Subrogation Page3

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The Belmonts purchased title insurance on the property from Fidelity National Title Agency of Nevada ("Fidelity"). Fidelity failed to discover the federal tax lien and insured clear title. The Belmonts recorded their deed of trust on November 17, 1992 .

On December 21, 1992 , the Belmonts , in consideration of a payment of $38,000, conveyed their interest in the promissory note and the deed of trust to the Morts. The assignment was recorded on December 23, 1992 , and re-recorded on January 20, 1993 . The Belmonts ' title insurance policy with Fidelity was transferred to the Morts by endorsement.

The Morts first learned of the IRS lien in June or July, 1993. On August 12, 1993 , the IRS seized the DeLee land. The Morts then filed a complaint in the United States District Court for the District of Nevada seeking injunctive relief and a declaratory judgment that their trust deed interest was superior to the federal tax lien. The parties filed cross motions for summary judgment, which were denied by the district court on September 16, 1994 . The district court dismissed the Morts' complaint without prejudice, concluding that the Morts could not bring their claim for equitable subrogation without first pursuing their legal remedies against the title insurer. See Mort v. United States [94-2 USTC ¶50,539], 874 F. Supp. 283 (D. Nev. 1994).

STANDARD OF REVIEW

The district court's decision not to exercise its equitable jurisdiction is reviewed for an abuse of discretion. Cf. Ramsden v. United States , 2 F.3d 322, 324 (9th Cir. 1993) (district court's decision to exercise its equitable discretion under Fed. R. Crim. P. 41(e) reviewed for abuse of discretion), cert. denied, -- U.S. --, 114 S.Ct. 1624, 128 L.Ed.2d 349 (1994). ¹

DISCUSSION

I

The district court offered no authority in support of its decision not to exercise equity jurisdiction in this case, and we are unable to find any. "It is a basic doctrine of equity jurisprudence that courts of equity should not act ... when the moving party has an adequate remedy at law. ..." Morales v. Trans World Airlines, Inc., 504 U.S. 374, 381 (1992) (citation and internal quotation omitted). Equitable relief should not be denied, however, unless the available legal remedy is against the same person from whom equitable relief is sought. Barr v. Roderick, 11 F.2d 984, 986 (N.D. Cal. 1925) ("[t]he fundamental principle ... that equity will grant no relief where an adequate remedy at law exists, must be limited strictly to cases in which there is an adequate legal remedy against the defendants before the court."). ²

The Morts have no legal remedy against the IRS. Their only potential legal remedy is against Fidelity, which is not a party to this action in equity. Because the availability of a legal remedy against a third party does not bar equitable relief, the district court abused its discretion in refusing to exercise its equitable jurisdiction.

II

Because the district court declined to exercise jurisdiction, it did not reach the merits of the Morts' equitable subrogation claim. In these circumstances, we can either remand to the district court to consider the Morts' claim or dispose of it ourselves if possible to do so as a matter of law. Meinhold v. United States Dept. of Defense, 34 F.3d 1469, 1474 (9th Cir. 1994); RTC Transp. Inc. v. Conagra Poultry Co., 971 F.2d 368, 375 (9th Cir. 1992). In this case, the facts are undisputed and further factfinding is unnecessary to resolve the equitable subrogation issue. Thus, we can determine as easily as the district court whether the Morts are entitled to equitable subrogation, and we exercise our discretion to do so.

A. Applicable Law

Equitable subrogation is a state-law doctrine and therefore whether equitable subrogation applies in this case presents a question of Nevada law. The Internal Revenue Code recognizes that certain interests may be subrogated under state law and provides:

Where, under local law, one person is subrogated to the rights of another with respect to a lien or interest, such person shall be subrogated to such rights for purposes of any lien imposed by section 6321 or 6324 .

26 U.S.C. §6323(i)(2) (1994).

There is limited Nevada authority on the doctrine of equitable subrogation. The Nevada Supreme Court first applied the doctrine in Laffranchini v. Clark, 39 Nev. 48, 153 P. 250 (1915), where it held that the holder of an invalid mortgage was entitled to be equitably subrogated to the priority position of the lender whose loan she had paid. Though the Nevada courts have applied equitable subrogation in other contexts, AT&T Technologies, Inc. v. Reid, 109 Nev. 592, 855 P.2d 533 (1993) (workers' compensation benefits); Federal Ins. Co. v. Toiyabe Supply Co., 82 Nev. 14, 409 P.2d 623 (1966) (subrogation rights of surety against bank that paid on forged endorsement); Globe Indem. Co. v. Peterson-McCaslin Lumber Co., 72 Nev. 282, 303 P.2d 414 (1956) (surety subrogated to rights of State on highway construction performance bond), they have not addressed the equitable subrogation of mortgage or trust deed interests since Laffranchini. Where Nevada law is lacking, its courts have looked to the law of other jurisdictions, particularly California , for guidance. See, e.g., People for the Ethical Treatment of Animals v. Bobby Berosini, Ltd., 111 Nev. 615, 895 P.2d 1269, 1281-82 (1995); Dutt v. Kremp, 111 Nev. 567, 894 P.2d 354, 358 (1995). In accordance with this practice, we have looked to the law of other states when necessary to supplement Nevada 's law on equitable subrogation.

