Park Bank et al v. US Bank Trust, N.A.
OPINION & ORDER affirming Bankruptcy Court decision re: 2 Bankruptcy Appeal. Signed by District Judge James D. Peterson on 8/17/2018. (kwf)
IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF WISCONSIN
OPINION & ORDER
U.S. BANK TRUST, N.A.,
This is an appeal of the bankruptcy court’s grant of summary judgment in an
adversary proceeding related to Vincent and Linda Hamilton’s bankruptcy. During the
bankruptcy, the Hamilton residence was sold under section 363. Appellant Park Bank and
appellee U.S. Bank Trust, N.A., both held security interests on the property, and they dispute
which of them is entitled to recover the net sale proceeds of $131,157.31.
Priority is complicated here. U.S. Bank is a successor to a lender who received
mortgages on the Hamilton residence that were not immediately recorded. Park Bank’s
security interest was granted later but recorded first. Under Wisconsin’s race-notice statute,
Wis. Stat. § 706.08(1)(a), Park Bank might well have priority. But Park Bank had actual
knowledge of the prior mortgages, because the Hamiltons had disclosed them to Park Bank.
And on that basis, the bankruptcy court held that Park Bank was not entitled to the benefit
of the race-notice statute and granted summary judgment to U.S. Bank.
Park Bank appeals. Park Bank contends that its actual knowledge of the prior
mortgages would prevent it from gaining priority over only the original holder of those
mortgages. But U.S. Bank, as the assignee of a later-acquired mortgage, is charged with
knowledge of Park Bank’s recorded security interest. Thus, the argument goes, Park Bank’s
first-recorded security interest takes priority over the later-recorded mortgages that U.S. Bank
now holds. This result is required, according to Park Bank, under principles of equitable
subrogation, which the bankruptcy court did not consider.
This court concludes that Park Bank took a security interest knowing that its interest
was subordinated to prior unrecorded mortgages, and that the principles of subrogation do
not give it priority over subsequent mortgages that were granted to secure financing to pay
off the Hamiltons’ original debt. The judgment of the bankruptcy court is affirmed.
The essential history of the financing of the Hamiltons’ residence, and the resulting
security interests in that property, is undisputed.
Back in the 1990s, the Hamiltons built a house at what is now N1922 Summit Drive,
La Crosse, Wisconsin. The property straddles two lots, which led to some complications that
the bankruptcy court resolved. (Those complications are not material to this appeal, although
they might explain some of the irregularities in the recording and discovery of the security
interests involved.) The Hamiltons’ construction loans were secured by a mortgage on the
Summit Drive property. When construction was complete, they refinanced those loans with
The Money Store (TMS) on November 20, 1998. Those loans were secured with two
mortgages—one for $405,000 and another for $40,000. But, for unexplained reasons, The
TMS mortgages weren’t recorded until May 12, 1999.
In the gap between the granting of the mortgages to TMS and the recording of those
mortgages, the Hamiltons sought financing from Park Bank to expand Linda Hamilton’s
chiropractic practice. The resulting Park Bank loan for $385,000 was secured not only by the
Hamiltons’ business property, but also the Hamiltons’ residence, as reflected in a Real Estate
Security Agreement (RESA). Park Bank recorded the RESA on April 19, 1999, almost a
month before the TMS mortgages were recorded. But critically, the Hamiltons disclosed the
TMS mortgages in the Personal Financial Statements submitted to Park Bank in support of
their loan applications.
The Hamiltons refinanced their debt to TMS with a $486,000 loan from Ameriquest
Mortgage Company on January 21, 2004. The proceeds of that loan were used to satisfy the
1998 TMS mortgages and other debts. The Ameriquest loan was secured with a new
mortgage on the Hamiltons’ residence, which was recorded on February 2, 2004. The
Ameriquest loan and mortgage were assigned, ultimately, to U.S. Bank on September 15,
2015, a few months after the Hamiltons filed their bankruptcy petition on July 8, 2015.
U.S. Bank filed an adversary proceeding seeking, among other things not material
here, to establish its priority over Park Bank. On January 25, 2018, the bankruptcy court
granted U.S. Bank’s motion for summary judgment, holding that Park Bank had actual notice
of the 1998 mortgages, and therefore U.S. Bank is “entitled to priority to the extent of the
balances on the 1998 TMS Mortgages that were actually paid and refinanced by the
Ameriquest Mortgage.” Dkt. 1-1, at 7.
The court has jurisdiction over this appeal under 28 U.S.C. § 158(a)(1). The court
reviews the bankruptcy court’s grant of summary judgment de novo, as with all conclusions
of law. In re Midway Airlines, Inc., 383 F.3d 663, 668 (7th Cir. 2004). The familiar summary
judgment standards apply: summary judgment will be affirmed if there is no genuine issue of
material fact and the moving party is entitled to judgment as a matter of law. Id.
Under Wisconsin’s race-notice statutes, which the parties agree are applicable here,
the date on which an interest is recorded in the title record generally determines its priority:
the first mortgage recorded is superior to later-recorded mortgages, regardless of when the
mortgages were actually executed. See Wis. Stat. §§ 706.08, 706.09; In re Thulis, 474 B.R.
668, 674 (Bankr. W.D. Wis. 2012). One exception to this general rule is actual notice: a
party who actually knows about a prior but unrecorded interest cannot claim the benefit of
the race-notice statute. Id.
On appeal, Park Bank does not challenge the bankruptcy court’s conclusion that it
had actual notice of the 1998 TMS mortgages and that therefore, the 1998 TMS mortgages
have priority over Park Bank’s RESA. Rather, it challenges the bankruptcy court’s conclusion
that U.S. Bank’s mortgage—or at least the portion of the mortgage that refinanced the 1998
TMS mortgages—is also superior to Park Bank’s RESA. The bankruptcy court did not fully
explain how it reached the conclusion that U.S. Bank effectively stood in the shoes of TMS.
