Summary: Following foreclosure, the priority of secured interests favors the lien who was recorded first and the lender who pays off a first mortgage is not necessarily equitably subrogated to first lien position.

CSMC, Inc. v. Hoppa, 345 Wis.2d 397 (Wis. Ct. App. 2012).

Facts: In 2003, Paul and Kim Hoppa (Hoppa) received funding for a building project secured by a one-year, $350,000 first mortgage from Central States Mortgage Company (CSMC), secured by Hoppa’s primary residence. The CSMC mortgage was recorded on November 4, 2004. Thereafter, the Hoppas entered into a Real Estate Security Agreement (RESA) with CSMC in order to borrow additional amounts subject to the lien. The RESA loan was recorded on February 8, 2005. The Hoppas borrowed $90,000 in accordance with the RESA. Payment became due on both the loans, and under advisement from CSMC, the Hoppas sought alternative funding to pay off the loans. The Hoppas received a $350,000 loan from Tri City National Bank (Tri City) in order to refinance the CSMC mortgage. The Hoppas did not disclose the $90,000 RESA loan to Tri City, and Tri City’s title commitment failed to identify the RESA loan. The Hoppas defaulted on both the $90,000 RESA loan and Tri City’s loan. Both banks obtained foreclosure judgments, and after the confirmation of the sheriff’s sale, sought an order clarifying the priorities of their security interests.

Both parties acknowledged that the RESA was recorded first, but Tri City argued that its security interest was superior under the doctrine of equitable subrogation. The trial court heard conflicting testimony as to when Tri City learned of the RESA and was therefore unable to make a specific finding as to when Tri City had notice of the RESA. The trial court held that because the RESA was related to the first mortgage and filed first in time, there was not enough evidence to equitably find that Tri City’s interest was superior to CSMC’s interest. Tri City appealed.

Holding: Affirmed. Equitable subrogation exists when a debt is paid with a justifiable expectation that the lender will have security interest equivalent to the one discharged and no innocent third party will suffer. The appellate court agreed with the trial court that the circumstantial evidence did not support a justifiable expectation of subrogation. Furthermore, the court rejected Tri City’s argument that CSMC was unjustly enriched because of Tri City’s payoff of the first mortgage. This is because CSMC’s RESA loan was related to the first mortgage, the RESA was first in right, and it is reasonable the CSMC expected the RESA to be paid off with the original mortgage or ascend to senior lienholder status. The court also held that a negligent title search could not justify Tri City getting first priority. Moreover, Tri City failed to take steps necessary to protect itself and its expectation, such as stating in the mortgage that its lien would have first priority. For these reasons the appellate court found that the trial court properly exercised its discretion in finding that the equities did not favor subrogation.