January-February Vol. 5, No. 1

Casenotes

Wisconsin

Mortgages

Community Bank & Trust v Pelzek, 2010 AP 2359 (Wis App Ct, 2011).

Facts: Bradley and Lisa Pelzek (the Pelzeks) took out a mortgage on their home in 2004. In 2008, they refinanced their mortgage with Citimortgage, Inc. During the refinancing, the Pelzeks agreed that Citimortgage would have a first priority lien on the property. The Pelzeks then obtained a home equity loan from Community Bank & Trust. On March 12, 2008 Community Bank recorded its lien on the Pelzeks' property. Citimortgage recorded its lien on March 19, 2008.

Community Bank brought a foreclosure action against the Pelzeks in 2009 and argued that, because it filed its lien first, its interest took priority over Citimortage's lien. Both Community Bank and Citimortgage filed for summary judgment. The circuit court held that Community Bank knew that there was a first priority lien already on the Pelzeks property when it made the home equity loan, and that Community Bank had constructive notice that the lien was a mortgage owed to Citimortgage. Therefore, the circuit court granted summary judgment in favor of Citimortgage.

Holding: Affirmed. The Wisconsin Court of Appeals held that the doctrine of equitable subrogation applied and that Citimortgage had a first priority lien on the Pelzeks property. Subrogation is a doctrine invoked when a "mere volunteer pays a debt which in equity and good conscience should be satisfied by another" and should be granted by a court when the volunteer paid the money with the expectation that they would have security for the loan. In this case, Citimortgage paid off the Pelzeks' first mortgage with the clear expectation that it would have a first priority lien.

The court stated that this expectation was in the agreement, "[R]ight there in black and white." Citimortgage may have been negligent in not filing its lien first, but Community Bank would be unjustly enriched if it were given a first priority lien because of Citimortgage's mistake. Community Bank knew that there was a first priority lien on the property and it knew that Citimortgage had given the Pelzeks a loan.

The court found that the natural inference for Community Bank to make was that the Pelzeks had a mortgage with Citimortgage. Therefore, the doctrine of equitable subrogation could be applied, to put "the parties in the positions they expected to be when they agreed to loan money to the property owners." 

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