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EQUITABLE SUBROGATION

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  • stonekutteral
    What is the Doctrine of EQUITABLE SUBROGATION and why should I care? Equitable What? If you regularly practice in the realm of mortgages and liens, you may be
    Message 1 of 1 , Aug 11 10:33 PM
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      What is the Doctrine of EQUITABLE SUBROGATION and why should I care?
      Equitable What? If you regularly practice in the realm of mortgages and
      liens, you may be familiar with this concept. (If you work for a title
      company, you’ve likely had to rely on it in the past.) If this is the
      case and you are intimately familiar with this doctrine and its effect
      on intervening liens, you may want to move along—you won’t learn
      anything new here. If you practice in these areas or regularly record
      liens for judgments or materialman’s liens and are unfamiliar with the
      concept, this might be worth a quick scan just so you know it’s out
      there.

      What is Equitable Subrogation? “Subrogation” is defined as the
      substitution of one party for another whose debt the party pays,
      entitling the paying party to the rights, remedies, or securities that
      would otherwise belong to the debtor.1 This concept appears in many
      areas of the law, commonly with insurance policies, but is also
      applicable to the law of mortgages. “Conventional (as opposed to
      Equitable) Subrogation” is a substitution that arises by contract or
      agreement of the parties. “Equitable Subrogation,” on the other hand,
      involves the substitution of one mortgageholder into the place of a
      prior mortgageholder, and arises by the operation
      of law or equity to prevent a fraud or injustice.

      When might it come into play?Equitable Subrogation arises in the case
      where a bank or other lender advances money to discharge an existing
      lien or mortgage and takes a new lien for his own security, expecting
      to obtain the same priority position as the discharged lien. In the
      situation where there exists only a first mortgage at the time these
      funds are advanced, or if there is a first and second mortgage and the
      second agrees to subordinate, there is no issue and no need for
      concern. The problem arises when the lender is unaware of an
      intervening lien that prevents the new mortgage from obtaining the
      first position it intended to occupy. This “intervening lien” could be
      a judgment lien, materialman’s lien, or even a second mortgage and can
      cause significant problems for the new mortgageholder, especially if
      the lienholder seeks to foreclose or execute upon its lien.

      What are the requirements for effectively implementing this doctrine?
      In order to take advantage of the doctrine of Equitable Subrogation, a
      party must typically show that: 1. they advanced money to extinguish
      the prior encumbrance (many jurisdictions require it be completely
      extinguished); 2. they expected to obtain a position equal to that of
      the discharged lien; 3. they had no knowledge of the intervening lien
      at the time of recording; and 4. that application of this doctrine
      would not work an injustice or unduly burden the holder of the
      intervening lien.2 It is typically the case that the intervening
      lienholder is in no worse position after the subrogation than they were
      before the first mortgage was paid off, and took no action in reliance
      upon the satisfaction.

      The most important of these requirements is typically that the party
      had no actual knowledge of the intervening lien. Mere constructive
      notice of the intervening lien arising from the recordation is
      typically not sufficient to defeat Equitable Subrogation. Willful
      ignorance or culpable negligence (such as when the lender failed to
      take any action to search title), often are sufficient to defeat it.
      The party seeking subrogation typically bears the burden of proving
      their lack of actual knowledge. Once shown, the burden then shifts to
      the opposing party to show the party’s ignorance resulted from culpable
      negligence.

      Is this something I can use to protect my client’s interest? Equitable
      Subrogation may be something you can use in representing a lender who
      advanced funds to pay off a first mortgage, recorded its own mortgage
      expecting it to now be in first position (but without an express
      agreement or assignment from the first mortgageholder), and is now
      shocked to find out that an intervening lien has “jumped ahead” of
      their mortgage. In order to take advantage of this doctrine, the
      intervening lien must have been recorded after the first mortgage was
      recorded but before it was satisfied or released and the new mortgage
      was recorded. Your client may be reassured to learn that they may take
      advantage of this even if there was an error with their title search
      which should have detected the intervening lien or the closing agent
      overlooked the lien at closing.

      Is it something that might be used against my client?
      The doctrine of Equitable Subrogation could definitely be used against
      your client if you represent the holder of a judgment lien, materialman
      or mechanic’s lien, or even a second mortgageholder who recorded their
      lien knowing they would have to deal with a first mortgageholder in the
      event of default, and has now found themselves in the
      catbird seat and does not relinquish this position. The justification
      for putting the intervening lien “back in its proper place” is that the
      lienholder would otherwise be unjustly enriched or obtain a “windfall”
      to the detriment of the party that put them in this position by paying
      off the first mortgage.

      Be aware that the party seeking subrogation will be required to meet
      each and every requirement of enforcing the doctrine in your
      jurisdiction. Thus, you may not want to roll over if you don’t believe
      each element has been met. Also, keep in mind that this doctrine may
      not be allowed to relegate your client’s lien if you can show your
      client acted to their detriment in reliance on their newfound position.
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