## Facts

- Cathryn Myers executed a $30,000 promissory note to Elwin J. and Jeanne Kern secured by a deed of trust on Nevada real property; the deed of trust was recorded in December 1990.
- The IRS recorded a notice of federal tax lien in August 1992 for unpaid income taxes owed by Myers and her husband.
- Myers later conveyed title to the Dannielle DeLee Irrevocable Trust.
- In November 1992, James and Carol Belmont loaned $38,000 to the trust, took a deed of trust, and used loan proceeds to pay off the Kern note (and a state property tax lien); the Belmont deed of trust was recorded after the IRS lien.
- Fidelity National Title Agency of Nevada issued title insurance to the Belmonts but failed to discover the recorded federal tax lien.
- In July 1993, the IRS seized the property to enforce its lien.
- The Belmonts assigned their note and deed of trust to Jeffrey and Pamela Mort and others (the Morts).
- The Morts claimed lien priority over the IRS by equitable subrogation to the Kerns’ earlier, senior deed of trust that the Belmont loan had satisfied.

## Issues

1. Whether a federal court may decline equitable jurisdiction over a lien-priority dispute because plaintiffs might have a legal remedy against a third party (the title insurer), rather than against the United States.
2. Whether Nevada equitable subrogation entitles the Morts, as assignees of the refinancing lender, to the priority position of the paid-off senior deed of trust over the intervening federal tax lien.

## Decision

- The Ninth Circuit reversed the dismissal and remanded for entry of judgment for the Morts.
- The court held the district court erred by refusing to exercise equitable jurisdiction based on the possibility of a separate legal claim against the title insurer.
- The court held the Morts were entitled, as a matter of law, to equitable subrogation to the Kerns’ senior lien priority over the IRS tax lien.

## Legal Principles

- A court sitting in equity may not refuse equitable relief against a defendant merely because the plaintiff may have a legal remedy against a third party; the question is whether an adequate legal remedy exists against the party from whom equitable relief is sought.
- Under Nevada law, a refinancing lender (and its assignee) whose funds satisfy a prior, senior deed of trust may be equitably subrogated to that lien’s priority when the payor is not a mere volunteer and subrogation does not unfairly prejudice the intervening lienholder.
- Equitable subrogation may be applied against the United States as a lienholder when it prevents the government from receiving a windfall by improving its priority solely because the senior lien was paid off with refinancing proceeds.
- Negligence by a title insurer in missing an intervening federal tax lien does not, by itself, bar equitable subrogation in a priority dispute between the refinancing lienholder and the IRS.

## Conclusion

The Ninth Circuit required the district court to decide the equitable claim despite potential insurance remedies and held that Nevada equitable subrogation restored the refinancing lender’s assignees to the paid-off senior deed of trust’s priority, leaving the IRS no better positioned than before the payoff.


Mort v. United States, 86 F.3d 890 (9th Cir. 1996)