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Effects of Subrogation

Subrogation simply means substitution of one person for another.  In Universal Forest Prods. E. Div., Inc. v. Morris Forest Prods., LLC, 558 F. Supp. 2d 893 (E.D. Wis. 2008), the court held that a party who is subrogated to a second party’s rights against a third party “steps into the shoes” of the second party and may bring all claims which the second party could have brought against the third party.

The rights to which the subrogee succeeds are the same as those of the person for whom s/he is substituted with.  A subrogee cannot acquire any claim, security, or remedy the subrogor did not have.  A subrogated claim is not in any way diminished or extinguished by the subrogation, but merely taken over by another. The right to subrogate arises from the relationship of the parties and it does not depend on contract or statute for its application.

In most jurisdictions, the person entitled to subrogation is substituted to the very debt.  Under the subrogation doctrine, the guarantor’s payment preserves the original debt and merely substitutes the guarantor for the creditor. In re Wiley, 2010 Bankr. LEXIS 781 (Bankr. D.N.M. Mar. 11, 2010), it was held that an instanter upon payment by a guarantor of a debt, a debtor’s obligation to a creditor becomes an obligation to the guarantor, not a new debt, but, by subrogation, the result is the shift of the original debt from the creditor to the guarantor who steps into the creditor’s shoes.

The subrogated person is entitled to the collateral securities of the creditor which the creditor may have as security for the debt and to such benefits from the securities as the creditor had.

In Leaf Funding, Inc. v. Brogan Pharms., Inc., 642 F. Supp. 2d 844 (N.D. Ind. 2009), the court stated that the guarantor of a debt may seek to avoid personal liability in a suit by a creditor by asserting the impairment of collateral defense. Pursuant to this defense, the guarantor’s liability will be discharged if the facts establish that the creditor’s conduct unjustifiably impaired the collateral securing the debt. The underlying purpose of the impairment of collateral defense is to prevent the guarantor from being exposed to personal liability beyond that which was expected at the time the parties entered into the contract secured by the collateral.

The rights of the person entitled to subrogation do not depend on the willingness or unwillingness of the creditor to transfer the security.  However, by law, the creditor is required to turn over the property or securities to the secondarily liable person as soon as s/he pays the creditor’s claim.  Therefore, when there is no equitable right, the claimant’s position will not be improved by an assignment.

A surety’s right to subrogation begins as of the date of the execution of the suretyship contract. One who merely has a prospective right of subrogation may not require that certain assets be held in reserve for his benefit.  A subrogee cannot sue for punitive damages.  In order to discharge a mortgage, the sum that a party pays determines the extent to which s/he may be subrogated to the mortgage lien.

A surety on a judgment who pays it off after the principal debtor’s death is subrogated to the same right of priority in the distribution of assets by the executor which the state law confers on bond or judgment creditors.  A surety is not subrogated against the interest of the obligee.

Inside Effects of Subrogation