Opinion ID: 3005324
Heading Depth: 2
Heading Rank: 2

Heading: The Doctrine of Equitable Subrogation

Text: Equitable subrogation is a doctrine that “allows one who has discharged the debt of another to succeed to the rights of the satisfied creditor.”13 For example, if Creditor #3 pays off a debt owed to Creditor #1 by the same debtor, equitable subrogation would enable Creditor #3 to jump ahead of Creditor #2 in priority for repayment. The doctrine, which began in the English courts of equity as a way for a surety to seek repayment from a defaulting debtor,14 has been applied by the Delaware Court of Chancery for over a century.15 Under the Court of Chancery’s precedent, there are five elements necessary to 13 E. Sav. Bank, FSB, 55 A.3d at 351 (quoting Reserves Dev. LLC v. Severn Sav. Bank, FSB, 2007 WL 4054231, at  (Del. Ch. Nov. 9, 2007)) (internal quotations omitted). 14 Gregg H. Mosson, Comment, Equitable Subrogation in Maryland Mortgages and the Restatement of Property: A Historical Analysis for Contemporary Solutions, 41 U. BALT. L. REV. 709, 715 (2012). 15 See Miller v. Stout, 5 Del. Ch. 259, 261 (1878) (“When a surety or guarantor pays a debt of a principal, equity substitutes him in the place of a creditor, as a matter of course, without any special agreement to that effect.”). 8 establish a claim for equitable subrogation: (1) payment must have been made by the subrogee to protect his or her own interest; (2) the subrogee must not have acted as a volunteer; (3) the debt paid must have been one for which the subrogee was not primarily liable; (4) the entire debt must have been paid; and (5) subrogation must not work any injustice to the rights of others.16 As in other jurisdictions,17 the Court of Chancery has expanded its use of the doctrine beyond its narrow origins for other equitable reasons.18 No Delaware court, 16 Reserves Dev. LLC v. Severn Sav. Bank, FSB, 2007 WL 4054231, at  (Del. Ch. Nov. 9, 2007) aff’d, 961 A.2d 521 (Del. 2008). 17 See Mosson, supra note 14, at 717 (“By the end of the 1800s in America, subrogation had expanded to apply to refinancing lenders in some jurisdictions . . . . By the 1920s and 1930s, American subrogation covered various just claims by plaintiffs to stand in another’s shoes and seek repayment.”). The majority of states still do not permit those with actual notice of the pre-existing lien to move up in priority, and a minority of jurisdictions do not permit a party with either actual or constrictive (i.e., record) knowledge to be subrogated. 73 Am. Jur. 2d Subrogation § 58 (1974); see also Glenn R. McGillivray, What’s your priority?: Revitalizing Pennsylvania’s Approach to Equitable Subrogation of Mortgages After First Commonwealth Bank v. Heller, 58 VILL. L. REV. 301, 310 (2013). For two cases in which courts have rejected the broader application of equitable subrogation and adopted the minority view, see Wells Fargo Bank, Minn., N.S. v. Ky., Fin. & Admin., Dep’t of Revenue, 345 S.W.3d 800, 807-08 (Ky. 2011) (“[T]he Court observes that equity demands that sophisticated businesses, like professional mortgage lenders, should be held to a higher standard for purposes of determining whether the lender acted under a justifiable or excusable mistake of fact in failing to duly investigate prior liens. Equity also demands that the responsibility for a defective title examination be allocated to the party who is most culpable.”) (internal citations omitted); Countrywide Home Loans, Inc. v. First Nat’l Bank of Steamboat Springs, N.A., 144 P.3d 1224, 1230 (Wyo. 2006) (“Having considered our statute and the cases from other states in which courts have applied equitable subrogation in the context of mortgage re-financing, we decline to adopt the Restatement. Unlike the trend in other courts, we are not persuaded any manifest injustice results from applying the express language of [Wyoming’s recording statute] and adhering to the clear legislative intent that lien priority in Wyoming is to be determined by the date of recording.”). 18 See, e.g., E. States Petroleum Co. v. Universal Oil. Prods. Co., 44 A.2d 11, 15 (Del. Ch. 1945) (“Originally, that remedy might have been largely confined to cases involving the relation of principal and surety, but it now has a much broader application; and when right and justice demand it the tendency is to extend, rather than to restrict, its application.”). 