Fix Real Estate Problems With Equitable Subrogation
Real estate transactions may be very simple or incredibly complex. Further complicating the already intricate process of purchases and sales, creations of subdivisions and problems of zoning is the reality that almost every real estate transaction involves some degree of credit financing. Whether on the commercial side or the consumer side, the financing for even the simplest modern real estate transaction is burdened by detailed documentation that almost always involves hundreds of pages of dense verbiage and tiny fonts. In the rush to close these deals, humans make mistakes.
In refinance transactions, common mistakes may include listing the wrong legal description for the collateral; a defective release of the prior mortgage or deed of trust; or recording late, out of sequence or in the wrong jurisdiction. When a refinancing lender pays an existing lien but makes a mistake that could cost that lender important priority in the real estate, that lender may frequently rely upon the remedy of equitable subrogation to save itself from a total loss.
What is subrogation?
Subrogation is a doctrine well known in the insurance world where payment of the claims of another is common. In many instances, after paying on a claim an insurance company will step into the shoes of its insured in order to assert rights against the person or entity that caused the damage to the insured. The insurance company becomes the subrogor and is entitled to all of the rights of its customer who has been paid and may have no longer any interest in pursuing the person who has damaged them.
Similarly, in a real estate refinance transaction a new lender is paying an existing lender. The refinance may occur for many reasons, including to lower the interest rate, cure a default or pull more cash out of the real estate. What’s supposed to happen: the new lender pays the prior lien, the new lender records a mortgage and the paid lender records a release.
But sometimes mistakes happen.
If the sequence doesn’t go the proper way but the new lender pays off the old lien the new lender may invoke the remedy of equitable subrogation to try and set things right. This subrogation is equitable because even if the new lender made a mistake, it would be fair for all the affected parties for the new lender to step into the shoes of lender that had been paid off. This way, the new lender will enjoy all of the rights that were held in the released lien, at least to the extent that the old lender had been paid.
The new lender will have to file a complaint in a court that has jurisdiction over the property in order to obtain the right of equitable subrogation. The parties should expect to have a contested lawsuit, usually between the new lender (or their title insurance company) and some other person with an interest in the property, whether a subsequent lienor or judgment creditor.
The new lender may not prevail in the lawsuit if an intervening equity would be harmed by allowing equitable subrogation. This may happen if another lienholder or property owner would be unfairly affected by the subrogation. Courts will view these disputes on a case by case basis. However, since the facts are usually well known to all parties and not in significant dispute, the courts can generally resolve the issues on motions for summary judgment.
Lenders who are faced with sudden or unexpected priority or recording issues should always consider the remedy of equitable subrogation as a possible solution to their problem.