Opinion ID: 567256
Heading Depth: 2
Heading Rank: 2

Heading: Excusable Mistake of Fact

Text: 17 The government also argues that Minnesota law precludes the application of legal subrogation in the instant case because Universal failed to undertake prudent business measures in searching for potential encumbrances to the Hjelms property. In other words, the government contends that Universal's failure to discover the properly recorded federal tax lien was not an excusable mistake of fact, as required by Minnesota case law. We agree. 18 In Heisler v. C. Aultman & Co., 56 Minn. 454, 57 N.W. 1053 (1894) (Heisler ), the Minnesota Supreme Court articulated a two-pronged standard for determining whether a party, who has discharged another's obligations without knowledge of an intervening lien, should be subrogated to the rights of the superior discharged lien. It stated that, under such circumstances, the interests of substantial justice dictate that a court may relieve one who has acted under a justifiable or excusable mistake of fact ... where ... no injury to innocent parties will result. Id. 57 N.W. at 1053-54. In Heisler, the plaintiff was an individual surety on a note made by her son and secured by a second mortgage on land purchased by him. After the son defaulted on the note, the plaintiff paid the note in full without knowledge of the existence of a judgment lien, which was third in priority to the second mortgage. The Minnesota Supreme Court affirmed the trial court judgment, which subrogated the plaintiff to the rights of the second mortgage, and accorded her priority over the judgment lienholder to the proceeds of the sheriff's sale of the land. In reaching its decision, the court noted: 19 Having caused [the mortgage] to be satisfied and discharged in ignorance of the existence of the judgment lien, under circumstances authorizing an inference of a mistake of fact, equity will ... give the party who made it the benefit of the equitable right of subrogation. To do so in this case is to prevent manifest injustice and hardship, and no superior intervening equities are interfered with. 20 Id. at 1054. The Minnesota Supreme Court also noted that the defendant was not placed in a worse position by subrogating the plaintiff to the rights of the mortgagee because it had notice of the plaintiff's cause of action, which was filed before the sheriff's sale. Id. 21 A more recent Minnesota Supreme Court decision reiterated the Heisler standard for the application of legal subrogation. Carl H. Peterson Co. v. Zero Estates, 261 N.W.2d 346, 348 (Minn.1977) (Peterson ). In Peterson, the Minnesota Supreme Court rejected a bank's argument that a 1973 mortgage should be subrogated to a 1970 mortgage for the purpose of gaining priority over intervening mechanics liens, despite the fact that the proceeds of the second loan were used to pay the balance of the first loan, as well as certain delinquent taxes, and that the bank had no actual knowledge of intervening mechanics liens on the same property. Id. In assessing whether the bank acted under an excusable mistake of fact, the court distinguished the factual situation from Heisler, stating 22 [t]he bank in this case has not demonstrated such equities in its favor. Unlike the unsophisticated individual wholly unaware of a judgment lien, the bank is a professional lender with knowledge of construction in progress giving rise to inchoate liens for contractors and materialmen. Its failure to consider potential priority conflicts and to obtain subordination agreements from them, as well as its failure to ascertain that its mortgagor was maintaining insurance in force, cannot be deemed justifiable as an excusable mistake. Id. 5 23 We believe that the Peterson case indicates that the Minnesota courts impose stricter standards on professionals than lay persons in assessing whether mistakes are excusable for purposes of the doctrine of legal subrogation, especially when the professional relationship arises out of a commercial transaction involving consideration. It is unreasonable to believe that the Minnesota Supreme Court would distinguish a title insurer from a bank; both are professional enterprises experienced in the area of secured transactions involving real property. 24 Our interpretation of Peterson is consistent with other jurisdictions, which have imposed stricter standards on professionals in contexts similar to the instant case. For example, the Washington Supreme Court distinguished between purchasers of real estate and a title insurer, noting that [t]he former are bona fide purchasers to the extent that they were entitled to rely upon others who were paid to give an expert opinion and insure title. The latter are engaged in giving those expert opinions for a consideration. In equity, [the purchasers] and [the title insurer] are poles apart. Coy v. Raabe, 69 Wash.2d 346, 418 P.2d 728, 731 (1966) (Raabe ). In elaborating on this dual standard, the court stated: 25 It would be a gross misapplication of the doctrine of subrogation were we to hold that its cloak settles automatically upon one who has simply made a mistake, when it is a commercial transaction involving consideration. [The title insurer's] relationship is governed by the law of contracts. Further, it is difficult to think of a situation in which a title insurance company could not claim unjust enrichment as to someone who might inadvertently benefit by their negligence. Either they insure or they don't. It is not the province of the court to relieve a title insurance company of its contractual obligation. [The insurer] has not cited us authority to the contrary. 26 Id. 27 The Indiana Court of Appeals also indicated a less deferential standard in a decision affirming the denial of subrogation to a title insurer, who by mistake failed to exempt from coverage a strip of land, which had previously been sold. Lawyers Title Insurance Corp. v. Capp, 174 Ind.App. 633, 369 N.E.2d 672, 674 (1977) (Capp ). In its opinion, the Capp court noted that the insurer's mistake arose out of a commercial transaction involving a consideration.... [which] is governed by the law of contracts. Id. (quoting Raabe, 418 P.2d at 731). In addition, the New Mexico Court of Appeals held that a title insurer's failure to conduct a more thorough title search to determine whether a federal tax lien was recorded against insured property constituted negligence, which precluded it from being subrogated to the IRS lien, despite the owner's assurances that the property was unencumbered. USLIFE Title Insurance Co. v. Romero, 98 N.M. 699, 652 P.2d 249, 252-53 (Ct.App.1982) (Romero ) (citing Capp, 369 N.E.2d at 674; Raabe, 418 P.2d at 731). 28 Having considered the relevant Minnesota case law, we believe that the instant case is more analogous to Peterson than Heisler. Universal is a professional enterprise, which is in the business of insuring marketable title to real property. Although Universal contends that it exercised prudent business practices in investigating the title to the Hjelms property, it fails to explain what precautions it took or why it failed to discover the properly recorded federal tax lien. Its claim that it sought and received assurances from the seller that there were no liens, other than those discharged at closing, is patently insufficient. It has long been recognized that purchasers of real property are expected to consult available records in regard to contemplated real property transactions ... [to minimize] the effect of any uncertainty of representation between vendor and vendee concerning existing incumbrances of record. Belcher v. Belcher, 161 Or. 341, 87 P.2d 762, 765 (1939). We can expect no less from a title insurer. 29 Universal's inability to explain its failure to find the properly recorded federal tax lien is significant, because Universal had the burden of persuasion at trial of demonstrating its entitlement to subrogation. See Peterson, 261 N.W.2d at 348. In light of the Minnesota Supreme Court's decision in Peterson, we hold that the district court erred in finding that Universal's failure to discover the federal tax lien was an excusable mistake of fact. On the contrary, we must conclude, under these circumstances, that Universal's failure to detect the federal tax lien resulted from negligence, and therefore, it is not entitled to be legally subrogated to the rights of the prior senior lienholders. 6 30