CASE NO. A09-187

~tate of jJliltnnesota

3Jn ([ourt of ~ppeaI~

MARTIN H. GORES AND MARY E. GORES,

Respondents,vs.

JP MORGAN CHASE BANK, MORTGAGE ELECTRONIC REGISTRAnONSYSTEMS, INC., FIRST NATIONAL BANK OF ARIZONA,

Appellants

APPELLANTS' BRIEF, ADDENDUM AND APPENDIX

ORME & ASSOCLt\TES, LTD.Michael J. OrmeAttGm€-y R€-g. NG. 199333Dana K. Nyquist4040 Nicols RoadEagan, Minnesota 55122Telephone: (651) 688-7646

Attorneys for Appellants

KRASS MONROE, PAPhillip R. KrassAttemey Reg. Ne; 58GS18000 Norman Center DriveSuite 1000Minneapolis, Minnesota 55437Telephone: (952) 885-5999

Attorneys for Respondents

200g·EXECUTEAM iBRIEF SERVICES DIV 2565 No Hamline Ave St Paul MN 55113 551,·6331443 8007478793

The appendix to this brief is not available for online viewing as specified in the Minnesota Rules of Public Access to the Records of the Judicial Branch, Rule 8, Subd. 2(e)(2).

TABLE OF CONTENTS

Table of Authorities ii

Legal Issues 1

Statement of the Case 2

Statement of Facts 4

Argument 7

I. Standard of Review 7

II. The Trial Court Erred In Determining That Appellants Could Not Challengethe Validity of Respondents' Mortgage Under Minn. Stat. §507.02 8

A. The Gores Mortgage Is Void, and Did Not Attach to the Property 10

B. Appellants Do Have Standing to Contest The Validity of Respondents'Mortgage Due to Failure to Comply with Minn. Stat. §507.02 12

III. The Trial Court Improperly Dismissed Appellants' Claim of EquitableSubrogation on Summary Judgment 15

A. Appellants Acted Under a Justifiable or Excusable Mistake of Fact 17

1. The Gores Mortgage Was Not Reasonably Discoverable of Recordon October 28, 2005 17

2. There Is Nothing in the Record Upon Which to Conclude ThatAppellants Failed to Thoroughly Check Title or to Investigatethe Relationship Between the Parties to the Sale 20

B. Appellants Are Innocent Parties That Will Be Injured If EquitableSubrogation Is Denied 22

C. The Standard Set by the Trial Court To Prevail on an EquitableSubrogation Claim, Even For Professional Lenders, is Too High 23

Conclusion 24

TABLE OF AUTHORITIES

MINNESOTA STATUTES

Minn. Stat. §507.02 3,8,9,10,12,14,24

Minn. Stat. §507.32 17, 19

Minn. Stat. §514.01 14

CASES

Banco Mortgage Company v. E.G. Miller Enterprises. Inc., 264 N.W.2d 399(Minn. 1978) 14

Barton v. Drake. 21 Minn. 299, 1875 WL 3769 (Minn.) (1875) 10, 11

Brookfield Trade Ctr. v. Ramsey County. 609 NW.2d 868 (Minn. 2000) 8

Carl H. Peterson Co. v. Zero Estates. 261 NW.2d 346 (Minn. 1977) 16, 19

Enright v. Lehman. 735 NW.2d 326 (Minn. 2007) 13

Fabio v. Bellomo, 504 NW.2d 758 (Minn. 1993) 8

Frost-Benco EIc. Ass'n v. Minn. Pub. Utils. Comm'n. 358 N.W.2d 639 (Minn.1984) 8

H(}tJ*iFls v. E-rnJliFe FiFe-anEl-MariuB-IHSm-auG@6o,.474- N.W.2d 2D9 (Minn.App.1991) 19, 21

Kingery v. Kingery. 185 Minn. 467, 241 NW. 583 (1932) 10

Lujan v. Defenders of Wildlife. 504 U.S. 555, 122 S. Ct. 2130, 119 1. Ed.2d 351 (1992) 13

Marrv. Bradley. 239 Minn. 503, 509, 59 NW.2d 331 (1953) 10, 11, 14

Mattice v. Minnesota Property Insurance Placement. 655 N.W.2d 336, (Minn.App. 2002) 12

ii

Modrow v. J.P. Foodservice. Inc. 656 NW.2d 389 (Minn. 2003) 7

Murphy v. Renner, 99 Minn. 348, 109 NW. 539 (1906) 10

Murphyv. Country House, Inc.. 307 Minn. 344, 248, NW.2d 507 (1976) 19

Northern National Bank of Bemidji v. Northern Minnesota National Bank ofDuluth. 244 Minn. 202, 70 NW.2d 118 (1955) 9,10

Parret v. Shaubhut, 5 Minn. 323 (Gil 258 at 262) (1861) 12, 13, 17

Peterson v. Hinz. 605 NW.2d 414 (Minn. App. 2000) 14

Ripley v. Piehl. 700 N.W.2d 540 (Minn. App. 2005) 16, 19, 20

Sierra Club v. Morton. 405 U.S. 727,92 S. Ct. 1361, 31 L. Ed. 2d 636 (1972) 13

Snyder's Drug Stores. Inc. v.Minn. State Bd. of Pharmacy, 301 Minn. 28, 221N.W.2d 162 (1974) 13

