CITIZENS ST. BANK v. RAVEN TR

ized that if we did not apply equitable subrogation some lienholders might receive a windfall; nevertheless, we still refused to apply subrogation: "The mere fact that, if subrogation is not allowed, the other lienors may be in better position, or, if allowed, may be in no worse position than if these claims had not been paid, is not, of itself, ground for subrogation." Id. at 398, 55 N.W. at 545.

One year after Wentworth, in Heisler v. C. Aultman Co., we again noted our statement in Emmert that a court may provide relief to a party that has "acted under a justifiable or excusable mistake of fact," and concluded that equitable subrogation should apply due to a mistake of fact where a mother failed to examine whether there were any judgments against her son. Heisler v. C. Aultman Co., 56 Minn. 454, 456-59, 57 N.W. 1053, 1053-54 (1894).

Unlike Emmert, where the mortgagee had constructive notice, but not actual notice of a recorded junior mortgage, the plaintiff-mortgagee in London Northwest American Mortgage Co. v. Tracy knew of an existing junior mortgage. 58 Minn. 201, 203, 59 N.W. 1001, 1002 (1894). The mortgagors told the plaintiff that if the plaintiff loaned money to pay two prior mortgages, the plaintiff would receive a first priority mortgage, and a third mortgagee, the mortgagors' mother, would release her mortgage and accept a new mortgage that was subordinate to the plaintiffs. Id. at 203, 59 N.W. at 1002. The plaintiff relied on the misrepresentation and loaned the money, but the third mortgagee's mortgage was not satisfied of record, and the plaintiff foreclosed before the plaintiff knew the third mortgage had not been satisfied. Id. at 203, 59 N.W. at 1002. We said that "where [the prior lien] was discharged under a mistake of fact of the party paying the money to discharge it, to refuse to restore it for his protection would be permitting the second lien holder to profit at the expense of that party, and from his mistake." Id. at 204, 59 N.W. at 1002. We concluded that to permit the inducement would amount to a fraud if equitable subrogation did not apply, and the plaintiff was entitled to subrogation of the discharged mortgages unless the junior mortgagee could somehow demonstrate that she had changed her position and would be prejudiced. Id. at 204, 59 N.W. at 1002.

Our emphasis that there must be a mistake of fact was reinforced in Elliott v. Tainter, where a property owner executed two mortgages on property. 88 Minn. 377, 378-79, 93 N.W. 124, 124-25 (1903). The property owner sought a loan in order to pay the first priority mortgage and taxes on the property; the abstract on the property mistakenly omitted reference to a second mortgage, and the lender was led to believe that there was only one encumbrance on the property. Id. at 379, 93 N.W. at 125. Neither the lender nor her attorneys examined the title to the property; instead, they relied on the faulty abstract, and the lender paid the senior mortgage and the taxes. Id. at 379-80, 93 N.W. at 125. We noted that equitable subrogation should apply when a lien "has been discharged under a mistake of the real situation," and we affirmed the district court in subrogating the lender to the rights of the first priority mortgagee because the lender had not intended to give priority to the junior mortgage by satisfying the senior mortgage and paying the taxes. Id. at 378-81, 93 N.W. at 124-26.

In Sucker v. Cranmer, we held that equitable subrogation may be applicable in a different context: when a party pays taxes to protect that party's rights. 127 Minn. 124, 128, 149 N.W. 16, 18 (1914). In Sucker, property owners defaulted on a mortgage, and the plaintiff, a mortgage assignee, foreclosed the mortgage. 127 Minn, at 125, 149 N.W. at 16-17. The plaintiff purchased the property at a foreclosure sale, and while the year of redemption was running, the plaintiff paid taxes on the property that the property owners had previously agreed to pay, but did not pay. Id. at 125, 149 N.W. at 17. The plaintiff paid the taxes to avoid a statutory penalty, but failed to file a statutorily required affidavit due to "mistake and inadvertence." Id. at 125, 149 N.W. at 17. The property owners subsequently redeemed the property, but did not reimburse the plaintiff for the tax payments because of the plaintiffs failure to file the affidavit. Id. at 126, 149 N.W. at 17. The mortgage provided that if the property owners failed to pay the taxes, the plaintiff could pay the taxes and charge the property owners for that amount in the form of a lien. Id. at 126, 149 N.W. at 17. We noted that the foreclosure never became complete because the property owners redeemed the property and the mortgage gave the plaintiff a right to make the payment and charge the property owners for that amount, so the plaintiff was entitled to personal judgment against the property owners. Id. at 126, 128, 149 N.W. at 17-18. Alternatively, we said that the plaintiff was entitled to equitable subrogation to the position of those parties to whom the property owners owed the taxes because "one, who has paid taxes to protect his own rights and not as a volunteer or intermeddler, may be subrogated to the rights of the state or of the one who had acquired the state's rights." Id. at 128, 149 N.W. at 18.