B. Equitable Subrogation

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. Han v. United States , 944 F.2d 526, 529 (9th Cir. 1991). 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. Id. (applying California law). 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.'" Id. (quoting Caito v. United Cal. Bank, 20 Cal.3d 694, 704, 144 Cal. Rptr. 751, 756, 576 P.2d 466, 471 (1978)).

The IRS argues that the Morts have failed to satisfy the traditional requirements of equitable subrogation because they were mere volunteers who did not act to protect their own interests. The IRS further argues that permitting equitable subrogation here would work an injustice on the government.

1. Volunteer Status

A volunteer, stranger, or intermeddler is "one who thrusts himself into a situation on his own initiative, and not one who becomes a party to a transaction upon the urgent petition of a person who is vitally interested, and whose rights would be sacrificed did he not respond to the importunate appeal." Laffranchini, 39 Nev. 48, 153 P. at 252. Parties may be considered volunteers if, in making a payment, they have no interest of their own to protect, they act without any obligation, legal or moral, and they act without being requested to do so by the person liable on the original obligation. Henningsen v. United States Fidelity Guar. Co., 208 U.S. 404, 411 (1908); Smith v. State Sav. & Loan Ass'n, 175 Cal. App. 3d 1092, 1098, 223 Cal. Rptr. 298, 301 (1986); Norfolk & Dedham Fire Ins. Co. v. Aetna Casualty & Surety Co., 132 Vt. 341, 344, 318 A.2d 659, 661 (1974). A person who lends money to pay off an encumbrance on property and secures the loan with a deed of trust on that property is not a volunteer for purposes of equitable subrogation. Cf. Katsivalis v. Serrano Reconveyance Co., 70 Cal. App. 3d 200, 138 Cal. Rptr. 620, 625 (1977) (lender granted new mortgage was not a volunteer and entitled to equitable subrogation even though mortgage was invalid under California law). In contrast, a person who purchases property at a foreclosure sale is a volunteer and therefore not entitled to subrogation over a tax lien. Fidelity Nat'l Title Ins. Co. v. United States Dept. of Treasury [90-2 USTC ¶50,402 ], 907 F.2d 868 (9th Cir. 1990). ³

The government's argument that the Morts are mere volunteers is based in large part on the Morts' status as assignees of the Belmonts . The government emphasizes that the Belmonts , not the Morts, paid off the Kern note, and the Morts did not acquire the Belmont 's interest in the note and trust deed until after the senior encumbrances had been paid off. We reject the government's argument that the Morts are mere volunteers as a result of their assignee status.

Although Nevada courts have not considered whether an assignee assumes the assignor's equitable subrogation rights, the general rule in most states is that where a valid assignment of a mortgage has been consummated with proper consideration, the assignee is vested with all the powers and rights of the assignor. Hagan v. Gardner , 283 F.2d 643, 645 (9th Cir. 1960); Bartlett Estate Co. v. Fairhaven Land Co., 49 Wash. 58, 94 P. 900 (1908). In this case, the Morts purchased the note and deed of trust, with assignment of rights, from the Belmonts . The Belmonts made a loan to the DeLee Trust to pay off the senior Kern note, and thus, had the Belmonts retained their interest, they would have been entitled to be equitably subrogated to the Kerns' priority position. ⁴ The Morts, as assignees of the Belmonts , assumed all the rights the Belmonts had in the DeLee note and deed of trust including the Belmonts ' right to equitable subrogation of their interest. Thus, the Morts have the same rights to equitable subrogation as the Belmonts .

2. Injustice to the IRS

The IRS argues that even if the Morts may assert the Belmonts ' rights to equitable subrogation, the doctrine should still not be applied because it would work an injustice to the rights of the government. We reject that argument, finding it to be wholly without merit.

At the time the IRS filed its tax lien, the tax lien was subordinate to the Kern mortgage. If the Morts are equitably subrogated to the priority position of the Kern mortgage, the IRS will be in the same position it was in at the time the tax lien was filed. If equitable subrogation is denied, however, the government will receive a windfall, moving up to a better position than it originally had. Under these circumstances, there is no basis for the government's argument that it will suffer harm from equitably subrogating the Morts' interest.

We are equally unpersuaded by the government's argument that the Morts and their title insurer would be unjustly enriched if appellants are equitably subrogated. ⁵ The Morts are innocent parties. Though, they may have had, consistent with Nev. Rev. Stat. Ann. §111.353 (Michie 1993), constructive notice of the federal tax lien at the time they acquired their interest from the Belmonts , constructive knowledge does not by itself bar equitable subrogation. Han, 944 F.2d at 530. As to the unjust enrichment of the title insurance company, the appellee has cited several cases where the title insurance company's negligence has barred the application of equitable subrogation, but in each case the title insurance company itself was seeking equitable subrogation. See, e.g., Universal Title Ins. Co. v. United States [92-1 USTC ¶50,106 ], 942 F.2d 1311 (8th Cir. 1991); Coy v. Raabe, 69 Wash.2d 346, 418 P.2d 728, 730 (1966). The equities in those cases are substantially different and for that reason, the cases are inapposite.

CONCLUSION

We hold that the district court abused its discretion in ruling that the appellants must first seek relief from their title insurer before bringing an action for equitable subrogation against the IRS. We further hold that the Morts are entitled to be equitably subrogated to the priority position of the lender whose loan was paid off by the Belmonts . We reverse and remand for entry of judgment in favor of the Morts.