State by Cooper v. French 460 NW.2d 2 (Minn. 1990) 8

Superior Construction Services. Inc. v. Beltin. 749 N.W.2d 388 (Minn. App.2008) 15

Weitzner v. Thingstad, 55 Minn. 244, 56 NW. 817 (1893) 10

Wells Fargo v. Chojnacki. 668 NW.2d 1 (Minn. App. 2003) 10

iii

LEGAL ISSUES

1. Whether a junior mortgagee has standing to challenge the validity of a

senior mortgage on real property, which senior mortgage is void pursuant to Minn.

Stat. §507.02.

The trial court held the junior mortgagee does not have standing to

challenge the void senior mortgage.

2. Whether dismissal of a mortgagee's equitable subrogation claim on

summary judgment was proper when the only evidence demonstrates there was no

reasonable opportunity to discover the existence of an intervening mortgage.

The trial court determined that summary judgment was proper.

1

STATEMENT OF THE CASE

This action was commenced by Respondents Martin H. Gores and Mary E.

Gores against Joshua Schultz, Cody Schultz and others, including Appellants JP

Morgan Chase Bank, Mortgage Electronic Registration Systems, Inc. and First

National Bank of Arizona. Plaintiff asserted claims of declaratory judgment

foreclosure of Plaintiffs' mortgage, default under a promissory note, and claims

against a notary public, Defendant Bilek. Appellants asserted counterclaims against

Respondents for equitable subordination and equitable subrogation and also

asserted crossclaims against the Schultzes for intentional misrepresentation and

negligent misrepresentation.

On August 6, 2008, before the Scott County District Court, the Honorable

Mary J. Theisen presiding, cross-summary judgment motions were heard with

respect to Appellants' equitable subrogation claim. Appellants moved for judgment

en that daim, and R€ispendgnts Gams moved for dismissal of that claim. Ry Order

dated August 18, 2008, Judge Theisen granted Respondents motion to dismiss

Appellants' equitable subrogation claim.

agreement dismissing all claims between them. Respondent's claims against

Defendant Bilek were also voluntarily dismissed prior to trial. Immediately prior to

2

trial, the Schultzes filed a Chapter 7 bankruptcy petition, and therefore trial on

Appellants' crossclaims against the Schultzes did not proceed.

The matter proceeded to court trial on September 30, 2008. By Order dated

October 24, 2008 Judge Theisen granted Respondents Gores mortgage claim in the

total amount of $177,602.16, and determined that, while the Gores' mortgage would

be invalid pursuant to Minn. Stat. §507.02 due to the failure of Mrs. Schultz to sign

the mortgage encumbering the Schultz' homestead, Appellants may not raise that

issue because they are not in privity of contract with the Schultzes.

Judgment was entered in this matter on December 1, 2008. This appeal

followed.

3

STATEMENT OF FACTS

The following facts in this case are essentially set forth in the trial court's

October 28, 2005 order, and are not in dispute (Add. 12-17).1 David M. Norling and

Rachel Norling owned a home located at 15239 Fairbanks Trail Northeast, Prior

Lake, Minnesota ("Property"). In June 2005, defendant Joshua Schultz contacted

Plaintiff Mary Gores, a real estate agent, because he was interested in homes she had

listed in the Prior Lake area. Ms. Gores showed Mr. Schultz and his wife, Cody,

numerous homes. Ms. Gores then showed them the Property.

Mr. Schultz informed Ms. Gores he did not believe that he and Mrs. Schultz

,could afford the Property. They did not have good credit and would need to

purchase the Property on a contract for deed since they could not get adequate

financing. The Norlings offered to sell the Property on a Contract for Deed, but

required a down payment of $100,000.00. The Schultzes did not have $100,000.00

to cover the down payment. Ms. Gores offered to loan the Schultzes the $100,000.00

in part because Mr. Schultz told Ms. Cores hI;! could bring more business to her. Mr.

Schultz accepted the loan offer. Ms. Gores did not know what collateral the

Schultzes would provide for the loan obligation. Mr. Schultz believed he would be

but not a mortgage upon the subject Property.

1 Citations to Appellants' Addendum will be indicated by "Add. " and citationsto Appellants' Appendix will be indicated as "App. "

4

Before the closing on their purchase of the Property from the Norlings, the

Schultzes asked to borrow an additional $35,000.00 from the Gores to payoff

unsecured consumer debt in the hope they would be able to make the monthly

payments that would be due under the Contract for Deed and the loan to the Gores.

The Gores agreed to loan the additional $35,000.00 to the Schultzes.

At the july 18, 2005 closing, the Schultzes purchased the Property from the

Norlings on a Contract for Deed. Plaintiffs gave the Schultzes a cashier's check for

$101,000.00 and a personal check for $34,000.00. At the closing, all parties agreed

that the Contract for Deed would not be recorded because no one wanted to "raise

red flags" that would cause the Norlings to have their original mortgages become

due upon the sale of the Property.

