Opinion ID: 5563
Heading Depth: 2
Heading Rank: 2

Heading: texas subrogation law

Text: was delivered upon payment of the money. Texas recognizes two types of subrogation: conventional subrogation and legal subrogation. Fleetwood v. Med Center Bank, 786 S.W.2d 550, 554 (Tex.App.—Austin 1990, writ denied). Conventional subrogation generally depends on an agreement between the parties, while legal subrogation, which courts often call equitable subrogation, is controlled by the principles of equity. Dietrich claims equitable subrogation, which traditionally receives favorable treatment in Texas. See id. There are several situations in which equitable subrogation might arise. See generally Grant S. Nelson & Dale A. Whitman, REAL ESTATE FINANCE LAW §§ 10.1-10.7 (2d ed. 1985). We are concerned with the application of the equitable subrogation doctrine to purchasers of encumbered property.
In Texas, any person who pays the debt of another to protect her own interest in property is entitled to subrogate to the rights of the creditor whose claim was paid. Fears v. Albea, 69 Tex. 437, 6 S.W. 286, 289 (1887); McDermott v. Steck Co., 138 S.W.2d 1106, 1109 (Tex.Civ.App.—Austin 1940, writ ref'd). This rule extends to purchasers who pay an existing mortgage debt as a part of the purchase transaction. See First Nat'l Bank of Houston v. Ackerman, 70 Tex. 315, 8 S.W. 45, 47 (1888); Fears, 6 S.W. at 288-89. In these cases, courts consider the purchaser/payor an equitable assignee of the lienholder (or mortgagee), and permit the purchaser/payor to keep the lien alive and enforce the lien for her own benefit. See Fears, 6 S.W. at 289. The equitable assignment is a legal fiction which does not depend on the parties' intent to keep the lien alive. Nor is the equitable assignment affected by the doctrine of merger-of-title, which in certain situations calls for the lien to merge into the title. Thus, equitable subrogation permits a purchaser to hold an equitable lien on the purchaser's own property. Several Texas courts have stated a companion rule: a purchaser who assumes payment of a mortgage as part of the purchase price, and thus becomes the principal and primary debtor, is not entitled to subrogate to the rights of the lienholder. See, e.g., Harrison v. First Nat'l Bank of Lewisville, 238 S.W. 209, 210 (Tex.Comm'n App.1922, judgm't adopted); Cheswick v. Weaver, 280 S.W.2d 942, 944 (Tex.Civ.App.—Beaumont 1955, writ ref'd n.r.e.); McDermott, 138 S.W.2d at 1109; see also 3 John Norton Pomeroy, EQUITY JURISPRUDENCE § 1213 (5th ed. 1941) (equitable subrogation should not occur when a purchaser has assumed payment of the mortgage debt and ... rendered himself the principal and primary debtor therefor). However, some Texas courts have permitted subrogation in situations where the purchaser has assumed payment of a prior mortgage. See, e.g., Murphy v. Smith, 50 S.W. 1040, 1042 (Tex.Civ.App.—1899, no writ); Davis v. John V. Farwell Co., 49 S.W. 656, 658 (Tex.Civ.App.—1899, no writ); see also Nelson & Whitman, REAL ESTATE FINANCE LAW § 10.7 (arguing that a purchaser who assumes payment of a lien and later pays it should be subrogated to the position of the discharged lien). Because Dietrich did not assume AAI's debt , we need not decide whether Texas law permits a purchaser who assumes a debt to subrogate once that purchaser has paid the assumed mortgage. However, at least one Texas court has applied the prior version of the rule concerning assumptions to purchasers who, instead of assuming the mortgage, discharged the debt as part of the agreed purchase price. See McDowell v. M.T. Jones Lumber Co., 42 Tex.Civ.App. 260, 93 S.W. 476, 476-77 (1906, no writ). The government argues that this case is controlled by McDowell. In McDowell, as here, the seller and purchaser agreed that the purchase price would be used to pay t he seller's debt and extinguish the accompanying lien, which was a superior lien. The purchaser, unaware of the existence of a recorded junior lien, believed he was taking the land free of all encumbrances. Sometime after the purchaser bought the property, the junior lienholder sought to foreclose its lien. Relying on the rule that purchasers who assume mortgages may not subrogate, the court of appeals refused to allow the purchaser to subrogate to the rights of the senior lienholder. If McDowell