REVERSED and REMANDED.

¹ Though the district court stated it was dismissing the appellants' action on ripeness grounds, which would ordinarily be reviewed de novo, Dodd v. Hood River County, 59 F.3d 852, 857 (9th Cir. 1995), the basis for the court's dismissal of the Morts' equitable subrogation claim was its determination that equity jurisdiction should not be exercised. Under either standard, we would reverse the district court's decision.

² See also Katsivalis v. Serrano Reconveyance Co., 70 Cal. App. 3d 200, 138 Cal. Rptr. 620, 627 (1977) ("a legal remedy against one of several obligors cannot relieve another obligor of his equitable responsibility"); Dudley v. Keller, 33 Colo. App. 320, 325, 521 P.2d 175, 178 (1974) ("an adequate remedy at law must exist against the same person from whom the relief in equity is sought in order to bar the equitable action"); Hill v. Hill, 185 Kan. 389, 345 P.2d 1015, 1025 (1959) (remedy must exist against same person from whom the relief in equity is sought); TCF Banking & Sav. v. Loft Homes, Inc., 439 N.W.2d 735, 740 (Minn. Ct. App. 1989) (mortgagee eligible for equitable relief of rescission even though he had a legal remedy against another party); Buttinghausen v. Rappeport, 131 N.J. Eq. 252, 24 A.2d 877 (N.J. Ch. 1942) ("the legal remedy which may move equity to deny relief is a remedy against the same person from whom relief in equity is sought.").

³ In Han, 944 F.2d at 530 n.2, we made clear that cases involving purchasers at foreclosure sales are not applicable to equitable subrogation cases not involving forced sales. In forced sale cases, the purchasers are not paying off existing debts but rather extinguishing all liens by paying any purchase price. Purchasers at forced sales do not pay money in order to satisfy the debt of another, and therefore equitable subrogation does not apply. Forced sale cases are inapplicable here.

⁴ Government counsel conceded at oral argument that the Belmonts would have been entitled to equitable subrogation had they retained their interest in the note and deed of trust. It is undisputed that the Belmonts were not volunteers and acted to protect their own interests.

⁵ The IRS's argument that the title insurer is the real party of interest in this case is also without merit. There is no evidence of collusion between the Morts and Fidelity.

 

 

[94-2 USTC ¶50,405] Jonathan's Landing, Inc., Plaintiff v. Jack Townsend, Nancy Townsend, Blue Water Truss, Inc., and The United States of America , Defendants

U.S. District Court, So. Dist. Fla. , 88-8490-CIV-Gonzalez, 4/26/94

[Code Sec. 6323 ]

Tax liens: Priority: Equitable subrogation.--Under the doctrine of equitable subrogation, the secretary-treasurer of a corporation acquired the bank's undisputed superior interests in the corporation's accounts receivable when the bank seized the secretary-treasurer's certificate of deposit in satisfaction of a loan made by the bank to the corporation. Although federal tax liens were imposed against the property of the corporation, the secretary-treasurer's interest in the accounts receivable took priority over the government's liens when she paid the debt of the corporation. She stepped into the bank's shoes and became subrogated to all the rights the bank had against the corporation, including the superior interest in the accounts receivable.

ORDER

GONZALEZ, JR., District Judge:

THIS CAUSE has come before the Court upon defendant Nancy Townsend's Motion for Summary Judgment and defendant United States of America 's Cross-Motion for Summary Judgment.

Introduction

This case was commenced in state court as an interpleader action by Jonathan's Landing, Inc., a creditor of Blue Water Truss, Inc. Defendant United States removed the case to this Court. On May 23, 1990 , this Court awarded summary judgment in favor of the United States upon the parties' cross motions for summary judgment. The Court's decision was based upon application of the federal insolvency statute, 31 U.S.C. §3713. On May 13, 1992, the Eleventh Circuit Court of Appeals reversed that decision, holding that Blue Water Truss, Inc. must have been insolvent prior to the Internal Revenue Service levy in order for the United States to prevail under 31 U.S.C. §3713. The case was remanded to this Court.

On or about June 9, 1990 , Jack Townsend assigned all of his right and interest in any proceeds from these proceedings to his wife, Nancy Townsend. Consequently, Nancy Townsend and the United States are the only parties claiming an interest in the interpleaded funds. These parties have once again filed cross motions for summary judgment. However, the government no longer claims a right to the funds pursuant to the federal insolvency statute. It now relies solely upon Section 6323 of the Internal Revenue Code of 1986, 26 U.S.C., and related statutory provisions.

The Facts

Jack Townsend and Nancy Townsend were president and secretary-treasurer of the tax-payer, Blue Water Truss, Inc. Between February, 1988 and May, 1988, Blue Water Truss, Inc. borrowed money from Florida National Bank in the following amounts: $80,000 (February, 1988); $400,000 (April, 1988); and $64,342.40 (May, 1988). As collateral for each of these loans, Florida National Bank retained security interests in certain properties owned by either Blue Water Truss, Inc. or the Townsends, including Blue Water Truss, Inc.'s accounts receivable.

