United Community Bank v. Prairie State Bank & Trust
972 N.E.2d 324
Ill. App. Ct.2012Background
- Santarelli owned Bogey Hills Estates real estate; construction mortgage to Illinois National Bank recorded May 12, 2005.
- A purchase contract for part of the property between Santarelli and McDonough was signed April 5, 2007 but not recorded.
- Prairie State Bank obtained and recorded a money judgment against Santarelli July 24–26, 2007.
- McDonough secured a mortgage from United Community Bank on 4410 Castle Pines Drive and $146,852.50 of loan proceeds were used to discharge the construction mortgage.
- Commonwealth issued title insurance commitments in Sept. 2007; Schedule B did not list Prairie’s judgment lien.
- In Oct. 2007, McDonough’s mortgage and a deed were recorded; the construction mortgage was released Oct. 11, 2007; plaintiffs sought declaratory relief on equitable conversion and subsistence of subrogation.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Did equitable conversion defeat Prairie’s lien despite unrecorded contract? | McDonough/United claim conversion voids lien | Prairie argues lien attaches notwithstanding unrecorded contract | Equitable conversion does not defeat the lien absent notice or prior recording. |
| Whether United Community Bank may be equitably subrogated to Illinois National Bank’s rights | United seeks subrogation to senior lien portion paid from loan proceeds | Prairie opposes subrogation; priority remains with Illinois National Bank | United is subrogated to Illinois National Bank to the extent of $146,852.50. |
| Is Commonwealth a necessary party to the action? | Commonwealth should be joined due to insurance defense | No duty to Commonwealth; not necessary party | Commonwealth not a necessary party. |
| Does Commonwealth’s alleged title-search negligence affect equitable subrogation? | Negligence should not bar subrogation | Negligence could negate equity | Negligence of Commonwealth does not defeat subrogation or priority. |
| What is the controlling priority among Prairie State Bank and United Community Bank? | Equitable subrogation gives United priority for paid loan proceeds | Prairie maintains its judgment lien priority | United has priority to the extent of $146,852.50; judgment remanded for further proceedings. |
Key Cases Cited
- Union Planters Bank, N.A. v. FT Mortgage Cos., 341 Ill. App. 3d 921 (2003) (subrogation as exception to first-in-time rule)
- Farmers State Bank v. Neese, 281 Ill. App. 3d 98 (1996) (equitable subrogation and recording rules)
- East St. Louis Lumber Co. v. Schnipper, 310 Ill. 150 (1923) (resulting trusts; recording law limits on liens)
- Detroit Steel Products Co. v. Hudes, 17 Ill. App. 2d 514 (1959) (subrogation principles for loan-proceeds context)
- First Midwest Bank, N.A. v. Stewart Title Guaranty Co., 218 Ill.2d 326 (2006) (title commitments; notice and exclusions affect coverage)