On july 27,2005, Mr. Schultz gave the Gores a note and mortgages for the two

properties owned by his business, located in Bloomington and Red Wing. The note

and the mortgages were for $135,000.00. Gayle and Duane jenkins and joshua

Schultz signed the Note. Gayle and Duane jenkins signed the Mortgages. Duane

Jenkins was Mr. Schultz' business partner. The Bloomington and Red Wing

properties were in the jenkins' name. Ms. Gores did not accept the note and

mortgages because she did not know the jenkins. Some time passed, and on

September 28, 2005, Ms. Gores received revised drafts of a note and mortgages from

her attorney. Ms. Gores presented Mr. Schultz with these documents. He reviewed

5

the documents. At this time, he realized the Gores had added an additional

$15,000.00 fee to the mortgage amount.

Mr. Schultz signed his wife's name on the Note and Mortgage and had the

contracts unlawfully notarized. The $150,000.00 Note was signed on September 18,

2005. The mortgage ("Gores Mortgage") was signed September 7, 2005. On or

about October 27, 2005, Mr. Schultz gave the Gores executed copies ofthe Note and

Gores Mortgage.

The Note, with a due date of July 15, 2006, was for $150,000.00, reflecting the

$135,000.00 principal loaned to the Schultzes, and the additional $15,000.00 fee.

The Gores delivered the Gores Mortgage to the Scott County Recorder's Office on

October 27, 2005 at 2:40 p.m. The next day, on October 28, 2005, the Schultzes

closed on the sale of the Property to Defendant Derek Christensen.

A title commitment, prepared in contemplation of the sale from the Schultzes

to Christensen, states "Fee Simple Interest in the land described in this Commitment

is owned, at the commitment date, by David M. Norling and Rachel Norling" and

goes on to describe the mortgages held by the Norlings. Appellants' title agent

obtained the necessary deeds from Norlings to the Schultzes and Schultzes to

Christensen to place Christensen in fee title of record to allow the Appellants'

mortgages to attach as valid encumbrances upon the property. (Trial Exs. 17 and

18, App. 151, 152). The Schultzes signed an Acknowledgement and Indemnity

Agreement at the closing, certifying that there were no mortgages encumbering the

6

Property, recorded or unrecorded, other than the mortgages set forth on the closing

statement (App. 153). They made a similar statement in a Seller's Affidavit (App

ISS). However, the Schultzes knew the Gores Mortgage existed.

Christensen was loaned $940,000.00 by Appellants to purchase the Property,

secured by first and second mortgages on the Property. The first mortgage was for

$752,000.00 and the second mortgage was for $188,000.00. Both mortgages were

signed by Christensen on October 28, 2005, and were recorded November 15, 2005.

The proceeds of the loans from the Appellants were used to payoff various

encumbrances against the Property. Per the Settlement Statement dated October

28, 2005, $657,533.94 was disbursed to Aurora Loan Services to payoff the first

mortgage, $127,931.06 was disbursed to First Tennessee Bank to pay off the second

mortgage, and $58,791.00 was disbursed to the Norlings to satisfy the Contract for

Deed. (App.145). The Schultzes took $78,275.42 from the closing.

ARGUMENT

I. STANDARll Of REVIEW,

This Appeal presents two questions. The review of the trial court's

determination that Appellants could not contest the validity of Respondents'

mortgage under Nlinn. Stat. §507.02 is a question of lavv, \A/hieh the AppeUate Court

reviews de novo. A reviewing court is not bound by, and need not give deference to,

a trial court's decision on purely legal issues. Modrow v. J.P. Foodservice. Inc. 656

7

NW.2d 389,393 (Minn. 2003). Frost-Benco Elc. Ass'n v. Minn. Pub. Utils. Comm'n,

358 N.W.2d 639, 642 (Minn. 1984).

On review of summary judgment, the Court of Appeals views the

evidence in the light most favorable to the party against whom summary judgment

was rendered Fabio v. Bellomo, 504 NW.2d 758, 761 (Minn. 1993). The reviewing

court determines whether there are any genuine issues of material fact and whether

the district court erred in its application of the law. State by Cooper v. French, 460

N.W.2d 2, 4 (Minn. 1990). The interpretation of a statute and the determination of

whether a genuine issue of material fact exists are subject to de novo review.

Brookfield Trade Ctr. v. Ramsey County, 609 NW.2d 868,874 (Minn. 2000).

II. THE TRIAL COURT ERRED IN DETERMINING THAT APPELLANTS COULDNOT CHALLENGE THE VALIDITY OF RESPONDENTS' MORTGAGE UNDERMINN. STAT. §507.02.

