Citizens State Bank v Pirius (WI)

Summary: Language in a mortgage that contemplates earlier mortgages does not indicate their superiority for purposes of determining intent under equitable subrogation.

Citizens State Bank v Pirius, 816 NW2d 351, 2011 AP 919 (Wis. Ct. App., 2012).

Facts: Terry Pirius owned real property that was subject to four separate mortgages. These mortgages were: (1) $345,000 to Associated Bank, N.A. recorded April 6, 2004 (Associated 1); (2) an undescribed mortgage to Riverbank recorded November 5, 2004; (3) a $280,000 mortgage to Citizens recorded October 11, 2005, and (4) a $350,000 mortgage to Associated recorded July 17, 2006 (Associated 2). The funds from Associated 2 were used to satisfy Associated 1. 

Pirius defaulted. Upon Pirius’s default and the banks’ subsequent foreclosures, the circuit court was asked to determine the priority of the three outstanding mortgages.  The circuit court determined that based upon a theory of equitable subrogation, Associated 2 took the position of Associated 1, therefore the order of lien priority was Associated 2, Riverbank, and then Citizens.  Citizens commenced this appeal, asserting that equitable subrogation was inappropriately applied.

Holding:  Affirmed.  Equitable subrogation is a doctrine that is akin to an assignment of the original security in which someone other than a mere volunteer pays the debt which should be satisfied by another.  For subrogation to be appropriate, the lender must have “lent money to the debtor to pay a debt on which the lender was secondarily liable, lent the money to protect the lender’s own interest, or entered into an agreement that the lender was to have security on the debt.” Rock River Lumber corp. v Universal Mortg. Corp., 82 Wis 2d 235, 241-242, 262 NW2d 114 (Wis. 1978).  This case was based upon the third theory of subrogation.  

Subrogation is present when there is a definite agreement in which money is advanced with a justifiable expectation that the lender will have the security equivalent to the one discharged, paid from the advance, and the balancing of equities favors application.  Citizens argued that there was no agreement to give first priority because of the language in the second mortgage. The second mortgage stated the “mortgagor also warrants that the Property is unencumbered, except for encumbrances of record.” Citizen argued that this indicates that it was subject to prior encumbrances. The court of appeals rejected this assertion and held that the language merely stated that there were no encumbrances on the property that were not recorded, and was neutral to the issue of priority.

Citizens next argued that the language stating that the mortgagor agreed “not to allow any modification or extension of, nor to request any future advances under any note or agreement secured by the lien document without Lender’s prior written consent” demonstrated a lack of intent to create a first-position mortgage because the language treated the mortgage as if there were prior security interests.  The court rejected this theory because it merely addressed the possibility of liens with a superior position without indicating that any existed.  For the reasons above the holding of the lower court was affirmed.

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By: ATG Underwriting Department | Posted on: Wed, 09/12/2012 - 11:17am