On the dates, and in the amounts set forth below, a delegate of the Secretary of the Treasury made assessments against Blue Water Truss, Inc., for federal income withholding and Federal Insurance Contributions Act taxes and penalties, plus interest thereon through each respective date of assessment, and gave notice thereof to Blue Water Truss, Inc.:

Date of                                                  Amount of

Assessment                                               Assessment

4/04/88
 ................................................ $64,405.24 Tax

                                                          11,592.94 Penalty

                                                           6,439.80 Penalty

                                                           3,509.82 Interest

                                                             292.65 Interest

6/30/88
 ................................................  79,782.85 Tax

                                                           3,496.32 Interest

                                                          17,951.14 Penalty

                                                           7,978.29 Penalty

6/30/88
 ................................................  62,466.79 Tax

                                                           1,049.69 Interest

                                                           5,622.01 Penalty

                                                           6,246.68 Penalty

7/05/88
 ................................................  76,049.76 Tax

                                                           7,604.98 Penalty

The liabilities referred to above have not been paid in full, and as of July 19, 1988 , there was due and owing to the United States by Blue Water Truss, Inc. the sum of $343,758.08, plus interest and statutory additions thereon. On July 19, 1988 a Notice of Federal Tax Lien with respect to these assessments was filed in the public records of Martin County, Florida.

On July 19, 1988 , the $400,000.00 loan from Florida National Bank to Blue Water Truss, Inc. was satisfied by the bank's seizure of a $400,000.00 certificate of deposit owned by Jack and Nancy Townsend. On August 29, 1988 , a UCC financing statement evidencing the assignment of Blue Water Truss, Inc.'s accounts receivable from Florida National Bank to Jack and Nancy Townsend was filed with the Florida Secretary of State.

On August 5, 1988 , plaintiff Jonathan's Landing, Inc. owed $46,483.87 to Blue Water Truss, Inc. for materials supplied by the company. On August 5, 1988 , a Notice of Levy was served on Jonathan's Landing, Inc., demanding surrender of the sum of $337,666.39 or such smaller amount of the property or rights to property of Blue Water Truss, Inc. as Jonathan's Landing, Inc. then possessed. Not knowing whom to pay, Jonathan's Landing, Inc. filed this interpleader action.

Discussion

The Court may grant summary judgment "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). The burden of establishing that there is no genuine issue of material fact lies upon the moving party and it is a stringent one. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S. Ct. 2548, 2553 (1986). The Court should not grant summary judgment unless it is clear that a trial is unnecessary, Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106 S.Ct. 2505, 2514 (1986), and any doubt as to the existence of a genuine issue for trial should be resolved against the moving party, Adickes v. S.H. Kress & Co., 398 U.S. 144, 157, 90 S. Ct. 1598, 1608 (1970).

Section 6321 of the Internal Revenue Code of 1986, 26 U.S.C., provides as follows:

If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.

The lien imposed by §6321 arises at the time of assessment and continues until the liability for the amount so assessed is satisfied or becomes unenforceable by reason of lapse of time. 26 U.S.C. §6322 . This lien may be perfected against specified competing interests in the property or rights to property of the taxpayer by proper filing pursuant to 26 U.S.C. §6323 . However, a lien imposed by §6322 is not valid against the holder of a security interest which has been perfected prior to the filing of the notice of the tax lien.

It is undisputed that Florida National Bank's security interests have priority over the federal tax liens. However, the parties disagree as to whether Nancy Townsend's interest in the accounts receivable also takes priority over the federal tax liens. Nancy Townsend argues that she has acquired Florida National Bank's superior interest in the accounts receivable through the doctrine of equitable subrogation. Equitable subrogation arises when one having a liability, right or fiduciary relationship pays a debt due by another under such circumstances that he is, in equity, entitled to the securities held by the creditor who has been paid. Mortoro v. Maloney, 580 So.2d 822, 823 (Fla. 5 DCA 1991). The party who pays the debt "steps into the shoes" of the former creditor, and becomes subrogated to all the rights of the creditor against the principal debtor, including the security given to secure the debt. In re Blair Contracting Company, Inc., Bkrtcy., 21 B.R. 353, 354 (M.D. Fla. 1982); Allen v. See, 196 F.2d 608 (10th Cir. 1952).

According to Nancy Townsend, the Townsends became subrogated to the security interests of Florida National Bank in Blue Water Truss, Inc.'s accounts receivables when their certificate of deposit was used to satisfy the April, 1988 loan debt. The United States asserts three arguments in opposition to Nancy Townsend's claim.

First, the United States argues that the Townsends could not have become subrogated to the bank's interest in the accounts receivable because the April, 1988 loan was secured solely by the Townsends' $400,000 certificate of deposit. It is true that the Promissory Note for the $400,000.00 loan specifies only the certificate of deposit as collateral. However, the Promissory Note and Security Agreement executed by the Townsends provides in pertinent part:

Each obligor hereunder (which term includes the Maker and any endorser, surety, guarantors or other party signing this agreement or otherwise guaranteeing or ensuring the performance or payment by the Maker) pledges to the Bank and gives a security interest in all of the property of Maker and each other Obligor now or hereafter in the possession, custody or control of the bank whether held expressly as collateral security or otherwise, including but not limited to any balance or share of any deposit, trust or agency or special account in which any obligor has an interest. All of such property, together with any specific property listed above as pledged to bank by Maker(s) shall be referred to herein as the collateral.

