellees, FirstBank, impliedly concedes on multiple occasions in its brief that Deutsche Bank and its predecessors are seeking relief from "mistakes." We further note that Trustmark does not argue on appeal that this failure to allege "mistake" is a basis for granting summary judgment, although its brief does state that the original and amended answers filed in this cause do not allege that Long Beach paid Ms. Turner as the result of a mistaken belief that it would occupy the first priority position after release of her lien.

The appellees are also not entitled to summary judgment simply because Deutsche Bank and its predecessors failed to act prudently to protect their interests. The appellees rely on dictum from this Court's decision in Banker's Trust Co. v. Collins, 124 S.W.3d 576 (Tenn. Ct. App. 2003), as conclusively precluding the application of equitable subrogation where a party's remedy is in its own hands and it fails to protect its interest. Collins, 124 S.W.3d at 579 (citing Leeper v. Cook, 688 S.W.2d 94 (Tenn. Ct. App. 1985)). Disallowing equitable subrogation on this sole basis, however, is inconsistent with the Dixon decision. As our supreme court explained, "[i]t is indeed difficult to conceive of any form of equitable relief from mistakes where some degree of negligence of the party seeking relief is not involved.'" Dixon v. Morgan, 285 S.W. 558, 561 (Tenn. 1926) (quoting Inst. Bldg. Loan Ass'n v. Edwards, 86 A. 962, 965 (N.J. Ch. 1913)). Denial of equitable subrogation simply because a party negligently failed to protect its interests would bar equitable subrogation in virtually every case arising in this context. Because a bright-line rule prohibiting the application of equitable subrogation where a subrogee fails to affirmatively act makes war on both the spirit and the purpose of the doctrine, we decline to adopt it. That is not to say that a court should not consider a party's failure to protect its interest when determining whether to award subrogation; rather, a party's failure to protect its interests despite the opportunity and ability to do so is yet another factor courts should consider when weighing the equities between the parties.

The holding of Collins as we read it is that a party which cannot demonstrate a mistaken or fraudulently induced belief that it would occupy the priority position of a prior encumbrancer after satisfying an existing indebtedness is not entitled to equitable subrogation. See Collins, 124 S.W.3d at 57.

As a final argument in support of summary judgment, Trustmark and FirstBank submit that the undisputed facts establish that application of equitable subrogation would prejudice them. Our supreme court has recognized that subrogation is unavailable "`where it will prejudice the legal or equitable rights of others.'" Castleman, 432 S.W.2d at 675 (quoting Couch on Insurance 2d, Subrogation, s 61:21). As we have explained, however, we reject the contention that Trustmark and FirstBank will be deprived of vested statutory rights in the Property, which is the only alleged prejudice cited in this appeal. Although we can conceive of various ways in which an intervening lienholder could demonstrate prejudice, e.g., Indymac Mortgage Holdings, Inc. v. Kauffman, No. W2000-01453-COA-R3-CV, 2001 WL 1683779, at *4 (Tenn. Ct. App. Dec. 21, 2001) (finding that subrogation would place the intervening lienholders in a worse position where the subrogee sought subrogation of a new mortgage that imposed a higher interest rate and afforded the mortgagor a longer period during which to repay the outstanding debt), the appellees have not presented undisputed facts to establish such prejudice here, s ee Holiday Hospitality Franchising, Inc. v. State Resources, Inc., 232 S.W.3d 41, 53-54 (Tenn. Ct. App. 2007) (recognizing that a intervening judgment lienholder would not suffer prejudice as the result of equitably restoring a mistakenly released deed of trust to first priority position); see also Hicks, 125 P.3d at 457 (stating that "an intervening lienholder suffers no prejudice merely by virtue of the fact that it is not elevated in priority"); Restatement (Third) of Property (Mortgages) § 7.6 cmt. e (1997) (stating that an intervening lienholder can hardly complain of equitable subrogation, "for it does not harm them, their position is not materially prejudiced, but is simply unchanged"). We therefore disagree with the contention the Trustmark and FirstBank are entitled to summary judgment on this basis.

We need not decide in the present appeal the heretofore unaddressed question of whether Tennessee courts should outright deny equitable subrogation if an intervening lienholder demonstrates any prejudice or merely limit subrogation to the extent of the prior encumbrance if possible. See Houston v. Bank of Am. Fed. Sav. Bank, 78 P.3d 71, 75 (Nev. 2003); E. Boston Sav. Bank v. Ogan, 701 N.E.2d 331, 334-35 (Mass. 1998).

In conclusion, we hold that Trustmark and FirstBank failed to allege undisputed facts negating an essential element of Deutsche Bank's counterclaim or showing that Deutsche Bank cannot establish an essential element of its counterclaim at trial. We note that Trustmark and FirstBank have repeatedly pointed to the absence of undisputed facts offered in support of Deutsche Bank's position as demonstrating the propriety of summary judgment. It is, however, the duty of the appellees, as the moving parties, to first present undisputed facts demonstrating some deficiency in the nonmoving party's counterclaim. Only then is Deutsche Bank required to produce additional evidence or point to additional facts establishing a genuine issue of material fact. Because Trustmark and FirstBank did not carry their initial burden on this issue, we conclude the trial court erred when it granted summary judgment on Deutsche Bank's counterclaim for equitable subrogation.

Finally, Deutsche Bank asks this Court to grant summary judgment in its favor. This is clearly not one of the "rare cases" in which the nonmoving party has demonstrated a right to summary judgment in its favor. See Griffis v. Davidson County Metro. Gov't, 164 S.W.3d 267, 284 (Tenn. 2005) (citing Thomas v. Transp. Ins. Co., 532 S.W.2d 263, 266 (Tenn. 1976)). Although Trustmark and FirstBank failed to carry their initial burden of production, there has been absolutely no showing that Deutsche Bank is entitled to summary judgment as a matter of law on each element of its counterclaim. This argument is without merit.

V. Conclusion

For the foregoing reasons, we reverse the trial court's grant of summary judgment on Deutsche Bank's counterclaim for equitable subrogation and remand this case for further proceedings. Costs of this appeal are taxed to the appellees, Trustmark National Bank and FirstBank, for which execution may issue if necessary.