Built on the foundation of the Tax Management Portfolios™, Bloomberg BNA Tax & Accounting is a comprehensive tax research solution designed by tax practitioners for tax practitioners.
Buchanan Ingersoll & Rooney PC, Washington, DC
In Mortgage Electronic Registration Systems Inc. v. Church, No. 09-2513 (6th Cir. 5/18/11) (unpub. opin.), the Sixth Circuit held that a mortgage registration company could not use the doctrine of equitable subrogation to cure the fact it registered its interest in a Michigan home in the wrong county and, therefore, the IRS lien on the property had priority.This case highlights the fact that the courts will not use the doctrine of equity subrogation to correct the mistake of a mortgage professional.
In March 2004, Taxpayer took out a $330,000 mortgage from Argent Mortgage Company on her property in Rapid City, Michigan. In August 2006, Taxpayer took out another mortgage on the same property with Mortgage Electronic Registration Systems (MERS) in the amount of $402,500 and used the proceeds from the MERS loan to pay off the Argent loan as well as to satisfy a judgment lien and pay a portion of her delinquent taxes. MERS recorded its interest in Taxpayer's property with the Kalkaska County Register of Deeds; however, the property was located in Antrim County. Shortly thereafter, Taxpayer's federal tax delinquencies prompted the IRS to record five tax liens (totaling $465,373.18) on her property with the Antrim County Register of Deeds in August 2006 and in April and May 2007.
In October 2007, MERS realized its mistake and recorded the mortgage in Antrim County. In doing so, MERS discovered that the IRS claimed an interest, now a first-in-time interest, in the property. MERS filed suit claiming that the Michigan doctrine of "equitable subrogation" permitted it to substitute itself for the earlier-in-time priorities of Argent Mortgage Company, Taxpayer's first lender, because Taxpayer had used the proceeds to pay off the first mortgage.
With respect to federal tax liens, the relative priority of competing liens is a matter of federal law. As a general rule, the liens filed first in time have priority. Section 6323(i)(2) permits subrogation of a tax lien to the extent provided by state law. Equitable subrogation is "a legal fiction through which a person who pays a debt for which another is primarily responsible is substituted or subrogated to all the rights and remedies of the other." 1
The Sixth Circuit noted that under Michigan law, the doctrine of equitable subrogation does not apply to a mere "volunteer" who loans money solely for profit and with "no interests to protect." 2 The Sixth Circuit concluded MERS had no preexisting interest in the property or "legal or equitable duty" to Taxpayer that compelled it to lend money for payment of Taxpayer's debt and, therefore, MERS was only a "volunteer" who lent money to Taxpayer through a generic refinancing transaction for the sole purpose of making money .3 The Sixth Circuit stated that the mere fact that Taxpayer decided to use the proceeds of the MERS mortgage to pay off the indebtedness secured by the old mortgage was not sufficient to permit MERS to subrogate its interests to the earlier lender.
In reaching its determination, the Sixth Circuit noted that the doctrine of equitable subrogation was not intended for the protection of sophisticated parties, but rather to protect in cases such as set forth in Smith v. Sprague, 4 wherein the property owner asked his former daughter-in-law to help him satisfy an outstanding mortgage in return for a promise to grant her a mortgage on the property but died without fulfilling that promise. The Sixth Circuit found that it had no basis in Michigan law for overlooking the mistake because MERS was not just a sophisticated party; its sophistication related to this precisely - to lending money and securing the loans with an interest in the real property. Here, the Sixth Circuit concluded that there was no legitimate explanation to invoke its equitable power.The Sixth Circuit made clear in its ruling that while it will invoke its equity power to assist unsophisticated parties to a lien, it would not extend its power to correct mistakes made by sophisticated professionals.Moreover, the Sixth Circuit noted that as a policy matter if "the law routinely protected lien holders who filed in the wrong county, that would go a long way to defeating the benefit of having a centralized lien-recording system in the first place." Accordingly, mortgage professionals should take great care to follow all procedure requirements and double check the appropriate jurisdiction prior to filing or, as the opinion starts out, "[i]t sometimes pays to check a map."
For more information, in the BNA Tax Management Portfolios, see Mather and Weisman, 637 T.M., Federal Tax Collection Procedure — Liens, Levies, Suits and Third Party Liability, and in Tax Practice Series, see ¶3870, Collection of Tax.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to firstname.lastname@example.org.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to email@example.com.
Put me on standing order
Notify me when new releases are available (no standing order will be created)