Opinion ID: 2571489
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Heading: The History of Equitable Subrogation

Text: ¶ 24 The rule requiring a subrogee have no knowledge of intervening interests is left over from an early mistrust of equitable subordination and was borrowed from courts applying subrogation as a restitution remedy. We abandon this rule since this early mistrust has abated, and we are concerned with refinancing mortgages, not restitution. ¶ 25 Courts have been divided in their application of equitable subrogation since its adoption in the 1800s. See Martin, 59 P.2d at 1142-44 (examining numerous equitable subrogation cases and classifying them into a traditional view and a modern view, depending on the plaintiff's knowledge). [10] A 1924 Georgia Supreme Court opinion illustrates this mistrust: This court has denied that subrogation is a benevolent doctrine, and that equity will apply it in any case which justice required, and this court has refused to follow the cases which were based on this theory of the doctrine of subrogation. Citizens' Mercantile Co. v. Easom, 158 Ga. 604, 123 S.E. 883, 886 (1924); see also Kitchell v. Mudgett, 37 Mich. 81, 86 (1877) (But the question whether or not it is equitable is altogether dependent on whether Mrs. Mudgett has consented to waive her priority. . . . If [Mrs. Mitchell] did not intend to take a second mortgage, and would have refused to do so had all the facts been known to her, then the fault is her own.). The District of Columbia Court of Appeals also recognized [s]ome courts in this country have limited the doctrine rather strictly but some jurisdictions applied a more liberal application of the doctrine, said by some authorities to be applicable to almost all cases in which one person, not a volunteer, pays an obligation which in justice and good conscience ought to have been paid by another. Burgoon, 92 F.2d at 729. The Burgoon court looked to federal cases with approval and followed the latter approach. Id. at 734 (`In applying the doctrine of subrogation, no attention should be paid to technicalities which are not of an insuperable character, but the broad equities should always be sought out so far as possible.') (internal quotation marks omitted) (quoting Barnes v. Cady, 232 F. 318, 325 (6th Cir.1916)). ¶ 26 In their early mistrust of the doctrine, courts would not allow any lender with either actual or constructive knowledge to seek equitable subrogation. Most courts, however, realized it was senseless to adhere to this strict interpretation in many situations. Nevertheless, acceptance was incremental. And while many courts were quick to allow equitable subrogation for a plaintiff with constructive notice, some continued to deny those with actual knowledge. ¶ 27 As this incremental change persisted, many jurisdictions have adopted the Restatement approach. In E. Boston Sav. Bank, 701 N.E.2d at 335, the court, after reviewing the three possible applications, said: We are persuaded by the reasoning of courts that not only allow subrogation where the subrogee has actual or constructive knowledge of the intervening mortgage, but also look to equity to decide if subrogation is inappropriate. In Bank of N.Y. v. Nally, 820 N.E.2d 644 (Ind.2005) the court accepted the Restatement's reasoning and said: Precluding equitable subrogation when a mortgagee discovered or could have discovered a junior lien holder runs contrary to the purposes underlying the doctrine. Equitable subrogation is a remedy to avoid an unearned windfall. . . . . We agree with the Restatement at least in the context of a conventional refinancing. A lender providing funds to pay off an existing mortgage expects to receive the same security as the loan being paid off. Refinancings are common place in today's economy. Permitting a junior lienholder to leapfrog the priority of the current senior mortgage would impair the owner's access to more favorable interest rates. Unless a junior lienholder is disadvantaged by permitted subrogation, we see no reason to give the junior lienholder in effect the right to block or object to the refinancing. Id. at 653; see also Bank of Am. Fed. Sav., 78 P.3d at 74 (Because the Restatement approach is the most persuasive, we adopt the view expressed by it.); Lamb Excavation, Inc. v. Chase Manhattan Mortgage Corp., 208 Ariz. 478, 95 P.3d 542 (2004); Wilkins v. Gibson, 113 Ga. 31, 38 S.E. 374 (1901); Klotz v. Klotz, 440 N.W.2d 406 (Iowa Ct.App.1989); Burney, 63 S.W.3d 223; Providence Inst. for Sav. v. Sims, 441 S.W.2d 516 (Tex.1969); Farm Credit Bank v. Ogden, 886 S.W.2d 305 (Tex.App.1994); Chicago Title Ins. Co. v. Lawrence Invs., Inc., 782 S.W.2d 332 (Tex.App.1989); see also Trus Joist Corp., 190 N.J.Super. 