The fundamental flaw in the trial court's decision is its attempt to judicially

resurrect a void instrument. In the memorandum incorporated into the trial court's

Order filed October 28, 2008, Judge Theisen found as follows in connection with the

Gores' Mortgage:

Mr. Schultz did not have permission to sign his wife's signature andMinn. Stat. §507.02 would apply in this matter. However, the[Appellants] cannot assert this defense because there is no privity of,....Ant-ra t- hohATOo.n t-ho r .6.nnollantc1 anrl thp ,rhlllt7P<:\.-V.l!\.! lJ \.V" l.l lJ. l pp ll 11 J .., ll L.I ~.

(Order filed October 28, 2008, p. 11, Add. 22). Based upon that reasoning, the trial

court reached the following legal conclusion:

8

5. There is no privity of contract between the Schultzes and [Appellants].Minn. Stat. §507.02 does not apply.

(Add. 17). The Court found that Mrs. Schultz did not sign the mortgage, that the

mortgage purported to encumber the Schultzes homestead, and that it was granted

by Mr. Schultz several months after the Schultzes purchased the property.

Appellants do not contest any of these findings. Appellants only contest the specific

and limited legal conclusion that they cannot assert that the mortgage is invalid

pursuant to §507.02 because there is no privity of contract between Appellants and

the Schultzes, and the trial court's failure to apply §507.02 on that basis.

In support of its conclusion that Appellants are unable to challenge the

validity of the Gores Mortgage under §507.02, the trial court analyzed Appellants'

challenge within the framework of the case of Northern National Bank of Bemidji v.

Northern Minnesota National Bank of Duluth. 244 Minn. 202, 70 NW.2d 118 (1955).

The Northern National Bank of Bemidji case involved a dispute between an assignee

of a contract and certain strangers to the contract over funds held in escrow. No

statutory provision regarding the validity of a mortgage was at issue. In analyzing

the doctrine of third-party beneficiary contracts, the court noted:

[T]he general rule is that a third-person may enforce a promise madefor his benefit ...

Northern National Bank of Bemidji. 244 Minn. at 208. The Supreme Court went on

to find that no such promise was made in that case. The error of the trial court in

the present case in analyzing the §507.02 claim pursuant to the frame work in

9

Northern National Bank of Bemidji is evident from the fact that no attempt is being

made by Appellants to enforce a promise made by any party. Appellants are making

no claim that they are intended beneficiaries of the Gores Mortgage. Rather,

Appellants assert that the Gores Mortgage itself fails of an essential, statutory

requirement, namely the valid signature of Mrs. Schultz, and therefore the mortgage

is void pursuant to Minn. Stat. §507.02. Appellants are not attempting to assert any

claim pursuant to the Schultzes/Gores contract, but are simply challenging the

validity of a mortgage lien claimed by the Gores against the same real property in

which Appellants have a valid mortgage interest.

A. The Gores Mortgage Is Void, And Did Not Attach To The Property.

The Respondents are attempting to foreclose a mortgage that does not exist

at law. This conclusion is certain. Minn. Stat. §507.02 provides as follows:

If the owner is married, no conveyance of the homestead ... shall be validwithout the signatures of both spouses.

Courts have consistently held that failure to obtain the signatures of both spouses

f€l-sults in a ffioftgageof other conveyance of the homestead being void. MarLv.

Bradley, 239 Minn. 503, 507, 59 NW.2d 331, 333 (1953). Kingery v. Kingery, 185

Minn. 467, 241 NW. 583 (1932); Wells Fargo v. Chojnacki. 668 NW.2d 1 (Minn. App.

Thingstad, 55 Minn. 244, 56 NW. 817 (1893). Barton v. Drake. 21 Minn. 299, 1875

WL 3769 (Minn.) (1875). The Gores Mortgage against the Schultzes' homestead,

which was not signed by Mrs. Schultz, is wholly void.

10

[Aj contract to convey a homestead executed by one spouse but notjoined in by the other is wholly void and ...the buyer acquires no rightsunder it whatsoever.

Marrv. Bradley. 239 Minn. 503, 509, 59 NW.2d 331, 334 (1953).

The Marr case involved a situation where Mr. and Mrs. Sheff executed a

purchase agreement to convey their homestead to Chester Marr. Subsequently, Mr.

Sheff alone excuted a purchase agreement to convey the homestead to the Bradleys.

Mr. and Mrs. Sheff ultimately executed a deed in favor of the Bradleys, but prior to

that time, Mr. Marr commenced suit under his purchase agreement signed by the

Sheffs, and filed a notice of lis pendens with Hennepin County. Mr. Marr challenged

the validity of the purchase agreement executed by Mr. Sheff, without his spouse, in

favor of the Bradleys. As noted above, the court found that the purchase agreement

executed by Mr. Sheff in favor of the Bradleys was void.