9 however, has ever applied the doctrine to enable a mortgage lender who funds a homeowner’s refinancing to assume the position of the original lender. Nevertheless, the Appellant relies on two Court of Chancery cases to support its claim that the doctrine should be applied to the facts of this case. In Stoeckle v. Rosenheim, a case from 1913, there were three competing mortgages.19 Stoeckle, the second mortgage-holder, paid off the first mortgage, erroneously believing at the time that the third mortgage-holder’s mortgage had also been paid off in full. Based on the specific facts of the case, the Court of Chancery deemed Stoeckle’s mistake to be a reasonable one, and reinstated the first mortgage for the benefit of Stoeckle. The Court of Chancery also granted Stoeckle’s request for a preliminary injunction to stay the foreclosure proceedings brought by the third mortgage-holder.20 In that case, Stoeckle paid off the first mortgage in order to protect his interest in the second mortgage which he held. 25 Del. C. § 2106 was neither discussed nor implicated in the decision. More recently, in Oldham v. Taylor, the Court of Chancery applied the doctrine 19 Stoeckle v. Rosenheim, 87 A. 1006, 1007 (Del. Ch. 1913). 20 The Court of Chancery reasoned: [T]he overlooking by the complainants of the right to be subrogated to the rights of the first mortgagee, or to be treated as the equitable assignees of that mortgage, is to be considered in this court as analogous to, if not identical with, a mistake of fact, and, therefore, entitles the second mortgages to relief from the consequences of such a mistake. Id. at 1008. 10 of equitable subrogation to prevent unjust enrichment.21 In that case, three members of a family owned a property subject to two mortgages. Two of the family members, who together owned a one-half interest in the property, refinanced by paying off the two existing mortgages with the proceeds of a new loan without informing the third family member, Oldham.22 The two family members executed a note and a mortgage on the entire property (including Oldham’s one-half interest) in favor of the new lender, Associates Financial Services Company, Inc. (“AFS”). After Oldham learned what had happened, she filed an action in the Court of Chancery contending that the new mortgage was void and unenforceable against her, and sought to quiet title with regards to her one-half interest.23 The Court of Chancery determined that the AFS mortgage was unenforceable against the plaintiff, but that she was still liable to AFS or the defendants under the doctrine of equitable subrogation.24 The court found that it would unjustly enrich Oldham if she was not responsible for any portion of the mortgage debt, and accordingly required her to pay half of the balance of the two previous mortgages.25 21 2003 WL 21786217, at  (Del. Ch. Aug. 4, 2003). 22 Id. at . 23 Id. at -4. 24 Oldham, 2003 WL 21786217, at -5. 25 Id. at -5. “The basis for this argument is that under the doctrine of subrogation, Oldham’s liability to pay that previous mortgage debt was shifted from the prior mortgage lenders to [the new lender] when [it] paid those prior mortgage creditors off. That is, metaphorically speaking, [the new lender] stepped into the shoes of the former mortgage lenders, with the result that after the 11 The Court of Chancery observed that the plaintiff would have, “[o]therwise, . . . receive[d] an unearned windfall by being discharged from liability on the mortgage debts without having paid any consideration.”26 In reaching its conclusion, the court explained that “subrogation rights arise to prevent unjust enrichment of a party whose obligation is fully performed by another.”27 C. The Doctrine of Equitable Subrogation is Inapplicable Here Unlike Stoeckle and Oldham, there was no reasonable mistake or unjust enrichment in this case.28 Nor is there any other equitable reason as to why the refinancing, Oldham’s obligation to repay her share of the preexisting mortgages ran to [the new lender].” Id. at . 26 Id. at . The Oldham Court applied the doctrine of equitable subrogation to remedy a finding of unjust enrichment. Oldham, 2003 WL 21786217, at . “Unjust enrichment is the unjust retention of a benefit to the loss of another, or the retention of money or property of another against the fundamental principles of justice or equity and good conscience.” Nemec v. Shrader, 991 A.2d 1120, 1130 (Del. 2010) (quoting Fleer Corp. v. Topps Chewing Gum, Inc., 539 A.2d 1060, 1062 (Del. 1988)) (internal quotations omitted). 27 Oldham, 2003 WL 21786217, at . This case provides little support for the Appellant’s claim. As the Superior Court stated in its opinion, “[a]lthough the Oldham Court uses the language of equitable subrogation, the Court of Common Pleas considered the analogy to this matter before the Court, and determined that, conceptually, Oldham is better understood as relying on a more general theory of unjust enrichment.” E. Sav. Bank, FSB, 2014 WL 3827496, at . 