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Mort v. United States - 86 F.3d 890 (9th Cir. 1996)

Rule:

The doctrine of equitable subrogation allows a person who pays off an encumbrance to assume the same priority position as the holder of the previous encumbrance. Equitable subrogation is generally appropriate where (1) the subrogee made the payment to protect his or her own interest, (2) the subrogee did not act as a volunteer, (3) the subrogee was not primarily liable for the debt paid, (4) the subrogee paid off the entire encumbrance, and (5) subrogation would not work any injustice to the rights of the junior lienholder. Equitable subrogation is a broad equitable remedy, and therefore it applies not only when these five factors are met, but also whenever one person, not acting as a mere volunteer or intruder, pays a debt for which another is primarily liable, and which in equity and good conscience should have been discharged by the latter.

Facts:

Plaintiffs Jeffrey and Pamela Mort, Jeffrey Tobian, and Fred Strefling, assignees of a promissory note secured by a deed of trust, brought an action in the United States District Court, District of Nevada, for injunctive relief and a declaratory judgment that their trust deed interest was superior to a federal tax lien. Plaintiffs acquired their interest after the Internal Revenue Service (IRS) filed a tax lien on the property, but they argued that they were entitled to be equitably subrogated to the priority position of the lender whose loan was paid off by their assignor. The district court denied the parties' crossmotions for summary judgment and dismissed Plaintiffs' action without prejudice, concluding that equity jurisdiction should not be exercised until Plaintiffs first pursued any legal remedies they may have against their title insurer. Plaintiffs argued on appeal that (1) the district court erred in not reaching the merits of its equitable subrogation claim, and (2) they are entitled to be equitably subrogated as a matter of law.

Issue:

Were the assignees entitled to equitable subrogation of the tax lien on the property?

Answer:

Yes

Conclusion:

The Court of Appeals for the Ninth Circuit reversed the district court's judgment in favor of the Internal Revenue Service, holding that Plaintiffs were entitled to equitable subrogation, which allowed them to assume the same priority position as the holder of the previous encumbrance as long as the new creditor was not a volunteer. A person who lent money to pay off an encumbrance was not a volunteer for equitable subrogation purposes. An assignee was vested with all the powers and rights of the assignor where the assignment was for proper consideration. The Court then remanded for further proceedings.

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