Opinion ID: 852250
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Heading: The Scope of Equitable SubrogationForeclosure, Interest, and Attorney Fees

Text: The nature of equitable subrogation is, as its name indicates, equity. The doctrine substitutes one who fully performs the obligation of another, secured by a mortgage, for the owner of the obligation and the mortgage to the extent necessary to prevent unjust enrichment. Restatement (Third) of Property § 7.6(a) (1997); see Bank of New York v. Nally, 820 N.E.2d 644, 653 (Ind.2005). This avoids an inequitable application of the general principle that priority in time gives a lien priority in right. See Jones v. Rhoads, 74 Ind. 510, 513 (1881). In considering whether to order subrogation and thus bypass the general principle of priority, courts base their decisions on the equities, particularly the avoidance of windfalls and the absence of any prejudice to the interests of junior lienholders. Nally, 820 N.E.2d at 653. As noted above, during the earlier stages of this litigation, the trial court ordered that the Neus and their lender be subrogated to the extent of the Irwin mortgage, and the Court of Appeals affirmed. There is no request to reconsider that determination, so we proceed by accepting it as the law of the case. Moving forward from that earlier determination about priority, the Neus assert that their status as equitable subrogees to the Irwin mortgage necessarily entitles them to foreclosure, interest, and attorney fees. Generally, they maintain that Irwin would be entitled to these remedies and that they are entitled to all of Irwin's rights under the previous mortgage. (Appellants' Br. at 6.) The Neus point to Nally for the proposition that a party entitled to equitable subrogation obtains all rights and remedies available to the prior lender. (Appellants' Br. at 7-8.) Nally involved a couple who purchased a home financed with two mortgages, one of these with a bank and the other with the sellers. 820 N.E.2d at 647. Although the sellers' mortgage expressly stated it was subordinate to the bank's, it was recorded before the bank's mortgage and the deed. Id. The husband, now single, subsequently refinanced with a second bank, which assigned the mortgage to Bank of New York. Id. Bank of New York did not have actual knowledge of the sellers' mortgage, relying on its assignor's title insurance instead of conducting a title search. Id. When the bank sought to foreclose its mortgage, the sellers intervened and asserted priority. Id. After concluding that the bank had at least constructive notice, we held that it stood in the shoes of the original bank's mortgage and therefore had priority over the sellers, but only to the extent the refinancing proceeds were used to pay off the first lien. Id. at 651-52, 654. This avoided prejudice to the sellers as junior lienholders. Id. at 654. The lending bank in Nally paid off the original lender, and then some (adding enough so the homeowner could pay off a few other debts). We declared that permitting the new lender subrogation to the position of the original lender (at least to the extent the new loan paid off the old one) was equitable because that lender expects to receive the same security as the loan being paid off. Id. at 653. Moreover, the junior lienholder is not typically disadvantaged by a transaction like the one in Nally, where the first position was essentially swapped between one lender and another. Nowhere in Nally did we state that equitable subrogation always entitles every subrogee to all of the rights its subrogor possessed. On the contrary, we emphasized that [t]he key to subrogation is an equitable result. Id. at 655. Nor did we maintain that every party entitled to equitable subrogation is entitled to all of the rights the bank held. As the maxim goes, equity supplies what equity demands. We thus consider each right the Neus assert in turn. A. Foreclosure. As noted above, the Irwin mortgage included terms stating that Nowak would be in default if any action begins that might result in a material impairment of Irwin's interest. The Neus assert that Gibson's action endangers their interest in the property. They have also declared Nowak in default and given him notice, and thus claim that they have the right to foreclose on their home under the terms of the Irwin mortgage. The Neus seek to obtain foreclosure on their own home in order to force a sheriff's sale. At that sale, they hope to bid successfully for the property, using their lien amount as credit, or at least to recover the lien amount. They argue that by denying foreclosure the court denied them the right, universally enjoyed by mortgage holders, to `credit bid' up to the amount of their judgment, without which they are at the mercy of third party bidders who could successfully bid a minimal amount the Neus would have to accept. (Appellants' Br. at 9-10.) Equitable subrogation does not resurrect every clause for the Neus to enforce. Nowak's obligations under the Irwin mortgage ended when the Neus satisfied the Irwin debt and the mortgage was discharged. Therefore, the Borrower to whom the mortgage refers no longer has any responsibility under that document. No party can possibly foreclose under the terms of the Irwin mortgage any longer. On the other hand, Nowak still has obligations under the Gibson mortgage and under the representations he made to the Neus at closing. It is not clear why the Neus' position would be