28 In order to show unjust enrichment, there must be: “(1) an enrichment, (2) an impoverishment, (3) a relation between the enrichment and impoverishment, (4) the absence of justification, and (5) the absence of a remedy provided by law.” Nemec, 991 A.2d at 1130. Eastern Savings argues that the Superior Court’s judgment will unjustly enrich CACH at its expense. But there is no hardship to Eastern Savings, who presumably contracted with Global Title so that it would be protected in the event that the title search failed to turn up any missing liens. Because Eastern Savings obtained title insurance, it has an adequate legal remedy at its disposal: pursuing a claim against Global Title for the amount of the proceeds it pays to CACH. Cf. Wells Fargo Bank, Minn., N.A., 345 S.W.3d at 808 (“However, the Court presumes that both lending institutions involved in this case have viable claims against their respective title insurance companies. Those title insurers are engaged in the very profitable business of assuring that their lending institution customers receive a clear title by insuring 12 doctrine of equitable subrogation should be applied. Thus, the question becomes: should Delaware permit refinancing lenders to jump ahead in priority when the funds that they disburse are used to pay off pre-existing mortgages, absent any other equitable reason? We decline to extend the equitable doctrine’s reach to such circumstances. Equitable subrogation has never been used to undercut the authority of a Delaware statute without equitable cause. When, as here, there is no equitable reason to set aside the provisions of Delaware’s pure race recording statute, the rule of “first in time, first in right” governs the priority of the parties’ competing claims. CACH recorded its judgment lien eight days before Eastern Savings recorded its mortgage. If the mortgage had been timely recorded with a proper bring-down title search, the issue of the CACH lien would have been avoided, or revealed and addressed. Eastern Savings has an adequate legal remedy at its disposal:29 pursuing a claim against Global Title and/or the settlement agent for the amount of the proceeds it pays such. If the title insurer’s examiners bungle the title search, no matter how innocent the mistake might be, then the title insurers must ultimately be held liable.”); ABN AMRO Mortg. Grp. v. Kangah, 934 N.E.2d 924, 927 (Ohio 2010) (“ABN would not be seeking equitable subrogation but for someone’s negligence. That circumstance alone was enough to defeat equitable subrogation in Jones. Whether ABN or the title insurance company it employed was negligent is uncertain. If the title insurance company was negligent, ABN may have a claim against it for its loss, negating its need for equitable subrogation.”). 29 Chavin v. H. H. Rosin & Co., 246 A.2d 921, 922 (Del. 1968) (“It is, of course, axiomatic that Equity has no jurisdiction over a controversy for which there is a complete and adequate remedy at law.”) . 13 to CACH. We will not apply the doctrine of equitable subrogation to cure the failure of Eastern Savings’ title insurer or settlement agent to ensure that Eastern Savings’ was placed in a first lien position before completing the settlement process. Moreover, Delaware courts have refused to apply subrogation when it would “work any injustice to the rights of others.”30 Eastern Savings argues that CACH would not be disadvantaged because its lien was always behind the other mortgages and judgment liens that Eastern Savings’ funds paid to satisfy. But to say that CACH is in no worse of a position than it would have been had Johnson not entered into the refinance focuses only on CACH’s position in priority, and ignores the fact that Eastern Savings’ loan left Johnson further in debt than he was beforehand. Eastern Savings’ argument also ignores the fact that CACH did not bargain for its subordinate position. In other cases in which courts have applied the doctrine of equitable subrogation, the intervening lien-holder was another mortgage lender who had agreed when lending money to be third or fourth in priority.31 By contrast, here, CACH’s property lien was obtained as a result of a judgment from the Court of Common Pleas. It therefore never agreed to be subordinated to another mortgage 30 Reserves Dev. LLC, 2007 WL 4054231, at  (quoting 73 Am. Jur. 2d Subrogation § 5 (2007)). 31 See, e.g., Bank of America, N.A. v. Prestance Corp., 160 P.3d 17, 23-24 (Wash. 2007) (concluding that equitable subrogation should apply to prevent an unearned windfall to Bank of America, who had agreed to provide the borrower with a line of credit on a property that was already subject to another mortgage; it was the new lender’s understanding that Bank of America’s deed of trust would be reconveyed following the refinance and thus the new lender would be first in priority). 14 loan, and it therefore will not receive an “unearned windfall” if it is paid the amount of the judgment to which it is entitled by law.32