Appeal from Circuit Court of Sangamon County No. 08MR563 Honorable Tim P. Olson, Judge Presiding.
The opinion of the court was delivered by: Justice Appleton
JUSTICE APPLETON delivered the judgment of the court, with opinion. Justices Steigmann and Cook concurred in the judgment and opinion.
¶ 1 Plaintiffs are James G. McDonough and United Community Bank. Defendant is Prairie State Bank & Trust. The proceedings in trial court had an additional defendant, Santarelli and Sons, Inc. (Santarelli), but Santarelli is not a party to this appeal.
¶ 2 McDonough borrowed funds from United Community Bank to buy a duplex from Santarelli, and McDonough mortgaged the duplex to United Community Bank as security for the loan. But, apparently unbeknownst to McDonough and United Community Bank as well as to the title insurer, Commonwealth Title Insurance Company (Commonwealth), the duplex already was encumbered by a duly recorded judgment lien in favor of Prairie State Bank as a result of a money judgment it had won against Santarelli. So, in the order of recording, Prairie State Bank's judgment lien came first, and United Community Bank's mortgage came next. But the earliest recorded lien of all was a construction mortgage that Santarelli had granted to Illinois National Bank.
¶ 3 In between the recording of the construction mortgage and the recording of the judgment lien, Santarelli and McDonough entered into their purchase contract-but they did not record the purchase contract. Despite the absence of the purchase contract from the public records of title, plaintiffs contended to the trial court that, by operation of equitable conversion, Prairie State Bank acquired no interest in the duplex when recording its judgment lien, because the moment Santarelli and McDonough signed the (unrecorded) purchase contract, Santarelli's interest in real property was equitably converted to an interest in the promised purchase money; thus, from that moment on, he no longer owned a duplex to which the judgment lien could attach. Alternatively, plaintiffs argued that because the loan from United Community Bank was used to pay off the earliest lien of all, the construction mortgage, United Community Bank was equitably subrogated to Illinois National Bank, stepping into its shoes as the senior lienholder.
¶ 4 The trial court denied plaintiffs' motion for summary judgment and granted Prairie State Bank's cross-motion for summary judgment (Santarelli was defaulted). The reason was that Commonwealth, which the court considered to be the real party in interest, had made an error in its title search, overlooking Prairie State Bank's judgment lien. Because of this mistake by Commonwealth, the court rejected both theories advanced by plaintiffs: equitable conversion as well as equitable subrogation. Plaintiffs appeal.
¶ 5 In our de novo review (A.B.A.T.E. of Illinois, Inc. v. Quinn, 2011 IL 110611, ¶ 22; City of McHenry v. Suvada, 2011 IL App (2d) 100534, ¶ 6), we affirm the trial court's judgment in part and reverse it in part. We conclude the court was correct in rejecting plaintiffs' argument that, by operation of equitable conversion, Santarelli had no interest in the duplex to which Prairie State Bank's judgment lien could attach, so as to completely negate the judgment lien. That would have been the case only if the purchase contract were recorded before Prairie State Bank recorded its judgment lien or only if Prairie State Bank otherwise had received notice of the purchase contract. We disagree with the court, however, that Commonwealth's apparent mistake in the title search, i.e., failing to discover Prairie State Bank's judgment lien, defeats United Community Bank's right of equitable subrogation. By law, United Community Bank has priority over Prairie State Bank to the extent of $146,852.50, the amount of the loan proceeds used to discharge the senior encumbrance, the construction mortgage.
¶ 7 Specifically, the facts in this case are as follows. Santarelli owned some real estate in Bogey Hills Estates, Third Addition, in Springfield. On May 5, 2005, Santarelli mortgaged this real estate to Illinois National Bank, to secure a construction loan. The construction mortgage was recorded on May 12, 2005.
¶ 8 On April 5, 2007, Santarelli and McDonough signed a contract (the purchase contract), in which Santarelli agreed to sell to McDonough, for $155,000, a portion of the real estate which was improved with a duplex and which was commonly known as 4410 Castle Pines Drive. In the purchase contract, Santarelli agreed to obtain title insurance.
¶ 9 On June 27, 2007, United Community Bank wrote McDonough that it was willing to lend him the funds necessary for his purchase of 4410 Castle Pines Drive, subject to some "terms and conditions," including "[a] Title Commitment in the amount of the purchase price indicating no *** liens or encumbrances other than those to be paid from the proceeds of the sale."
¶ 10 On July 24, 2007, Prairie State Bank won a judgment against Santarelli in the amount of $634,488.39 plus costs, and on July 26, 2007, Prairie State Bank recorded a memorandum of this judgment. At the time Prairie State Bank recorded the memorandum of judgment, the purchase contract between Santarelli and McDonough was still executory and unrecorded, and Prairie State Bank had no knowledge of the purchase contract.