Unlike Sucker, where we applied equitable subrogation when a party had paid taxes to protect his rights, in Kingery v. Kingery we declined to apply equitable subrogation because "[t]here could be no belief on plaintiffs part that he would be subrogated to the two mortgages discharged so as to come ahead of the new first mortgage." 185 Minn. 467, 471, 241 N.W. 583, 585 (1932). The plaintiff in Kingery had orally agreed to help his mother obtain a new first mortgage in order to partially pay off two prior mortgages on her property; the plaintiff also agreed to pay whatever amount the new first mortgage failed to cover in order to discharge the two prior mortgages. Id. at 469, 241 N.W. at 584. We cited Emmert, Wentworth, and Heisler, and concluded that there was no mistake of fact about the situation, no inadvertence, and no fraud; the plaintiff had been the one who had negotiated for the new first mortgage for his mother, and he could not have believed that he would be subrogated to the two prior mortgages and take priority over the new first mortgage. Id. at 470-71, 241 N.W. at 585.

In Hirleman v. Nickels, we again analyzed whether there was a mistake of fact, but implicit in our analysis was the understanding that the mistake must have somehow induced the party to act. See 193 Minn. 51, 54-57, 258 N.W. 13, 15-16 (1934). In Hirleman, the plaintiff purchased a first priority mortgage on property and recorded the assignment. 193 Minn, at 52, 258 N.W. at 14. The original property owners sold the property, and the new owners subsequently executed a second mortgage on the property. Id. at 52-53, 258 N.W. at 14. The second mortgage expressly stated that it was subject to the first mortgage, and the second mortgage was recorded. Id. at 52-53, 258 N.W. at 14. The plaintiff agreed with the property owners to extend or renew the first priority mortgage for another three years, but the plaintiff was unaware of the existence of the intervening mortgage, and relied upon the representations of the transacting company. Id. at 53, 258 N.W. at 14. The plaintiff executed a satisfaction of the first mortgage and accepted a new mortgage for the same amount and the same interest rate as the original mortgage. Id. at 53, 258 N.W. at 14. Although the new mortgage indicated that the property was subject to the intervening mortgage, the plaintiff had no actual knowledge of the intervening mortgage and did not intend to release the lien of her first mortgage, but executed a satisfaction of her first mortgage in ignorance of the intervening mortgage. Id. at 53, 258 N.W. at 14-15. We concluded that "[t]here can be no doubt that the mortgage was mistakenly satisfied" and the plaintiff executed a satisfaction of her mortgage based on ignorance of the intervening mortgage. Id. at 54, 56, 258 N.W. at 15-16.

We then specifically looked at the nature of the mistake to determine whether equity should apply to correct the mistake. Id. at, 56, 258 N.W. at 16. We noted that previously we had relieved parties who discharged mortgages due to a mistake and when no prejudice to third parties would occur. Id. at 56-57, 258 N.W. at 16. In analyzing what constituted a "mistake," we suggested that the mistake must mislead a person to perform an action that, but for the error, the person would not have done. Id. at 57, 258 N.W. at 16. After analyzing the mistake the plaintiff made, we then noted that the intervening mortgagee would not be harmed if we applied equitable subrogation because she would receive that for which she bargained. Id. at 58, 258 N.W. at 16. In other words, we first analyzed whether there was a mistake, what type of mistake was made, whether that mistake induced the party to satisfy a prior mortgage, and then we proceeded to determine whether prejudice to a third party would occur.

Forty-three years later in Carl H. Peterson Co. v. Zero Estates, we again analyzed equitable subrogation. 261 N.W.2d 346 (Minn. 1977). In Peterson, the First National Bank of Lakeville made a loan to the Brauns in 1970, secured by a mortgage on 152 acres owned by the Brauns. Id. at 347. The Brauns endeavored to construct a 300-by 176-foot horse barn on the property, with construction beginning in 1972. Id. In 1973 the bank made a second loan to the Brauns, and the bank received another mortgage on the property subsequent to the initial labor and materials provided for construction by mechanics' lienholders. Id. Part of the second loan was used to pay the balance on the first loan and delinquent taxes. Id. The mechanics' lienholders commenced actions to foreclose the liens in 1974; the barn collapsed in 1975. Id.

