Iowa Court of Appeals word of caution: Subrogation is not for the negligent

Laura Wasson Iowa Real Estate & Land Use Dickinson Law Des Moines, Iowa

Posted on 11/28/2016 at 08:37 AM by Laura Wasson

Subrogation can be a handy tool for mortgagees finding themselves on lowest rung of the priority ladder. In Iowa, equitable subrogation allows mortgagees to advance their priority position by expending funds which are then used to pay off a higher priority loan. In the eyes of the law, the mortgagee then “steps into the shoes” of the creditor their funds helped to pay off. By advancing their priority position, the mortgagee may be more successful in subsequent foreclosure proceedings.

On November 9, 2016, however, the Iowa Court of Appeals declined to advance a mortgagee’s priority position under this doctrine, despite the fact that the mortgagee had expended funds which the property owner used to pay off higher priority mortgages. Nationstar Mortgage, L.L.C. v. Bowman, No. 15-0843 (Iowa Ct. App. Nov. 9, 2016). It held that the mortgage company could not use the doctrine of equitable subrogation to advance its position because it failed to discover a recorded contract for sale on the property before granting its reverse mortgage. Thus, the party to the prior contract for sale had priority over the mortgage company and the foreclosure petition was dismissed.

The lesson here is that the mortgage company’s failure to examine title for a recorded contract for sale prior to granting a mortgage is negligence and “the right of subrogation is lost by inexcusable negligence on the part of the person asserting it.” Likewise, Iowa courts follow the rule that equitable subrogation should be denied if a subsequent mortgagee has either direct or constructive knowledge of a junior interest. A subsequent mortgagee always has constructive knowledge of junior interests if they are properly recorded, and the contract for sale in Nationstar was properly recorded.

For further information regarding mortgage priority and foreclosure, contact Laura Wasson

The material in this blog is not intended, nor should it be construed or relied upon, as legal advice. Please consult with an attorney if specific legal information is needed.

Laura Wasson

 

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