¶ 11 On September 6, 2007, Commonwealth issued a commitment for title insurance in the amount of $155,000 on 4410 Castle Pines Drive, listing McDonough and United Community Bank as the proposed insureds. The commitment included a "Schedule B," which stated that the title insurance policy would contain exceptions to coverage, including the construction mortgage in favor of Illinois National Bank. The exceptions, however, did not include Prairie State Bank's memorandum of judgment.
¶ 12 On September 27, 2007, Santarelli's sale of 4410 Castle Pines Drive to McDonough was closed, and McDonough executed a mortgage on this property in favor of United Community Bank, to secure its loan. In paragraph 4 of the mortgage, McDonough promised to "promptly discharge any lien which ha[d] priority over this Security Instrument." Accordingly, on that same day (September 27, 2007), $146,852.50 of the loan proceeds were used to discharge the construction mortgage in favor of Illinois National Bank.
¶ 13 On October 5, 2007, Commonwealth issued two policies of title insurance: one to McDonough in the amount of $155,000 and the other to United Community Bank in the amount of $156,335.20. The policies provided that, subject to exclusions from coverage, Commonwealth agreed to insure from loss resulting from (among other things) "[a]ny lien or encumbrance on the title." Commonwealth further agreed to "pay the costs, attorneys' fees and expenses incurred in defense of the title, as insured." Each policy contained a "Schedule B" stating that the policy did not insure against loss or damage resulting from certain encumbrances listed therein. Prairie State Bank's memorandum of judgment was not on the list in "Schedule B" of either policy.
¶ 14 On October 9, 2007, two documents were recorded: (1) McDonough's mortgage of 4410 Castle Pines Drive to United Community Bank, securing a debt in the face amount of $156,335.20; and (2) a warranty deed, in which Santarelli conveyed 4410 Castle Pines Drive to McDonough.
¶ 15 On October 11, 2007, a release of the construction mortgage in favor of Illinois National Bank was recorded.
¶ 16 In September 2008, United Community Bank and McDonough filed a complaint for declaratory judgment against Prairie State Bank and Santarelli. In count I, plaintiffs sought a declaratory judgment that conventional subrogation "voided" Prairie State Bank's judgment lien or, alternatively, made United Community Bank's lien superior to that of Prairie State Bank. In count II, they invoked equitable subrogation, seeking a declaratory judgment that McDonough's ownership of 4410 Castle Pines Drive was "free and clear" of Prairie State Bank's judgment lien. In count III, they sought indemnity from Santarelli in the event that Prairie State Bank's judgment lien were "determined to be a lien against [4410 Castle Pines Drive]."
¶ 17 Prairie State Bank pleaded affirmative defenses. In their reply to one of these affirmative defenses, plaintiffs admitted that Commonwealth was "funding this litigation against Prairie State Bank pursuant to its obligations under [the title insurance policies]"; nevertheless, in their reply, plaintiffs disputed the materiality of this fact.
¶ 18 In September 2009, the trial court entered a default judgment against Santarelli and in plaintiffs' favor, ordering Santarelli to indemnify plaintiffs if either of them had to pay any monies to Prairie State Bank as a result of a judgment against plaintiffs on either count I or II of their complaint.
¶ 19 In July 2010, plaintiffs filed a motion for summary judgment on counts I and II, and in December 2010, Prairie State Bank filed a cross-motion for summary judgment on those counts.
¶ 20 In August 2011, the trial court denied plaintiffs' motion for summary judgment and granted Prairie State Bank's cross-motion for summary judgment. In its summary-judgment order, the court said it was "misfeasance" on the part of Commonwealth to miss Prairie State Bank's judgment lien in the title search and that this "misfeasance [had] created the situation." "Had they competently done their job," the court said, "the contingency would not [have] been met and the sale would not have closed. No harm to anyone." (The court did not specify which "contingency" it meant.) In the court's view, Commonwealth was "financing the litigation in order to avoid the consequences of [its] misfeasance."
¶ 21 In this connection, the trial court found a case from Indiana to be persuasive, Lawyers Title Insurance Corp. v. Capp, 369 N.E.2d 672 (Ind. Ct. App. 1977). A federal case that Prairie State Bank had cited to the trial court, First Federal Savings Bank of Wabash v. United States, 118 F.3d 532, 534 (7th Cir. 1997), relied on Capp in holding that equitable subrogation should not be used to "benefit a negligent *** insurer." The trial court in the present case said:
"The Court believes the Indiana Court makes more sense, and the Court will consider the complete picture, including what the insurance company is trying to accomplish.
The Court does not see how the actual plaintiffs will be harmed. The insurance company will in all likelihood be required to compensate plaintiffs pursuant to the contract of insurance with them. No party will be out anything.
Therefore, as between the parties, this Court does not believe equity requires the Court to invoke the doctrines [of equitable conversion and equitable subrogation] as put forth by plaintiffs. To do so would only ...