The bank argued that its 1973 mortgage should be equitably subrogated to its 1970 mortgage and given priority over the 1972 mechanics' liens to the extent that part of the second loan from the bank was used to pay off the first loan and delinquent taxes. Id., at 348. We stated 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." Id. But we concluded that equitable subrogation should not apply. Id. We began by first analyzing whether there was a mistake involved, and distinguished the bank from the unsophisticated individual in Heisler, 56 Minn. 454, 57 N.W. 1053, who was unaware of a judgment lien. Peterson, 261 N.W.2d at 348. We reasoned that the bank was "a professional lender with knowledge of construction in progress giving rise to inchoate liens for contractors and materialmen" and concluded that the bank's failure to consider the intervening liens and obtain subordination agreements "cannot be deemed justifiable as an excusable mistake." Id. We then noted that if we applied equitable subrogation, the rights of innocent parties — the mechanics' lienholders — would be jeopardized. Id. Weighing these factors, we concluded that equitable subrogation should not apply because the bank had not demonstrated equities in its favor. Id.

We also noted that the mechanics' lienholders only had recourse to 39.5 acres that were subject to their liens, while the bank had undisputed priority over 112 acres. Peterson, 261 N.W.2d at 348.

Citizens argues that our approach in Minnesota case law is consistent with the approach in Restatement (Third) of Property: Mortgages § 7.6 (1997) in analyzing when equitable subrogation should apply, and Citizens argues that we should adopt the Restatement's position. The Restatement provides:

(a) One who fully performs an obligation of another, secured by a mortgage, becomes by subrogation the owner of the obligation and the mortgage to the extent necessary to prevent unjust enrichment. Even though the performance would otherwise discharge the obligation and the mortgage, they are preserved and the mortgage retains its priority in the hands of the subrogee.

(b) By way of illustration, subrogation is appropriate to prevent unjust enrichment if the person seeking subrogation performs the obligation:

(1) in order to protect his or her interest;

(2) under a legal duty to do so;

(3) on account of misrepresentation, mistake, duress, undue influence, deceit, or other similar imposition; or

(4) upon a request from the obligor or the obligor's successor to do so, if the person performing was promised repayment and reasonably expected to receive a security interest in the real estate with the priority of the mortgage being discharged, and if subrogation will not materially prejudice the holders of intervening interests in the real estate.

Id. The comments to the Restatement note that "[s]ubrogation is an equitable remedy designed to avoid a person's receiving an unearned windfall at the expense of another." Id. cmt. a. Further, "[t]he holders of intervening interests can hardly complain about this result, for they are no worse off than before the senior obligation was discharged. If there were no subrogation, such junior interests would be promoted in priority, giving them an unwarranted and unjust windfall." Id.

We agree that, depending on all the circumstances, equitable subrogation may be applicable when a party satisfies a lien in order to protect that party's interest, when a party is under a legal duty to satisfy a lien, or when there is a misrepresentation, mistake, duress, undue influence, or deceit. But we have specified that a mistake must be justifiable or excusable, not simply a mistake. In addition, we have not previously applied equitable subrogation based solely on a party expecting to receive a security interest in real property because of the promise of repayment and priority of the discharged mortgage. Although our approach may overlap in part with the approach suggested by the Restatement, there are differences, and we decline to wholly adopt the approach set forth in the Restatement.

We also take this opportunity to clarify that contrary to the court of appeals' statement in Ripley, 700 N.W.2d at 545, that "actual or constructive notice of an existing lien bars equitable subrogation," we have not automatically rejected equitable subrogation when the party seeking subrogation has actual or constructive notice of an existing lien. For example, we have applied equitable subrogation where a mortgagee had actual notice of a recorded junior mortgage, but was induced by misrepresentation to loan money to pay two prior liens. London Nw. Am. Mortgage Co., 58 Minn, at 203, 59 N.W. at 1002. In addition, we have previously applied equitable subrogation where a party had constructive notice of recorded liens. See, e.g., Elliott, 88 Minn, at 379-81, 93 N.W. at 125; Heisler, 56 Minn, at 457-60, 57 N.W. at 1053-54; Emmert, 49 Minn, at 391-92, 52 N.W. at 31-32. Our focus has not been on whether a party had actual or constructive notice; rather, in most of our cases, we have looked primarily to whether a mistake was made, the nature of the mistake made, and whether the mistake induced the party seeking equitable subrogation to satisfy a lien. Then, to weigh the equities, we have analyzed whether applying equitable subrogation would harm innocent third parties. But as we noted in Wentworth, the mere fact that there may be a windfall to a third party does not in itself provide sufficient grounds for applying equitable subrogation. See Wentworth, 53 Minn, at 398, 55 N.W. at 545.

