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Subrogation in Mortgages

Subrogation is the process of substituting one person in the place of another.  The substituting person succeeds to the claims and rights of the substituted person.  The party seeking to enforce the right of another is called a subrogee and the person whose rights a subrogee is enforcing is a subrogor.  Subrogation is an equitable doctrine[i].

A person, who pays a mortgage when the original debtor fails to pay, can obtain all the rights under the doctrine of subrogation.  However, the entire mortgage should be paid off by the person[ii].  The person should also have an interest over the property mortgaged.  The person paying the debt will be substituted in the place of the original creditor.  The person can enforce the security over the original debtor for reimbursement.  A person pays a mortgage to protect his/her own interest in the property or because s/he is secondarily liable for the debt or for the discharge of the lien.  However, if the borrower used the proceeds of the loan to discharge a prior encumbrance, it is not a sufficient reason to entitle the lender to subrogation.  There should be ample proof that the loan was made for that purpose[iii].

When a subsequent mortgagee substitutes a prior mortgage by a subsequent mortgage, courts apply equitable subrogation only after determining the following factors:

  • the subrogee made payment to protect his/her own interest,
  • the subrogee did not act as volunteer,
  • the subrogee was not primarily liable for the debt paid,
  • the subrogee paid off the entire encumbrance, and
  • subrogation would not work any injustice to the rights of a junior mortgage holder.

However, courts can grant rights under the doctrine of subrogation even where one or more of factors is absent[iv].  A court determining whether to apply equitable subrogation to a mortgage must examine the actions of the subrogee. The degree of knowledge attributable to a subrogee concerning the existence of the intervening mortgage may nullify equitable subrogation[v].

When a third party pays off an encumbrance on a mortgaged property where there is an agreement, the right to subrogation can be granted.  The agreement should provide that a new mortgage can be executed by the person paying the mortgage.  Agreement can only be implied if the lender believed in good faith that s/he was to have a security of equal position as that discharged.

A person cannot invoke the rule of subrogation successfully without an agreement of subrogation, unless fraud, mistake or some other consideration is shown[vi].  However, when a person has interest in the property, the person can obtain the subrogation rights of a creditor when the person has lent money for the property.

In certain cases, when the security taken for a loan turns out to be invalid, the party advancing the money will be subrogated to the rights of the holder of the lien.  Therefore, subrogation can also be allowed when a security fails due to lack of authority or capacity.

When one person in good faith lends money to another for security of a mortgage to discharge a property titled to the borrower, the person lending the money can have subrogation rights that the mortgagor had against the parties claiming title to the property.  When a person holding a junior mortgage advances money to secure a prior mortgage, that person is entitled to the subrogation rights of a senior encumbrance[vii].  However, the entire debt must be cleared by the junior lien holder.  This is necessary because when there is a threat of foreclosure, a senior lien can eliminate a junior lien and therefore a junior lien holder can reinstate the loan by making a payment sufficient to cure the default or to pay off the senior lien and become subrogated to the rights of the senior lien holder.

Purchasers who pay liens on a property can also be granted subrogation rights.  An assignee of a mortgage cannot obtain subrogation rights for amounts advanced to pay off a second mortgage.  This is because there is no relation between principal and surety, or guarantor, or other relation between the parties to give rise to such a right.  However, subrogation does not apply to a purchaser who buys a property without prior knowledge about a lien[viii].

[i] Ohmer v. Boyer, 89 Ala. 273 (Ala. 1889)

[ii] Merchants’ Ins. Co. v. Herber, 68 Minn. 420 (Minn. 1897)

[iii] Gower v. State Tax Com., 207 Ore. 288 (Or. 1956)

[iv] Hicks v. Londre, 125 P.3d 452 (Colo. 2005)

[v] Wells Fargo Bank, N.A. v. Nat’l Lumber Co., 76 Mass. App. Ct. 1 (Mass. App. Ct. 2009)

[vi] Stroh v. O’Hearn, 176 Mich. 164 (Mich. 1913)

[vii] Texas Commerce Bank Nat’l Asso. v. Liberty Bank, 540 S.W.2d 554 (Tex. Civ. App. Houston 14th Dist. 1976)

[viii] Taxel v. Chase Manhattan Bank (In re Deuel), 361 B.R. 509 (B.A.P. 9th Cir. 2006)

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