When this Promissory Note was signed, the accounts receivable of Blue Water Truss, Inc. had already been assigned to Florida National Bank as security for a loan advanced in February, 1988. Thus, through the above-quoted provision, the accounts receivable of Blue Water Truss, Inc. also became collateral for the $400,000.00 loan. The United States ' first argument therefore fails.

Next, the United States argues that the Townsends may not be equitably subrogated to Florida National Bank's interest in the accounts receivable, because they were under no obligation to pledge their certificate of deposit as collateral for the loan to Blue Water Truss, Inc. The government cites Boley v. Daniel, 72 So. 644 ( Fla. 1916), in support of this argument. However, its reliance upon Boley is misplaced.

In Boley, the Court merely recognized the well established rule that legal subrogation is not available to a mere volunteer or intermeddler who, without any duty, moral or otherwise, pays the debt or discharges the obligation of another. Boley, at 645; 73 Am Jur 2d, Subrogation §23 . In the instant case, the Townsends were not mere volunteers who stepped in, without any obligation, to satisfy the debts of Blue Water Truss, Inc. As guarantors of Blue Water Truss, Inc.'s loan from Florida National Bank, they had a legal obligation to satisfy the debt. ¹ The Townsends' motivations for becoming guarantors are irrelevant.

Finally, the government argues that the Townsends are not entitled to equitable subrogation because they were aware of the tax lien when they satisfied the $400,000.00 debt. However, the Townsends' knowledge of the lien at the time when the debt was satisfied is inconsequential. They had already guaranteed the loan and pledged the certificate of deposit as collateral.

In conclusion, the Court finds, as a matter of law, that the Townsends became subrogated to Florida National Bank's interest in Blue Water Truss, Inc.'s accounts receivable when they satisfied the $400,000.00 debt. Nancy Townsend is therefore entitled to the funds originally deposited into the Registry of the Court by Jonathan's Landing, Inc., which are now held by the United States .

Accordingly, having reviewed the motion and the record, and being otherwise duly advised, it is hereby:

ORDERED and ADJUDGED that defendant Nancy Townsend's Motion for Summary Judgment is GRANTED. Defendant United States of America 's Cross-Motion for Summary Judgment is DENIED. Defendant Nancy Townsend shall file a form of judgment for entry in this cause within fifteen (15) days from the date of this Order.

DONE AND ORDERED in chambers at Fort Lauderdale , Florida , this 26th day of April, 1994.

¹ Although the government initially argued that the Townsends were not guarantors on the $400,000.00 loan, Nancy Townsend has submitted a copy of the executed guaranty agreement. Since, the government has not challenged the accuracy of this document, the Court concludes that the Townsends were, in fact, guarantors on this loan.

 

 

[92-1 USTC ¶50,106] Universal Title Insurance Company, a Minnesota corporation, Appellee v. United States of America , Appellant

(CA-8), U.S. Court of Appeals, 8th Circuit, 89-5330, 8/27/91, Reversing and remanding an unreported District Court decision

[Code Sec. 6323 ]

Liens: Federal tax lien: Subrogation.--A title insurance company was not entitled to be equitably subrogated to the rights of lienholders who were senior to a federal tax lien which the insurer failed to discover in performing a title search incident to issuing two insurance policies. The company failed to meet the prerequisites for asserting the equitable doctrine of subrogation under state ( Minnesota ) law. The company made no payment that would entitle it to subrogation. Its failure to detect the federal tax lien resulted from negligence, rather than an excusable mistake of fact. Finally, subrogation rights did not apply as against the government because the seller of the property, not the government, was responsible for the loss to the insured parties.

John M. Koneck, Jon C. Nuckles, Fredrikson & Byron, 900 2nd Ave. S., Minneapolis, Minn. 55402-3397, for appellee. Shirley D. Peterson, Assistant Attorney General, William S. Estabrook III, Gary R. Allen, Barbara I. Hodges, Department of Justice, Washington, D.C. 20530, for appellant.

Before MCMILLIAN, Circuit Judge, FRIEDMAN, ^* Senior Circuit Judge, and ARNOLD, Circuit Judge.

MCMILLIAN, Circuit Judge:

The government appeals from a final judgment entered in the United States District Court for the District of Minnesota in favor of Universal Title Insurance Company ("Universal"), finding that Universal was entitled to be equitably subrogated to the rights of lienholders who were senior to a federal tax lien, which the insurer failed to discover in performing a title search incident to issuing two insurance policies. Universal Title Insurance Co. v. United States , No. 3-87-835 (D. Minn. Apr. 26, 1989) (Universal Title). For reversal, the government argues that the district court erred in subrogating Universal to the position of the prior lienholders because Universal has not met the prerequisites for asserting this equitable doctrine under Minnesota law. For the reasons discussed below, we reverse the judgment of the district court and remand the case to the district court to enter judgment in favor of the government.

I.