In utilizing Minnesota's homestead rule as an analogy in his dissent in a case

involving issues unrelated to this case, Judge Randall of the Minnesota Court of

Appeals, stated:

The best analogy and the best precedent out there is Minnesota'slongstanding homestead rule. There can be no valid sale of ahomestead, nor can any mortgage validly attach to a homestead unlessthe document contains the signature of both husband and wife. As tohomesteads, the Minnesota Supreme Court stated that void contracts... ~ ............. .f- .............. i- ...;,..:1-......... ~ .... +1.-.,.,. ..................-+-~r>..... A ............. +-,.... ..........+- f"......... +1.-..-.. ........ 1.........+ ..... h'-""I'Y\Asre~rlL.dUUUl VC':'l 110Ul':) HI lHe !-Jal Lie,:,. n l.-UUl.J. ctt...l IVJ. lJJC ,:,QIC VI a UU.l.lIC l- au:

lacking one of the required signatures "must be held void for allpurposes and not constitute the basis of any action against the obligor."Marr v. Bradley, 239 Minn. 503, 507, 59 NW.2d 331,334 (1953)(emphasis added). This has long been the rule. See Barton v. Drake, 21Minn. 299, 305 (1875) (stating "* * * the contract and decree being

11

alike void, the defendant acquired by them no title to, or estate in, orlien upon, such homestead").

It is simple. You have two prongs when analyzing a purported sale of ahomestead or the claims of a purported mortgagee. The first prong isto find out if both the husband and the wife signed. If they did not, youdo not move to the second prong. ..

Mattice v. Minnesota Property Insurance Placement, 655 N.W.2d 336, 345 (Minn.

App. 2002) (emphasis present in original).

The trial court in this case specifically found:

The Gores Mortgage was signed September 7, 2005. Mr. Schultz signed hiswife's name on the Note and Mortgage and had the contracts unlawfullynotarized. (Add. 14-15).

The Gores' Mortgage did not ever attach to the subject Property because it was not

validly executed by Mrs. Schultz as required by Minn. Stat. §507.02, and was not

properly acknowledged.

If the record contains any instrument which is not authorized to berecorded, either from the nature of its subject matter or a defect in itsexecution, it is a mere nullity, and is not notice for any purpose.

Parret v. Shaubhut, 5 Minn. 323 (Gil 258 at 262)(1861). While Appellants believe

that these issues dispose of this case, they do not wish to abandon the remaining

issues if this court deems it necessary to reach them.

B. Appellants Do Have Standing To Contest The Validity Of Respondents'Mn.rt-rTa~O nuLl. 'rn. Ji'ai11J 'O' Tn. rnn1ln.lu lA.Tit-h M-inn c;:'f--:lIt- §t:07 tl?J ..... u .. "'6 6'""'" ....... VI. .... "" v '"'v .....p.". ...... "'... ,,· ........ a ...... "'..... "'. 0.1 V I ~v_.

The trial court appears to have found that Appellants do not have standing to

raise the invalidity of the Gores' mortgage under Minn. Stat. §507.02. "Standing is a

legal requirement that a party have a sufficient stake in a justiciable controversy to

12

seek relief from a court." Enright v. Lehman. 735 NW.2d 326, 329 (Minn. 2007),

citing to Sierra Club v. Morton, 405 U.S. 727, 731 - 732, 92 S. Ct. 1361, 31 L. Ed, 2d

636 (1972). Standing is acquired either by suffering some "injury-in-fact" or by

being the beneficiary of some legislative enactment. Id.. citing to Snyder's Drug

Stores, Inc. v. Minn. State Bd, of Pharmacy, 301 Minn. 28, 31-32, 221 NW.2d 162,

165 (1974). "An injury in fact is a concrete and particularized invasion of a legally

protected interest." Id., citing to Lujan v. Defenders of Wildlife, 504 U.S. 555, 560,

122 S. Ct. 2130, 119 L. Ed. 2d 351 (1992),

Given that both the Appellants and the Gores assert claims to the same piece

of real property, and given the fact that the void Gores Mortgage has been

determined to be prior to Appellants' mortgage interest in the property, clearly

Appellant's have suffered a concrete and particularized invasion of their legally

protected mortgage interest.

For many years, Minnesota Courts have recognized the rights of mortgage

holders to challenge the amount, validity and priority of other mortgage holder's

liens. As far back as 1861, in a contest involving priority of liens between two

separate mortgagees, neither of whom was a third-party beneficiary of the other's

mortgage, the Minnesota Supreme Court determined that a mortgage properly

recorded took priority over a prior improperly recorded mortgage. Parret v.

Shaubhut. supra.

13

In Marr v. Bradley, supra, the Minnesota Supreme Court determined the

purchase agreement between Mr. Sheff and the Bradleys to be void under Minn. Stat.

§507.02, based upon the challenge by Chester Marr, a stranger to the purchase

agreement. In fact, the Court noted that "defendant contends that, while [the

purchase agreement] may have been unenforceable by the Bradleys, its invalidity

may not be attacked by Plaintiff. .." Marr v. Bradley, 239 Minn. at 507, 59 NW.2d at

333. In spite of this claim, the Court determined that Mr. Marr's challenge was

proper and that the purchase agreement in that case was void under Minn. Stat.

§507.02.

In Peterson v. Hinz, 605 NW.2d 414 (Minn. App. 2000), the Court of Appeals

noted that a subsequent owner properly challenged an attorney's lien against real

property as void for failure to comply with Minn. Stat. §507.02. Id. at 416. It is

readily apparent from the Hinz opinion that there was no privity of contract

between Mr, Hinz, the owner of the property, and Mr. Holt, who contracted with

Attorney Peterson for legal services.