In Minnesota, a party seeking equitable subrogation has the burden of establishing that equities weigh in the party's favor, which also requires that no injury to innocent third parties will result if subrogation is applied. See Peterson, 261 N.W.2d at 348. There is no injury to a party if the party's position remains unchanged or the party received that for which the party bargained. See, e.g., Hirleman, 193 Minn, at 58, 258 N.W. at 16 ("She bargained for and secured a second mortgage. . . . She has just that now. She is entitled to nothing more."); Gerdine, 41 Minn, at 421, 43 N.W. at 93 ("He had paid nothing, and his position remained unchanged."). Because Citizens is the party seeking equitable subrogation, Citizens has the burden of establishing that equities weigh in its favor.

We said in Emmert that a court "under a great variety of circumstances, may relieve one who has acted under a justifiable or excusable mistake of fact." 49 Minn, at 391, 52 N.W. at 32. And we have applied equitable subrogation to a variety of circumstances. But we conclude that it should not apply here.

It is undisputed that, here, there was no mistake of fact, no misrepresentation, and no fraud that induced Citizens to loan $165,000 to Feyereisen to pay the two prior mortgages. Citizens was not legally obligated to loan the money, and Citizens did not loan the money in order to protect its own interests. The initial mistake was that Land Title, Inc., acting on Citizens' behalf, did not send the correct amount of money for the mortgage registration tax when the Citizens mortgage was sent to the county recorder's office to be recorded. We may assume, without deciding, that this mistake might be justifiable or excusable. But our inquiry does not end there.

Citizens has not explained why it, or its agent, failed to promptly resubmit the mortgage to the county recorder's office when the mortgage was returned unrecorded on March 14, 2005. Citizens did nothing for 38 days, waiting until April 20, 2005, to again submit the mortgage for recording. Citizens simply neglected to act in a timely manner. In the meantime, Feyereisen executed a second mortgage on the property on April 7, 2005, and Raven had the mortgage recorded on April 29, 2005, taking priority over the Citizens mortgage that was finally recorded on May 9, 2005, based on the provisions of Minn. Stat. § 507.34.

In the end, whether to apply equitable subrogation is determined based on the circumstances present in each dispute. Here, we conclude that equitable subrogation should not apply to waive the normal recording requirements of Minn. Stat. § 507.34 when Citizens had notice of the unrecorded mortgage on March 14, 2005, and did nothing for 38 days. This delay in submitting the document for recording, given that Minnesota is a race-notice state, see Minn. Stat. § 507.34, is not justifiable or excusable, regardless of the sophistication of the mortgagee. Once Citizens received notice that the mortgage was returned, Citizens had an obligation to expeditiously record the mortgage. Unlike previous cases where equitable subrogation applied, Citizens was aware of its original mistake — not paying the correct mortgage registration tax — and had the opportunity to remedy it by timely resubmitting the mortgage with the correct payment. In previous cases where equitable subrogation applied, we were concerned with parties that unknowingly made one mistake, whether due to fraud or negligence, and who had no opportunity to correct that mistake once it had been made. See, e.g., Hirleman, 193 Minn, at 54, 56-57, 258 N.W. at 15-16 (satisfaction of a first mortgage in ignorance of existing intervening mortgage); Elliott, 88 Minn. at 379-81, 93 N.W. at 125-26 (property owner misled lender); London, 58 Minn. at 203, 59 N.W. at 1002 (mortgagee relied upon mortgagors' misrepresentation); Emmert, 49 Minn, at 390, 392, 52 N.W. at 31-32 (fraudulent inducement of mortgagee); Gerdine, 41 Minn, at 419, 43 N.W. at 92 (satisfaction of first mortgage based on the mistaken belief that the foreclosure proceedings were valid, when they were not).

We agree with the court of appeals that equitable subrogation should not apply here, but disagree to the extent that the court of appeals opinion suggests that Citizens must be held to a higher standard as a commercial lender in order to conclude that equitable subrogation should not apply. Citizens, 2009 WL 1515585, at *2 (citing Peterson, 261 N.W.2d at 348). It is not necessary for us to decide here whether the presence of a commercial lender is a factor to be considered in deciding whether to apply equitable subrogation.