Remember that U.S. Bank did not acquire the TMS mortgages; it acquired the Ameriquest
mortgages, which were granted to secure a loan that was used to pay off the TMS debt and
The parties agree that the only way that U.S. Bank’s mortgage could receive the same
priority as the 1998 TMS mortgages is through application of subrogation, an equitable
doctrine applied when “a person other than a mere volunteer pays a debt which in equity and
good conscience should be satisfied by another.” In re Trampush, 552 B.R. 817, 821 (Bankr.
W.D. Wis. 2016) (quoting Rock River Lumber Corp. v. Universal Mortg. Corp., 82 Wis. 2d 235,
262 N.W.2d 114, 116 (1978)). There are two varieties of subrogation—conventional
subrogation and legal or equitable subrogation. See Am. Ins. Co. v. City of Milwaukee, 51 Wis.
2d 346, 187 N.W.2d 142, 145 (1971).
The parties agree that conventional subrogation, which rests essentially on contract
principles, would be applicable here. “Under conventional subrogation, ‘a lender will be
granted subrogation where money is advanced in reliance upon a justifiable expectation that
the lender will have security equivalent to that which his advances have discharged, provided
that no innocent third parties will suffer.’” Trampush, 552 B.R. at 821 (quoting Rock River
Lumber, 262 N.W.2d at 117). Refinancing a mortgage is a prototypical situation in which
conventional subrogation would apply, allowing “one who has paid off another’s mortgage
obligation [to be] treated as the owner of that obligation.” Countrywide Home Loans, Inc. v.
Schmidt, 2007 WI App 243, ¶ 1, 306 Wis. 2d 200, 742 N.W.2d 901. It seems clear that the
bankruptcy court applied the doctrine of conventional subrogation in deciding that U.S.
Bank stood in the shoes of TMS, even though it didn’t expressly say so.
“The remedy of subrogation is highly favored, and the courts are inclined to extend
rather than to restrict the principle, and to give it a liberal application.” Jindra v. Diederich
Flooring, 181 Wis. 2d 579, 511 N.W.2d 855, 861 n.11 (1994). But the party requesting
subrogation has the burden of proving its right to subrogation, id. at 861, and “conventional
subrogation will be available only where a definite agreement of the parties is shown and
where a balancing of the equities favors application of the doctrine.” Rock River Lumber, 262
N.W.2d at 242. This court is satisfied that U.S. Bank has shown the requisite agreements of
the parties: Ameriquest refinanced the Hamiltons’ debts, including the debt to TMS. Funds
from the Ameriquest loan were used to satisfy the TMS mortgages and Ameriquest took a
new mortgage as its security on the loan it made. And by a series of assignments, U.S. Bank
paid off the Ameriquest loan and took Ameriquest’s security position.
But the bankruptcy court did not walk through the equities (and disclaimed the need
to consider equitable subrogation, Dkt. 1-1, at 8). On this basis, Park Bank contends that the
grant of summary judgment was erroneous. This court could remand the matter to the
bankruptcy court to consider the equities in the first instance, if the facts could support a
different outcome. But the parties conceded in the bankruptcy court that all the material
facts were of record, and the bankruptcy court could decide the issue as a matter of law.
Dkt. 1-1, at 1-2. Based on the undisputed facts of record, this court concludes that the
balancing of the equities favors the application of conventional subrogation for U.S. Bank.
Park Bank’s core argument is that even though it is not entitled to the benefit of the
race-notice statue against TMS, it should be entitled to the benefit of the race-notice statute
against Ameriquest and its successors. This is because Ameriquest should have known when it
refinanced the Hamiltons’ debt in 2004 that the Hamilton residence was subject to Park
Bank’s RESA. The Park Bank RESA was recorded in 1999, providing constructive notice to
anyone who might take the Hamilton residence as security for any later loan. Of course, the
Hamiltons thought that they were refinancing a first-position mortgage, so it might be
understandable if Ameriquest thought so, too. Nevertheless, the court agrees that Ameriquest
should have checked for recorded security interests, and that it is charged with knowledge of
those security interests.
But here is where the equities tip against Park Bank. What if Ameriquest had checked
for recorded security interests? Would Ameriquest have refinanced $486,000 of the
Hamiltons’ debt with a second-position mortgage? Very unlikely. Ameriquest would have
sought to clarify that it was taking a first-position mortgage and that Park Bank’s mortgage
was subordinate to it. But would Park Bank agree to subordinate? Most likely; it had already
done so when it made the business loan to the Hamiltons knowing that the residence was
already subject to the TMS mortgages. After all, the residence was only part of the collateral
for the Park Bank loan, which was also secured by the Hamiltons’ business property.
Everyone would have gotten what they bargained for. But if the court were to deny U.S.
Bank’s claim for subrogation, then Park Bank would get a windfall because it would step up
to a first-position security interest when all it bargained for was an interest subordinate to the
Hamiltons’ primary home mortgages.
The equities favor the application of conventional subrogation to U.S. Bank’s interest
in the Hamilton residence to the extent of the original TMS mortgages. The court has
considered Park Bank’s arguments based on the language of the Ameriquest documents and
Ameriquest’s purported negligence and finds them unpersuasive in light of the broader
context of the transaction.
IT IS ORDERED that the final decision of the United States Bankruptcy Court for
the Western District of Wisconsin granting appellee U.S. Bank Trust, N.A.’s motion for
summary judgment is AFFIRMED.
Entered August 17, 2018.
BY THE COURT:
JAMES D. PETERSON
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