Under Minnesota's mechanic's lien statute, Minn, Stat. §514.01 et seq., it is

common for mechanic's lien holders and mortgage holders to challenge each other's

liens even though no privity of contract exists. In Banco Mortgage Company v, E.G.

Miller Enterprises, Inc" 264 N.W.2d 399 (Minn. 1978), the Minnesota Supreme Court

decided a case in which a mortgagee, Banco Mortgage, successfully challenged

various mechanic's liens that were asserted against the subject real property. In

14

Superior Construction Services, Inc. v. Beltin, 749 N.W.2d 388 (Minn. App. 2008),

Town and Country Credit Corporation prevailed on a challenge to a mechanic's lien

claiming to be prior and superior to its mortgage. Both of the foregoing cases

involve a mortgagee challenging a prior lien on real property, absent privity of

contract.

The trial court erred in determining that Appellants did not have standing to

challenge the Gores' Mortgage. It is clear from the cases cited that it is common

practice for creditors with liens in common property to challenge the validity of

each other's liens and they certainly have standing to do so. It is not a question of

intent to benefit or duty owed, but merely a question of whether the basic elements

necessary to create a valid security interest were met. Since they were not in this

case, any party with a valid interest in the subject Property may challenge the Gores'

mortgage lien. Appellants have a valid mortgage interest in the Property and

therefore have standing to challenge the Gores' mortgage against the same Property.

III. THE TRIAL COURT IMPROPERLY DISMISSED APPELLANTS' CLAIM OFEQlJITABl.E SUBROGATION ON SUMMARY JUDGMENT,

As the trial court properly noted, equitable subrogation:

[W]ill be applied in the interest of substantial justice... where oneparty has provided funds used to discharge another's obligations if (a)+-h ..... ....... ., .....hr .... en1r;n ...... C'n"h. .... r\rY.,t-~..-..'Y'I hac ar+orl llnrlor a illS"Hfla'hlo nrl.1JC" 'paILJ .:'I en-ui5 JU.Ul V5ULIVil 11':> \"..I,.\-U U.UU....... JU I,..U. .l IJJ'- VJ.

excusable mistake of fact and (b) injury to innocent parties willotherwise result.

15

Ripley v. Piehl. 700 NW.2d 540, 545 (Minn. App. 2005), quoting Carl H. Peterson Co.

v. Zero Estates. 261 NW.2d 346, 348 (Minn. 1977). (Order Granting Summary

Judgment in Part, p. 4, Add. 4).

The trial court found that the Appellants' funds were used to discharge the

debt of others when proceeds of Appellants' loans were utilized to pay prior

encumbrances on the property, namely those in favor of Aurora Loan Services

($657,533.94), First Tennessee Bank ($127,931.06) and the Norling Contract for

Deed ($58,791.00), for a total of $844,256.00. (Add. 3-4). The Gores fully expected

their mortgage to be in position behind those prior encumbrances, and Appellants

attempted only to place the Gores Mortgage in the position in which the Gores

expected it to be. (App. 149, 150).

While Appellants believed, and continued to believe, that there are no

material facts in dispute which would have precluded the trial court from granting

Appellants' motion for summary judgment on the equitable subrogation issue, there

is simply an absence of facts in the record to support granting Respondents'

summary judgment motion to dismiss Appellants eqUitable subrogation claim.

Furthermore, the trial court erred in its application of the law as set forth in Ripley

v. Piehl in determining that the Appellants in this case did not operate under a

justifiable or excusable mistake of fact. Appellants do not contest that professional

lenders are held to a higher standard under Minnesota law for the purpose of

determining whether they acted under a justifiable or excusable mistake of fact, but

16

believe that the facts of this case require, at a minimum, a trial on the merits of the

equitable subrogation claim.

A. Appellants Acted Under a Justifiable Or Excusable Mistake Of Fact.

The closing on the sale from Schultzes to Derek Christensen and the loans by

Appellants to Derek Christensen occurred on October 28, 2005. There is no

evidence in the record regarding the time of day that the closing occurred and

whether the Gores Mortgage was of record when the closing took place. The Gores

Mortgage was delivered to the Scott County Recorder at 2:40 p.m. on October 27,

2005, the day before the closing on Appellants' loans. The trial court found that

under Minn. Stat. §507.32 (2008), Appellants had constructive notice of the Gores'

mortgage. As previously noted, the improperly signed and acknowledged mortgage

in favor of the Gores could not be constructive notice of anything. Parret v.

Shaubhut. 5 Minn. 323 (Gil 258) (1861).

1. The Gores Mortgage Was Not Reasonably Discoverable OfRecord On October 28, 2005.

Appellants submitted the Affhlavit of P-at Bee€kman, Stott County R€H;mQ€lf,

in support of their motion for summary judgment. The purpose for doing so was to

demonstrate that it was not reasonably possible for Appellants to identify the

existence of the Gores lv10rtgage of record on October 28, 2005, the date of the

closing on the loans to Christensen and advancing of Appellents funds to pay prior

encumbrances.