represents Texas law, Dietrich is not entitled to subrogation. But we believe that McDowell contravenes the Texas Supreme Court's decisions in Fears and Ackerman. In Fears, the land in question was encumbered by a first and a second lien. The seller and purchaser agreed that the sale proceeds would be used to pay the first mortgage, which was later released. Unaware of the junior lien, the purchaser expected the land to be free of all liens. The Texas Supreme Court concluded that the purchaser's payment of the senior lien entitled the purchaser to subrogate to the superior rights of the senior lienholder. Fears, 6 S.W. at 289-90. In Ackerman, the Texas Supreme Court similarly held that a purchaser who applies the agreed purchase price to release a senior lien is entitled to subrogate to the position of the senior lienholder. Ackerman, 8 S.W. at 45, 47. The Texas Supreme Court's decisions in Fears and Ackerman control our decision here. The McDowell court might have been correct in stating the rule that a purchaser who assumes a mortgage is not thereafter entitled to subrogation. In fact, McDowell is often cited for such a rule. See, e.g., Cheswick, 280 S.W.2d at 944; 68 TEX.JUR.3d Subrogation § 25, at 69 & n. 34 (1989). Nevertheless, we believe that the McDowell court ignored the Fears and Ackerman decisions in applying such a rule to a purchaser who, instead of assuming the senior debt, simply discharged the debt as part of the agreed purchase price. Based on Fears and Ackerman, Dietrich is entitled to subrogate to Broadlands's position as senior lienholder. The government proffers two additional arguments in support of its position that equitable subrogation does not control this case.
The government contends that Dietrich is not entitled to equitable subrogation because Dietrich had constructive knowledge of the tax liens and was negligent in failing to discover the liens. In some jurisdictions constructive knowledge bars a subrogation claim, see, e.g., Hieber v. Florida Nat'l Bank, 522 So.2d 878 (Fla.App. 3d Dist.), pet. for review denied, 534 So.2d 399 (Fla.1988), but, in Texas, a purchaser with constructive knowledge of the junior lien is not precluded from asserting equitable subrogation. In Fears, the Texas Supreme Court applied the equitable subrogation doctrine even though the purchaser had constructive knowledge of the junior lien. See Fears, 6 S.W. at 288, 292; see also Sanger Bros. v. Ely & Walker Dry Goods Co., 207 S.W. 348, 349 (Tex.Civ.App.—Fort Worth 1918, writ ref'd); McDermott, 138 S.W.2d at 1107. The government has cited no Texas authority for the proposition that a purchaser with constructive knowledge is precluded from seeking equitable subrogation.2 2 The IRS relies on Providence Institution for Savings v. Sims, 441 S.W.2d 516 (Tex.1969), in which the Texas Supreme Court noted that [n]egligence on the part of one seeking subrogation is of some importance when the right is wholly dependent upon equitable principles. Id. at 519.
As a general rule, a person is not entitled to subrogate to the rights of a creditor until the creditor's claim against the debtor has been satisfied or paid in full. Sims, 441 S.W.2d at 519; Ricketts v. Alliance Life Ins. Co., 135 S.W.2d 725, 735 (Tex.Civ.App.—Amarillo 1939, writ dism'd judgmt cor.). Here, Dietrich did not pay the full amount of the debt which AAI owed Broadlands. Broadlands, however, agreed to release its lien in consideration of the partial payment. The government argues that Dietrich's failure to pay the entire debt prevents it from subrogating to the rights of Broadlands. We disagree. This general rule requiring payment of the entire debt protects the senior lienholder whose rights are being subrogated (i.e., Broadlands). Sims, 441 S.W.2d at 519. The rationale behind the rule is that equitable subrogation should not prejudice the senior lienholder's attempt to collect the entire indebtedness secured by the senior lien. See id.; Ricketts, 135 S.W.2d at 735. The fact that Dietrich has not paid the entire indebt edness is not a matter about which the government, as a junior lienholder, can complain. See Hurt v. Read, 108 F.2d 282, 283 (5th Cir.1939). Moreover, Broadlands's rights will not be prejudiced by Dietrich's subrogation because Broadlands agreed to release its entire lien in exchange for partial payment of the debt.