The facts of the instant case are undisputed. On April 29, 1985 , Rodney and Martha Hjelms purchased residential property, located in Richfield , Minnesota , from Diane Warner by way of warranty deed. At the time of purchase, the property was encumbered with the following liens: (1) a mortgage lien in favor of Midwest Federal Savings and Loan Association dated January 31, 1974, in the amount of $26,920.82; (2) a judgment lien in favor of Dwain W. Warner Jr. filed July 30, 1979, in the amount of $22,590.16; (3) county real estate taxes in the amount of $810.34; (4) a water and sewer charge lien in the amount of $379.81; and (5) a United States tax lien filed September 14, 1981, in the amount of $31,027.54. The Hjelmses borrowed the purchase money from Investors Savings Bank ("Investors"), which secured the loan by a mortgage deed. Prior to the sale, Universal conducted a title search of the property, but failed to discover the properly recorded federal tax lien, and the Hjelmses and Investors had no knowledge of the tax lien prior to closing. At the direction of the Hjelmses, Investors and Diane Warner, all of the liens and encumbrances, except the federal tax lien, were satisfied at the time of closing. After payment of consideration, Universal issued two title insurance policies, one to the Hjelmses insuring clear title and another to Investors insuring its first mortgage. Under the policies, Universal is responsible for the removal of the tax lien. The policies also provide that if Universal paid to remove claims or liens from the title, Universal would be subrogated to the rights of its insureds (the Hjelmses and Investors).

The day after closing, the Hjelmses received notice from the Internal Revenue Service ("IRS") advising them of the existence of the tax lien against their property. Universal offered the IRS $12,865.01 as full payment of the lien, an amount equal to the seller's net proceeds, or, in other words, the purchase price minus the amounts paid to satisfy the prior liens and closing expenses. The IRS stipulated that it had a practice of releasing its tax liens if it is paid all of the seller's proceeds after payment of prior liens and customary closing costs. However, the IRS refused to accept Universal's tender of payment equal to the amount of the seller's net proceeds in the instant case. The IRS and Universal agreed that Universal would deposit $76,000, the full market value of the property, into an escrow account in exchange for release of the tax lien. The parties also agreed that their rights and claims against the property would be transferred to the escrow account, pending resolution of their dispute by a court of competent jurisdiction.

On December 14, 1987, Universal filed a complaint in the United States District Court for the District of Minnesota, seeking a ruling that it was entitled to a full release of the federal tax lien upon payment of $12,865.01, the net proceeds of the sale paid to Diane Warner. Universal argued that the practice of the IRS was to accept the seller's net proceeds from the sale in exchange for full release of the lien, that the IRS would be unjustly enriched if it received an amount greater than the net proceeds, and that Universal was entitled to be equitably subrogated to the rights of the prior senior lienholders, which the Hjelmses and Investors paid off at the time of closing. Following a bench trial, the district court concluded that Universal was "equitably subrogated to the rights of the owners of the prior mortgage liens and encumbrances," and that the government was entitled to $12,865.01 of the escrowed funds, with the balance distributed to Universal. Universal Title, slip op. at 5. This appeal followed.

II.

We note initially that, although we defer to the district court's findings of fact, setting them aside only if "clearly erroneous," Fed. R. Civ. P. 52(a), we review its conclusions of law de novo. SEC v. Comserv Corp., 908 F.2d 1407, 1411 (8th Cir. 1990). "Rule 52(a) does not inhibit an appellate court's power to correct errors of law, including those that may infect a so-called mixed finding of law and fact, or a finding of fact that is predicated on a misunderstanding of the governing rule of law." Bose Corp. v. Consumers Union of United States, Inc., 466 U.S. 485, 501 (1984). In addition, we engage in an independent review of the district court's interpretation of the appropriate state law, which in the instant case is Minnesota law. Salve Regina College v. Russell, 111 S. Ct. 1217, 1221 (1991). Finally, we note that neither party has presented controlling precedents for our consideration, and this court has found none that exactly match the unusual factual setting of this case.

On appeal, the government argues that the equitable doctrine of subrogation is inapposite to the instant case for three reasons. First, the government claims that Universal made no payment that would entitle it to subrogation. Second, the government contends that Universal is precluded from the equitable remedy of legal subrogation because its failure to discover the properly recorded federal tax lien was not an "excusable mistake of fact." Finally, the government argues that Universal is not entitled to be subrogated to the rights of the senior lienholders because an insurer's subrogation rights extend only to one causing the loss to its insureds, in this case Diane Warner, the seller of the property who breached her warranty of good title. ¹ We agree, and will address each point in turn.

In addition to its substantive arguments with respect to each of the issues raised by the government, Universal argues that the government should be precluded from raising all but its second argument on appeal because they were not raised before the district court. See American General Finance Corp. v. Parkway Bank & Trust Co., 520 F.2d 607, 608 (8th Cir. 1975). The government counters that its argument before the district court, which essentially addressed the issue of whether the equities supported Universal's claim for subrogation, was broad enough to encompass all of its arguments on appeal. We agree.

Although, as a general rule, we do not consider issues not presented to the district court, "a blanket statement condemning new arguments is far too broad." In re Osweiler, 346 F.2d 617, 621 (C.C.P.A. 1965).

The real question should be whether the new argument is such as to raise a new issue . . .. [W]e think it would be in disharmony with one of the primary purposes of appellate review were we to refuse to consider each nuance or shift in approach urged by a party simply because it was not similarly urged below.