17

Ms. Boeckman's affidavit is set forth in Appellant's Appendix on pages App.

156 to App. 159. Ms. Boeckman's affidavit details the process through which

documents are put when they arrive at the Recorder's office, either by mail, from

title companies or at the customer service counter. What is clear from Ms.

Boeckman's affidavit is that the Gores' Mortgage, received October 27, 2005 at 2:40

p.m., would have been placed in a basket with documents received by mail and from

title companies on October 26, 2005. Beginning in the afternoon on October 28,

2005, all 129 documents in that basket would have been entered into the

Grantor/Grantee Index and Tract Index, and they would have been entered in the

order they were received. Ms. Boeckman stated that this process would normally

have been completed by the end of October 28, 2005, but might have taken up to

three days depending upon the number of documents, staffing and other variables.

Exactly how long it did take is not in the record.

When all the documents were entered into the Recorder's computerized

Grantor/Grantee Index and Tract Index, the documents would be deemed posted as

of that date. Once posted the documents could be accessed on the computers at the

Recorder's office but were not accessible online via the County's website. Only after

documents were scanned (one additional day) and verified into the Recorder's

computer system (two additional days) would the documents be verified and

available online through the County's website. It is absolutely certain that the Gores

Mortgage was not verified of record prior to the closing on October 28, 2005.

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The trial court noted that the Gores suggested the lenders could have called

the Recorder's office on October 28, 2005 to search for other liens, but there is no

evidence that any such call would have revealed the Gores Mortgage. (Transcript of

August 6, 2008 Summary Judgment Hearing, p. 11, line 16-p.12, line 5, p. 14, lines

17-20). The only such suggestion is made by the Gores' counsel in its memoranda

opposing Appellants' summary judgment and in support of the Gores' motion. (App.

58, 76). Statements made by counsel are not admissible evidence. Hopkins v.

Empire Fire and Marine Insurance Co.. 474 NW.2d 209, 212 (Minn. App. 1991).

Evidence offered to support or defeat a motion for summary judgmentmust be such evidence as would be admissible at trial.

Id .. citing to Murphy v. Country House, Inc., 307 Minn. 344, 349, 240, N.W.2d 507,

511 (1976). With no evidence in the record of the time of day that the closing took

place and whether the Gores Mortgage was available to be discovered on October

28, 2005, the trial court erred determining that the Appellants had constructive

notice of the Gores Mortgage when it was recorded in the Scott County Recorder's

office.

In addition, equitable subrogation claims generally are made in cases where

there is a prior, recorded, intervening interest of which the party seeking

subrogation did not have actual notice. Such was the case in Ripley v. Piehl. supra

and Carl H. Peterson Co. v. Zero Estates, supra. In the Ripley case, the Minnesota

Court of Appeals noted Minn. Stat. §507.32 regarding constructive notice and

indicated that constructive notice would be imputed to the lender in that case,

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"unless, as Option One contends, equitable subrogation requires that the priority be

reversed." Ripley. 700 N.W.2d at 544-545. Ripley involved a case where the

intervening mortgage was filed four weeks prior to the closing in question, and the

lender failed to update its title search. Had it done so, it would have discovered the

Ripley mortgage. Ripley, 700 N.W.2d at 547. The Gores mortgage could not have

been discovered by Appellants through any reasonable title update. If the Gores

Mortgage was recorded, but not available to the public, equity demands that the

priority ofthe Gores Mortgage and Appellants mortgages be reversed.

2. There Is Nothing In The Record Upon Which To Conclude ThatAppellants Failed To Thoroughly Check Title Or To InvestigateThe Relationship Between The Parties To The Sale.

The trial court determined that even if Appellants did not have the ability to

access information regarding the Gores' mortgage on October 28, 2005, Appellants

did not act under a justifiable or excusable mistake of fact because they "were not

thorough in checking title and investigating the relationship between all the parties

involved in the sale of the Property." (Add. 4, 9). As evidence of Appellants' failure

the trial court cites the fact that the purchase agreement was between the Schu!tzes

and Mr. Christensen, and that the title commitment did not even mention the

Schultzes. The trial court further indicated that the title commitment stated that the

fee title interest in the Property was owned as of the date of the commitment by

David and Rachel Norling and went on to describe the mortgages held by the

Norlings. Based on this evidence, the trial court erred in concluding that the

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Appellants, as professionals, were not justified in their failure to investigate the

parties and possible prior liens. Again, the only information related to the level of

title checking and investigation was the suggestion of the Gores' counsel in their

memorandum, which is not evidence. Hopkins v. Empire Fire and Marine Insurance

Co.. 474 NW.2d 209, 212 (Minn. App. 1991).