The dissent concludes that we are "tak[ing] a step back" from "the path our court blazed approximately a century ago," and that we are adopting a restrictive analysis of "justifiable or excusable mistake of fact," because, according to the dissent, Citizens' mistake is not more serious than the mistakes plaintiffs in the past have committed. Infra at D-4, D-5. On the contrary, the dissent's position represents a departure from the principles in our previous cases. Plaintiffs in previous cases unknowingly committed a variety of errors, whether due to fraud or negligence, based on a mistake of fact. But the parties cite no precedent, and we have found none, where a plaintiff knowingly committed a second mistake when there was an opportunity to correct an underlying problem. To overlook Citizens' mistake in neglecting to more timely resubmit the mortgage with proper payment would require flexibility with respect to the requirements of Minn. Stat. § 507.34 to the point where the normal recording requirements of the statute become suggestions, not requirements. We believe that, based on the undisputed facts here, we must give effect to the statute that the Legislature enacted.

The dissent also concludes that "[i]f equitable subrogation was appropriate in Sucker, . . . it is appropriate here." Infra at D-5. Sucker, however, is not controlling under these circumstances. We said in Sucker that the issue was whether

a mortgagee, who at the foreclosure sale bid in the property for the full amount of the debt then due, but, while the year of redemption ran, disbursed money in payment of taxes and in redemption from tax sales, [has] no remedy if he has failed to file and furnish an affidavit in accordance with [the statute], when redemption is made by the mortgagor, as owner, without reimbursement for such tax payments, the mortgage containing a provision that the mortgagee may pay delinquent taxes and charge the amount to the mortgagor or the then owner, or at his option secure tax title to the property.

127 Minn, at 126, 149 N.W. at 17. Our basis for protecting the plaintiff's interest and excusing the failure to file an affidavit was two-fold: (1) the mortgage executed by the defendants gave the plaintiff the right to pay the taxes and charge the amount to the defendants, and the defendants had failed to perform their covenant with regard to the taxes; and (2) "[t]axes are a perpetual lien until paid." Id. at 127-28, 149 N.W. at 17-18. Here, unlike the plaintiff in Sucker that paid taxes on the property in order to protect his rights after a foreclosure sale and had an underlying right expressed in the mortgage to charge that amount to the defendants, Citizens did not pay taxes on the property. The grounds for applying equitable subrogation in Sucker are not present here.

We recognize that if we do not apply equitable subrogation, Raven will receive a windfall because Raven anticipated that its mortgage on the property would have second priority. If we apply equitable subrogation and give the Citizens mortgage priority over the Raven mortgage, Raven would be in no worse position. But we need not apply equitable subrogation merely to prevent a party from obtaining a windfall or unjust enrichment. See Wentworth, 53 Minn, at 398, 55 N.W. at 545.

The dissent states that "our prime concern in equitable subrogation cases is whether the `restoration of the discharged lien may be made without putting the holder of the second incumbrance in any worse position than if the prior lien had not been discharged' and protecting the expectations of those who pay off another's debt." Infra at D-4 (quoting London, 58 Minn, at 204, 59 N.W. at 1002). But in London, we said: "A prime consideration . . . is that the restoration of the discharged lien may be made without putting the holder of the second incumbrance in any worse position . . . where [the mortgage] was discharged under a mistake of fact. . . ." London, 58 Minn, at 204, 59 N.W. at 1002. Consideration of the rights of a third-party lienholder, such as Raven, is a prime consideration, but not the prime consideration. The implication from the dissent's position is that there is a presumption that because we have liberally applied equitable subrogation in the past, equitable subrogation will apply so long as there is no harm to a third party. The first determination that must drive the analysis is whether the expectations of a party who paid the debt of another should be protected. Citizens did not discharge the mortgages under a mistake of fact, and had the opportunity to correct its mistake. It is not enough to invoke equity merely to prevent a windfall. See Wentworth, 53 Minn, at 398, 55 N.W. at 545.

We conclude that the facts here, in light of applicable law and principles of equity, do not support applying equitable subrogation. "[E]quity aids the vigilant, and not the negligent." Sinell v. Town of Sharon, 206 Minn. 437, 439, 289 N.W. 44, 46 (1939) (citation omitted) (internal quotation marks omitted). Contrary to the district court's conclusion, Citizens' mistake in failing to act for 38 days was not a justifiable or excusable mistake of fact. Because the district court's weighing of the equities and decision to apply equitable subrogation rested on an erroneous view of the law, we conclude that the district court erred in giving the Citizens mortgage priority over the Raven mortgage.

Affirmed and remanded.

STRAS, J., not having been a member of this court at the time of the argument and submission, took no part in the consideration or decision of this case.