Id. We also have the discretion to consider an issue for the first time on appeal "where the proper resolution is beyond any doubt, or 'where injustice might otherwise result,' " Sanders v. Clemco Industries, 823 F.2d 214, 217 (8th Cir. 1987) (quoting Hormel v. Helvering [41-1 USTC ¶9322 ], 312 U.S. 552, 557 (1941)), or when the argument involves a purely legal issue in which no additional evidence or argument would affect the outcome of the case, Donovan v. Williams Enterprises, Inc., 744 F.2d 170, 176 (D.C. Cir. 1984).

III.

Before addressing the points raised by the government on appeal, some discussion of the law of subrogation is appropriate. While subrogation is generally defined as "the substitution of one person in the place of another with reference to a lawful claim or right," 73 Am. Jur. 2d Subrogation §1 (1974), there are actually two distinct types of subrogation, ² "conventional subrogation" and "legal subrogation," which is often confusingly called "equitable subrogation," due to its origin and basis in equity. ³ Conventional subrogation "occurs where one having no interest or any relation to the matter pays the debt of another, and by agreement is entitled to the rights and securities of the creditor so paid." Id. §9. Legal subrogation, however, "has for its purpose the working out of an equitable adjustment and the doing of complete and perfect justice between the parties by securing the ultimate discharge of a debt by the person who in equity and good conscience ought to pay it." Id. §3 (footnotes omitted). Unlike conventional subrogation, legal subrogation does not depend on contract, assignment, or privity. Id. In either case, however, the right to subrogation is predicated on the full payment of the debt or claim of another by one who is not a mere volunteer or intermeddler. See City of Red Wing v. Eichinger, 203 N.W. 622, 623 ( Minn. 1925); 73 Am. Jur. 2d Subrogation §11 .

Although legal subrogation is a highly favored doctrine, it is not an absolute right, but rather, one that depends on the equities and attending facts and circumstances of each case. See e.g., Compania Anonima Venezolana de Navegacion v. A.J. Perez Export Co., 303 F.2d 692, 697 (5th Cir. 1962). In general, the equity of the party seeking subrogation must be clear and substantial, and superior to that of other claimants. Finally, subrogation cannot be invoked where it would work an injustice, violate sound public policy, or result in harm to innocent third persons.

IV.

A. "Full Payment of the Debt or Claim"

The government argues that Universal is not entitled to be subrogated to the rights of the lienholders who were senior to the federal tax lien because they were not paid by Universal. The government contends that the district court erroneously concluded that "the prior mortgage liens and encumbrances . . . [were] released after being paid in full by Universal." Universal Title, slip op. at 5. The government notes, to the contrary, that the liens were extinguished at closing by payment with money advanced by the Hjelmses and Investors, the Hjelmses' mortgagee. Universal responds that, despite the statement by the district court, the government misconstrues the origin of its right to subrogation. Universal contends, in essence, that Investors and the Hjelmses were entitled to be legally subrogated to the prior liens by virtue of the fact that they paid them at closing in good faith and with the intention of establishing the primary claim to the property, and that this right was conventionally subrogated to Universal under the subrogation clause in the title insurance policy when it effected the release of the federal tax lien. In short, Universal argues that it now stands in the place of the Hjelmses and Investors. For the purposes of this discussion, we accept Universal's characterization of its claim to subrogation.

Although we recognize that an insured may contractually assign his or her right to subrogation to an insurer who pays the claim under which the right arises, there is nothing in the stipulated facts of the instant case to support Universal's contention that it discharged the federal tax lien. Universal has paid the Hjelmses nothing; neither has it expended anything that would constitute a payment of the government's lien. According to the escrow agreement, the government's lien was merely transferred from the Hjelmses' property to the escrow fund, pending resolution of the dispute by a court of competent jurisdiction. The escrow agreement expressly retained all of the rights and claims of each party with respect to the disputed lien. In other words, the federal tax lien has not been extinguished; it continues in existence attached to the funds in the escrow account. ⁴ Therefore, we hold that the mere transfer of the lien from the property to the escrow account was insufficient to entitle Universal to be conventionally or legally subrogated to the rights of the prior lienholders.

B. "Excusable Mistake of Fact"

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.

In Heisler v. C. Aultman & Co., 57 N.W. 1053 (Minn. 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. 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:

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.

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.

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

[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

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.

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, 418 P.2d 728, 731 ( Wash. 1966) (Raabe). In elaborating on this dual standard, the court stated:

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.

Id.

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, 369 N.E.2d 672, 674 (Ind. Ct. App. 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, 652 P.2d 249, 252-53 (N.M. Ct. App. 1982) (Romero) (citing Capp, 369 N.E. 2d at 674; Raabe, 418 P.2d at 731).

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, 87 P.2d 762, 765 (Or. 1939). We can expect no less from a title insurer.

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

C. "Innocent Third Party"

The government's third argument is that Universal is not entitled to the benefits of legal subrogation because, under Minnesota law, its right to subrogation, if any, extends only to its insureds' (Investors and the Hjelmses) claims against individuals whose negligence or wrongful act caused a compensable loss. The government contends that, because it was not notified of the sale between Warner and the Hjelmses and did not conceal, either actively or passively, the existence of the federal tax lien, it could not have caused the loss to Investors or the Hjelmses. Rather, the government contends that the loss resulted from the seller's breach of her warranty of good title under the warranty deed, as well as Universal's failure to discover the federal tax lien. We agree.