The fact that the title commitment indicates that fee title was in the name of

the Norlings is not to be unexpected in this case. The title commitment simply sets

forth the state of the title as it exists as of the day of the commitment and the terms

upon which a title insurance policy will be issued. (App. 142-144). Without any

evidence, by affidavit or otherwise, and apparently based solely upon the Gores'

counsel's argument in its brief, the court concluded that Appellants and the title

insurer did not adequately investigate prior liens. There simply was no evidence

upon which to make such a fact finding. What is clear is that in noting that the title

commitment showed title in the Norlings,Z the Appellants and the title company

realized that in order to make a loan to Mr. Christensen, the chain of title must be

completed from the Norlings to Derek Christensen, which was accomplished by the

warranty deed from the Norlings to the Schultzes, and the warranty deed from the

Schultzes to Derek Christensen, both of which were filed of record prior to the

mortgages from Derek Christensen to Appellants. (App. 151, 152). In addition, in

2 Mary Gores clearly understood that a title commitment would show the Norlingsin title since she agreed that the contract for deed to the Schultzes should not befiled of record. (Add. 14).

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investigating the possible existence of unrecorded mortgages that might have been

executed by the Schultzes, the title agent had the Schultzes execute an

Acknowledgement and Indemnity Form, in which the Schultzes specifically

represented that there were no additional mortgages either recorded or

unrecorded, against the subject property. CAppo 153). The Schultzes also were

required to sign a sellers affidavit which stated that there were no unrecorded

interests in the Property. CApp 155). No other investigation was warranted or

would be reasonable.

While there was no evidence put before the court at the time of summary

judgment to support the court's conclusions, no such evidence should have been

necessary due to the fact that it simply was not possible for the Appellants to

discover the Gores Mortgage regardless of any effort they might have made.

B. Appellants Are Innocent Parties That Will Be Injured If EquitableSubrogation Is Denied.

The injury to be suffered by Appellants if equitable subrogation is denied is

o13viou-s. With no nEltice Elf, Elf reasGua1:Jle basis UpGU whkh t~ discover, the Gores

Mortgage, Appellants disbursed loan proceeds to payoff prior, valid encumbrances

upon the Property. Those encumbrances consisted of the first and second

paid to the Norlings under their contract for deed with the Schultzes. CAppo 145).

The Gores fully expected their mortgage to be subordinate to all of the items that

were paid using Appellants' loan proceeds. CAppo 148, 149). Consequently, by

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dismissing Appellants equitable subrogation claim, the trial court has erroneously

granted a windfall to the Gores by placing them ahead of the approximately

$840,000.00 in encumbrances they full expected to be ahead of their mortgages. In

doing so the trial court has placed the Gores' mortgage in the amount of

$177,602.16, ahead of Appellants' mortgage when Appellants had no notice of the

Gores' mortgage or any reasonable basis upon which to discover it.

C. The Standard Set By The Trial Court To Prevail On An EquitableSubrogation Claim, Even For Professional Lenders, is Too High.

The standard which the trial court has set is far above that which should

practically be required of a professional lender in today's world. It is absolutely

certain from the Affidavit of Pat Boeckman that at the time of the closing on

Appellants' loans on October 28, 2005 the Gores Mortgage could not have been

discovered online. It is also absolutely certain that in no event could the mortgage

have been found in any manner prior to some unknown point in the afternoon on

October 28, 2005, and perhaps it might not have been found at all, according to Ms.

BoeGkman. Despite those faGts, the trial rGurt granted the Gores' motion for

summary judgment dismissing the equitable subrogation claim.

In doing so, the trial court has essentially vitiated the long standing doctrine

professional lender could reasonably avail itself of the legally recognized equitable

subrogation cause of action. The trial court did not have any evidence before it

regarding any activity which was undertaken by the lender or the title agent in

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connection with investigating the possible liens and or the relationship between the

parties.

Furthermore, the trial court did not have any evidence before it to determine

whether it was reasonably possible for the Appellants to learn of the Gores

Mortgage prior to closing. Is it reasonable to require a professional lender to

discover a mortgage before its entry in the County's Tract Index is verified and

available online? Is it reasonable to require a professional lender to discover a

mortgage before it is even posted by the County? Appellant's respectfully suggest

that it is unreasonable to expect them, even as professional lenders, to identifY

intervening mortgages before they are entered and verified in the Tract Index. The

, Affidavit of Pat Boeckman outlines the process utilized by Scott County in recording

documents. It is evident from Ms. Boeckman's affidavit that the entries in the Tract

Index are verified and become available online on the same date. Given the likely

fact that there are variances between counties in the timing and manner in which

documents are placed of record, even professional lenders should not be required to

discover documents before they are verified by the County Recorder as being of

record in the Tract Index.

CONCLUSION

Based upon the fact that the Gores Mortgage against the subject Property is

void pursuant to Minn. Stat. §507.02, Appellants respectfully request that the

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judgment of the trial court be reversed and that judgment be entered in favor of

Appellants dismissing Respondents' mortgage against the subject Property.

Respectfully Submitted,

Dated: April 20, 2009. ORME & ASSOCIATES, LTD\\ rc;:---JBy /;/v1/1/J~(2--

Michael J. Orme (\ IAttorney No. 19933UDana K. NyquistAttorney No. 250211

Attorneys for Appellants4040 Nicols RoadEagan, MN 55122Telephone: (651) 688-7646

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