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Friday, June 7, 2019

Equitable Subrogation (mortgages)

Equitable subrogation in the context of mortgages doesn't show up with much frequency on the MBE but it's given very little focus in many of the outlines even though it does show up on the exam.

When a lender advances funds used to satisfy a senior mortgage, the doctrine of equitable subrogation allows the lender to "step into the shoes" of the senior mortgagee. The significance here is that it will allow the lender to obtain priority over all interests that were junior to the senior mortgagee.

Some jurisdictions (the majority view) take the view that a lender will not take priority over liens that were junior to the senior mortgage if the lender had actual knowledge of those liens at the time that payment was made. The minority view is that either actual or constructive knowledge of the junior liens is sufficient to avoid application of the doctrine. The Restatement (Third) of Property, in contrast, treats notice or knowledge of the other liens as irrelevant, instead stating that the determining factor is simply whether the lender satisfied the senior lien and whether application of the doctrine will prevent unjust enrichment. The rationale here is that because the lender is merely taking the place of the senior mortgagee, the junior mortgagees are in no worse position than they would have been in had the doctrine not applied to give the lender that priority over them.

It's enough for purposes of the MBE to recognize that this doctrine exists and to understand how it can grant priority to a lender who pays off the debt owed to a senior mortgagee. And because it's an equitable doctrine, equitable defenses such an unclean hands and laches should always be considered.

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