Insurer Prevails Over “Collusion” Gambit
On a motion for summary judgment, a U.S. District Court in California held that an IRS lien is equitably subordinate to a subsequently recorded mortgage. In so doing, the Court also held that the (non-party) title company’s involvement in the litigation was not “the sort of ‘collusion’ as would defeat relief.” Bedrock Financial, Inc. v. United States of America, Case No. 1:10-CV-01055-MJS (U.S.D.C., E.D. Cal., November 11, 2012).
The Court noted that Bedrock Financial’s involvement in the litigation was “dormant except as necessary to pursue this action.” The IRS opposed subrogation because the insurer who would ultimately bear the Bank’s loss instigated the litigation and was the one funding, controlling and directing it. While noting authority to the contrary, the Court relied on a Ninth Circuit Bankruptcy Appellate Panel case in deciding that “[c]ollusion requires an agreement to defraud or obtain a result contrary to law. Here, ..., the parties seek only to enforce their contractual rights and obligations and obtain an equitable remedy authorized by law.”
COMMENT:
There is a split among the circuits that have considered the issue. Construing Indiana law, the 7th Circuit has determined that the title insurer was the real party in interest. First Federal Savings Bank of Wabash v. US, 118 F. 3d 532 (7th Cir., 1997). Ostensibly basing its determination on the fact that the insurer was paying the costs of the litigation, the Court relied heavily on an Indiana Court of Appeals opinion that found it inequitable to apply subrogation when doing so would relieve an insurer of the consequences of its mistake.
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