In Board of First Congregational Church v. Cream City Mutual Insurance Co., 96 N.W.2d 690 (Minn. 1959) (Cream City), the Minnesota Supreme Court held, in part, that an insurer who contracts to provide insurance coverage in exchange for fair consideration, without knowledge of the insured's collateral rights, is not entitled to be subrogated to the rights of the insured against a third person who did not cause the compensable loss. While the Minnesota Supreme Court acknowledged the general rule that an insurer is entitled to be subrogated to the insured's rights against one who wrongfully caused a compensable loss, it noted:

[T]here is no such agreement of authorities as to the right of an insurer to be subrogated to collateral contract rights which the insured has against a third person who did not cause the loss. . . . [T]o give the insurer the benefit of the collateral obligation through subrogation ignores the plain terms of the insuring agreement and provides the insurer with a windfall. Its premiums are assumed to represent the fair equivalent of the obligation it contracted to incur without knowledge of the existence of collateral remedies.

Id. at 695-96 (emphasis added). Although the facts of Cream City are not exactly on point, we believe the Minnesota Supreme Court's holding supports the government's contention that an insurer has no right of subrogation as against a third party who has not caused the insured's loss.

Universal argues that the subrogation clause of the title insurance policies evidence the fact that it anticipated a right to legal subrogation in the event undiscovered liens existed against the Hjelms property, a consequence that was also reflected in the premiums. Although Universal concedes that the seller, and not the IRS, caused the loss in the instant case, it argues that its right of subrogation is not limited to application against the seller. Universal contends that it makes no equitable difference if it is allowed to assert its insureds' subrogation rights against the government, because the government would still receive the amount of the seller's net proceeds in satisfaction of the tax lien, and thus the status quo would be preserved. Rather, Universal argues that denying it the right to subrogation under these circumstances would allow the government to benefit from Universal's mistake, resulting in a windfall to the government. We disagree.

Universal's argument begs the question. Universal erroneously assumes that the conclusion to its argument is true--that is, that the IRS is limited to recovering $12,865.01, the seller's net proceeds, because of the IRS's past practice of releasing tax liens upon receipt of the seller's net proceeds. We also reject Universal's contention that denying it the right of subrogation will result in a windfall to the government. On the contrary, the government will simply receive that which it is entitled--full payment of the federal tax lien. The IRS properly recorded its tax lien, and the government is legally entitled to be paid the full amount of that lien. The fact that the IRS has, in the past, gratuitously released liens in exchange for payment of less than the full amount of the lien is immaterial. The government has the discretion to decide whether to insist upon full payment of its lien or to accept a lesser amount.

Even if we accept Universal's argument that the IRS would have settled for the seller's net proceeds had it been informed of the sale, it does not change our holding here. The doctrine of legal subrogation requires more than a showing that a junior lienholder will be placed in a better position than the lienholder would be in if legal subrogation applied. See Fidelity National Title Insurance Co. v. Department of the Treasury [90-2 USTC ¶50,402 ], 907 F.2d 868, 871 (9th Cir. 1990) ("neither [buyer] nor [title insurer] is entitled to [legal] subrogation merely because the IRS might now recover more on its tax lien than it could have had it been a party to the foreclosure sale").

Universal agreed to insure marketable title to the Hjelms property, for which it received valuable consideration. It is uncontested that, by virtue of this contract, Universal incurred the obligation to discharge the underlying federal tax lien. Universal cannot now minimize this obligation by resorting to the equitable doctrine of legal subrogation at the expense of the government's preexisting legal right. " 'Subrogation is the creature of equity, and will not be permitted where it will work injustice to the rights of those having equal or superior equities, or where it will operate to defeat a legal right.' " Benson v. Saffert-Gugisberg Cement Construction Co., 198 N.W. 297, 299 ( Minn. 1924) (citation omitted). We therefore hold that Universal is not entitled to invoke legal subrogation, as against the government, under the facts and circumstances of the instant case. ⁷

V.

In sum, we hold that Universal is not entitled to be subrogated to the rights of the prior lienholders, under Minnesota law, because it made no payment that would entitle it to subrogation, its failure to discover the federal tax lien was not an "excusable mistake of fact," and its subrogation rights, if any, do not apply as against the government, which was not responsible for Investors' and the Hjelmses' loss. Accordingly, we reverse the judgment of the district court and remand the instant case to the district court with directions to grant judgment in favor of the government.

^* The Honorable Daniel M. Friedman, Senior United States Circuit Judge for the Federal Circuit, sitting by designation.

¹ In addition, the government argues that, even if the doctrine of subrogation applied to the facts of the instant case, Universal should be precluded from its benefits because the equities are not in its favor. Because we hold that Universal is not entitled to be subrogated to the rights of the prior lienholders for the above-mentioned reasons, we need not address the issue of balancing the relative equities of the parties here.

² Some legal authorities regard assignment as a third type of subrogation. See 73 Am. Jur. 2d Subrogation §2 n.6 (1974).

³ For the sake of consistency and clarity, we note that we will use the term "legal subrogation" in reference to the equitable remedy.

⁴ The fact that the District Director of the Internal Revenue Service issued a certificate of discharge on the Hjelms property does not alt