168, 462 A.2d 603 (allowing subrogation even when the new mortgagee knew of the intervening interests), rev'd sub nom., Trus Joist Corp. v. Treetop Assocs., 97 N.J. 22, 477 A.2d 817 (1984); Martin, 59 P.2d at 1142-44; Hudson v. Dismukes, 77 Va. 242, 246-47 (1883). [11] This trend is clearly toward the more liberal approach, and we would be wise to follow it. ¶ 28 Jurisdictions that continue to deny equitable subrogation when the plaintiff knows of intervening interests rely on cases discussing subrogation in the context of a mistake. Subrogation applies in many contexts, and while the overall purpose of preventing unjust enrichment is the same, many times the requirements will be tailored to the particular nuances of the situation. [12] Restitution is one such context. When a lender paid off another's debt mistakenly believing there were no intervening interests, he would then have to appeal for equitable relief. [13] Dicta stating a party cannot have knowledge of junior interests was in the context of ensuring there had been a genuine mistake. In a Maryland case, the court recited the following requirements for subrogation: First, the lienholder seeking equitable subrogation must have taken the later lien without knowledge of the intervening lien and have intended the later lien to be of the same priority as the lien it replaced. Second, the negligence vel non of the lienholder requesting equitable subrogation in not discovering the intervening lien is not relevant, unless the intervening lienholder can show detrimental reliance. Levenson v. G.E. Capital Mortgage Servs., Inc., 101 Md.App. 122, 131-32, 643 A.2d 505, 509-10 (1994) (citation omitted) (discussing Bennett v. Westfall, 186 Md. 148, 46 A.2d 358 (1946)), rev'd on other grounds, 338 Md. 227, 657 A.2d 1170 (1995). In Bennett, a lienholder released a prior mortgage and obtained a new mortgage against the debtor. In the interim, Bennett obtained a judgment against the debtor. Westfall, the lienholder, never discovered this judgment. Despite his carelessness, Westfall had intended to retain the same priority, and the court said he was entitled to equitable subrogation. But the court had to find Westfall had no knowledge of the intervening lien  otherwise his mistake argument necessarily fails and he could not seek restitution. [14] ¶ 29 But in the context of refinancing, where mistake is not at issue, there is no reason to consider the subrogree's knowledge. [15] In Levenson, G.E., a refinancing mortgagee, discovered intervening judgment liens before it began foreclosure proceedings against the property. The Maryland appeals court held G.E. Capital was entitled to equitable subrogation and extended it beyond Bennett to include refinancing mortgagees: [T]he weight of authority extends the application of the doctrine of equitable subrogation to situations in which the initial and refinancing lenders are not the same, provided the refinancing lender's money is intended to be used, and is used, to eliminate a specific encumbrance, and the refinancing lender intended to get as security for his loan either the land free and clear of the encumbrance or else the benefit of the encumbrance itself rather than rely upon the general creditor of the mortgagor. . . . We believe that such an extension is appropriate in view of modern lending practices, and we hold that the trial court did not abuse its discretion in holding that G.E. was entitled to be equitably subrogated to the First Federal lien. Levenson, 101 Md.App. at 132-33, 643 A.2d 505 (citations omitted). [16] Similarly, the law in New York is: where the funds of a mortgagee are used to satisfy the lien of an existing, known incumbrance [sic] when, unbeknown to the mortgagee, another lien on the property exists which is senior to his but junior to the one satisfied with his funds. King v. Pelkofski, 20 N.Y.2d 326, 333-34, 282 N.Y.S.2d 753, 229 N.E.2d 435, 439 (1967). But again this rule was made in the context of a mistake: subrogation erases the lender's mistake in failing to discover intervening liens, United States v. Baran, 996 F.2d 25, 29 (2d Cir.1993), and does not implicate all applications of equitable subrogation. [17] ¶ 30 Restatement (Third) § 7.3 further illustrates how knowledge of intervening interests is irrelevant in the context of refinancing mortgages. Section 7.3 concerns mortgages, but instead of a new lender refinancing a first mortgage, it pertains to lenders renegotiating the same mortgage. This is a common practice. RESTATEMENT (THIRD) § 7.3 cmt. a. The Restatement notes the similarities between §§ 7.6 and 7.3. Restatement (Third) § 7.6 cmt. e, at 519. ([Section 7.3] is analogous to subrogation, and under this Restatement the requirements are essentially similar to those for subrogation.). Both rules seek to protect the legitimate expectations of the holders of junior interests, while at the same time denying them the ability to veto workouts or other flexible restructuring arrangements between mortgagors and senior lenders. RESTATEMENT (Third) § 7.3 cmt. a. It is common sense that the same lender should not lose priority for renegotiating a mortgage with the debtor. Why should it be any different when a new lender renegotiates that same mortgage? As long as the junior interests are not materially prejudiced, then equitable subrogation maintains the proper priorities. ¶ 31 When we are dealing with refinancing, as opposed to mistakes, there is no reason to consider the subrogee's knowledge of intervening interests. Rather, subrogation's overall purpose as a doctrine `of equity and benevolence' should guide our reasoning: `its basis is the doing of complete, essential, and perfect justice between the parties, without regard to form, and its object is the prevention of injustice.' Prestridge, 132 Miss. at 176, 95 So. at 838 (quoting Robinson v. Sullivan, 102 Miss. 581, 59 So. 846 (1912)).