so disadvantageous should Gibson request a sheriff's sale. Their lien would still have the first priority, and a sheriff's sale would not change that. Nothing precludes them from bidding the amount of that lien against other bidders. B. Interest. The Neus next argue they are entitled to interest at the rate provided for in the Irwin mortgage because a party obtaining a lien through equitable subrogation is unquestionably entitled to interest. (Appellants' Br. at 11.) They argue that Nally supports this because in that case we held that the bank was entitled to interest up to the maximum rate provided for in the subrogated mortgage. ( Id. (citing 820 N.E.2d at 654).) They also cite a handful of cases from other states in which the subrogee was entitled to interest, such as Harper v. Ely, 70 Ill. 581 (1873). (Appellants' Br. at 11-12.) Additionally, we note that in Braden v. Graves, 85 Ind. 92 (1882), we held that the subrogee was entitled to interest at the rate of the liens he purchased. Braden involved determining the rights of the landowner and a lienholder. Id. at 92. Braden, the landowner, had acquired the deed by paying off two judgment liens against the sellers. Id. at 92-93. Prior to his purchase but after the judgments were entered, the sellers had executed a mortgage to Graves. Id. at 92. When one of the sellers died, Graves sued to foreclose. Id. at 93. Braden maintained that he did not have actual or constructive knowledge of the Graves mortgage because it was not properly recorded. Id. at 96. After determining that Braden was subrogated to the two liens he purchased, this Court reversed the trial court's ruling and held that Braden was entitled to interest based on the rates provided by each respective lien. Id. Interest at these rates was therefore added to Braden's prior lien at the sale of the land at stake. Id. at 98. In Harper the current owner, Ely, had bought the property and the mortgage after the original owner's mortgagee and caretaker had allowed the property to lose rental income to force the mortgagor into default. Harper v. Ely, 56 Ill. 179, 185 (1870). The mortgagee foreclosed and sent his nephew to the foreclosure sale to buy the property and the debt. Id. at 191-92. The court determined the sale was a sham. Id. 56 Ill. at 191-93, 196. In the meantime, the owner had sold the property to Harper. Id. at 184. After concluding that Ely was the subrogee to the original mortgagee but should have known the questionable nature of his title, the court required him to surrender the land. Harper, 70 Ill. at 582-83. Harper could not take the property, however, until he paid off a lien in Ely's favor that included rents earned, liens discharged, taxes, insurance costs, and, notably, interest at the rate provided by the subrogated liens. Id. at 582-83, 585-86. Both these cases and Nally appear to be representative. See Annotation, Scope and extent of subrogation in favor of one entitled to be subrogated to mortgage lien, 107 A.L.R. 785, 787-90 (1937). As seems apparent from these recitations, however, there are multiple factual differences between each of the three foregoing cases and the one before us now. And in a court of equity, differences in fact do matter in deciding the outcome. To take the most recent of the three, Nally, it mattered that the new mortgagee had more or less swapped places with the original lender during what we characterized as a conventional refinancing in which it was appropriate that the new lender receive the same security as the loan being paid off. Nally, 820 N.E.2d at 653. In the present case, the Neus and their lender have shaped a rather different set of relationships. The new lender, whose loan reflected only a fraction of the loan paid off at closure, stands in a wholly satisfactory position as a result of the trial court's earlier decision that it and the Neus stand ahead of Gibson in order of priority. Wells Fargo will presumably receive the interest its predecessor bargained for, and it stands fairly secure from market risks relating to real estate value. The Neus positioned themselves to be rather different from the lender they helped pay off at closing. They were not simply swappers of debt; they were people who anticipated exposing themselves to both market risk and market reward. Their present dilemma flows from their reliance on the services and insurance arranged by Investors Titlecorp. The trial court's earlier ruling giving them priority ahead of Gibson seems like a substantial step of equity that largely rescued them from the calamity that might have otherwise befallen them (namely, ending up in line behind Gibson). All in all, the question is whether the trial court worked an inequitable result when it declined to go beyond its earlier order on priority by awarding interest to Wells Fargo and the Neus (to the further disadvantage of the now-junior, innocent lienholder Gibson). We conclude that the court acted equitably. C. Attorney Fees. The Neus also argue that they are entitled to attorney fees and costs. (Appellants' Br. at 13.) The Irwin mortgage calls for Nowak to pay for the expenses Irwin would have incurred had Nowak defaulted. The Irwin mortgage cannot be said to be in default, so it cannot be the reason they are entitled to fees and costs. Furthermore, the equities weigh against the Neus recovering fees for the same reasons they weigh against them recovering interest. For these reasons, the Neus are not entitled to attorney fees.