Equitable Subrogation in the Context of Interests in Real Property: the Basics and the Areas Needing Authoritative Clarification

JurisdictionConnecticut,United States
Publication year2021
CitationVol. 85 Pg. 231
Pages231
Connecticut Bar Journal
Volume 85.

85 CBJ 231. EQUITABLE SUBROGATION IN THE CONTEXT OF INTERESTS IN REAL PROPERTY: THE BASICS AND THE AREAS NEEDING AUTHORITATIVE CLARIFICATION

Connecticut Bar Journal
Volume 85, No. 3, Pg. 231
September 2011

EQUITABLE SUBROGATION IN THE CONTEXT OF INTERESTS IN REAL PROPERTY: THE BASICS AND THE AREAS NEEDING AUTHORITATIVE CLARIFICATION

By Henry C. Winiarski Jr.(fn*)

The Connecticut Supreme Court last addressed the doctrine of equitable subrogation in the context of interests in real property in 1966, affirming a trial court judgment in favor of the mortgagee that invoked it.(fn1) The Chapman decision continued a long line of Supreme Court precedent sustaining the use of the doctrine to undo mistakes made by mortgagees when closing new mortgage loans by resetting the priority of those mortgages vis-a-vis the interests of third parties who would otherwise have been unjustly enriched by the mistakes. Since then, the doctrine has been the subject of numerous decisions in the Appellate and Superior Courts, nearly all of which have denied its use.

This article explains the doctrine of equitable subrogation as it is used to adjust the priority of interests in real property and examines the significant, and often irreconcilable, divergence between existing Connecticut Supreme Court precedent on the doctrine and the manner in which it has been articulated and applied by the lower courts since the Supreme Court last addressed it nearly fifty years ago. Perhaps a case will make its way to the Supreme Court and the pronounced divergence will be explained and reconciled. At present, however, the doctrine has been interpreted by the lower courts in such a way that its continued viability and efficacy as an equitable remedy used to adjust priorities of interests in real property is in serious doubt.

I. The Doctrine of Equitable Subrogation

Subrogation, whether contractual or equitable,(fn2) is an equitable remedy or a contractual device which substitutes one party for another for a limited purpose; it allows a party to occupy a position, or enjoy a status, previously occupied or enjoyed by another and to hold or assert that position against another. Equitable subrogation is a remedy used to prevent an injustice, typically the unjust enrichment of the party against whom application of the remedy is sought. In the context of interests in real property, the doctrine of equitable subrogation is primarily applied to alter the priority of interests in real property by making a fictional substitution of one party for another in order to resurrect and maintain an order of priorities between or among various interests that previously existed but was unintentionally or unwittingly altered somehow, usually as the result of a mistake by an attorney or title searcher. In this sense, it is a remedy of restoration; it resets, or restores, an order of priorities by resurrecting an interest that had been extinguished and it accomplishes this by making a substitution of one party for another, specifically, by allowing a party taking a new interest in real property to assume the status or priority previously enjoyed by a party whose interest has been extinguished with the funds provided by the new party.

II. Existing Connecticut Supreme Court Precedent

A. The Common Fact Situation In Which The Doctrine Is Invoked

The concept of substituting the holder of a new interest for the holder of an old interest will be made very clear by an examination of several of the cases in which the doctrine was applied to alter the chain of priorities and adjust the record priority of interests. The common fact pattern in an equitable subrogation case, which most frequently arises in a mortgage refinancing situation, is the grant of a mortgage intended by the mortgagor and mortgagee to be a first mortgage but which, by reason of mistake or negligence or ignorance or fraud, never gains the first position that these parties intended it to have. The result of the faulty execution of the new transaction is that a previously junior mortgagee or lien holder gains a priority that it never had, and did not bargain or pay for, by reason of the application of the new mortgagee's funds to clear the title of interests to which the junior mortgagee or lien holder had previously been subordinate. Rather than gaining its intended, bargained and paid for first position, the new mortgagee ends up behind a previously junior interest. In these circumstances, the doctrine is used to take from the previously junior interest the record priority it mistakenly came to enjoy at the expense of the new mortgagee and restore that junior interest to its previously subordinate position in the chain of priorities. It establishes an exception to the general rule that priorities are determined by the principle that first in time is first in right.(fn3)

B. Home Owners' Loan Corp. v. Sears, Roebuck and Co.

In 1937, the Connecticut Supreme Court addressed the doctrine of equitable subrogation in the real property context in Home Owners' Loan Corp. v. Sears, Roebuck and Co.(fn4) This case is not the first one in which the Supreme Court addressed the doctrine, but it is a classic example of the application of the doctrine in the common fact situation in which it is most often invoked and contains an excellent, comprehensive exposition of the essential elements of the doctrine. The facts are as follows: An individual owned a piece of property on which he had granted three mortgages to various parties and on which taxes were delinquent. The value of the property was insufficient to satisfy all of the charges against it and the owner sought to refinance the various charges at a discount with the proceeds of a new mortgage that he would grant to the Home Owners' Loan Corporation. The deal worked out among the parties was that Home Owners' would make a mortgage loan to be secured by a first mortgage on the property and, after taxes were brought current, the holders of the other interests would either release their interests or release them and accept new mortgages subordinate to the one to be granted to Home Owners'. The owner of this property also owned another piece of property on which he had granted a mortgage to Sears, Roebuck and Co. While the owner was arranging for the new financing on the first property, Sears foreclosed its mortgage on the other property, claimed a deficiency judgment and, to secure that judgment, filed an attachment on the first property, at which point that property was subject to delinquent taxes, the three mortgages and, in last place, the Sears attachment. After Home Owners' closed its new loan, Sears proceeded to judgment and filed a judgment lien, which related back(fn5) to the date of its earlier attachment and thus had priority over the new mortgage granted to Home Owners'.

Prior to making its loan, Home Owners' had a title search done on the property, but the party who did the search did not discover, or report to it, the existence of the attachment in favor of Sears. Proceeding upon the understanding that the property was subject to delinquent taxes and the three mortgages, Home Owners' made its loan and the owner granted it what was intended and assumed by the parties to be a first mortgage. The taxes were paid and the three existing mortgagees released their mortgages. Of course, as no one was aware of the attachment, no provision was made for its release and the parties proceeded as though it were not there at all. As a result of proceeding upon incorrect information as to the condition of title, the release of the three existing mortgages had the effect of advancing the Sears interest from fourth to first place on the property and depriving Home Owners' of the first position it had bargained for.

When Home Owners' discovered the true condition of the title to the property and learned that it did not receive the first mortgage it had intended to, and for which it had bargained, it brought a declaratory judgment action to have its mortgage declared to be superior in priority to the Sears lien. The trial court entered judgment for Home Owners' on the basis that it was equitably entitled to be subrogated to the interest of the first mortgagee who was paid with the proceeds of the Home Owners' loan and this determination was sustained on appeal.(fn6)

Decisions rendered in equity are highly fact-dependent. Of course, facts are the foundation of any legal decision, but equity, which strives for the just, fair and satisfying result, casts a wide net to gather the many facts that it weighs in balancing the equities of a given situation to arrive at its decisions. Nevertheless, the application of equitable principles does occur with reference to recognized, established bases for its various remedies and those upon which the remedy of equitable subrogation typically is granted are clearly set out in Home Owners' Loan. They are: 1) the party asking to be subrogated cannot have acted as a volunteer; 2) the party asking to be subrogated must have proceeded in the subject transaction under a misconception as to the true state of affairs involved in the execution of the transaction; and 3) the party against whom subrogation is granted will be unjustly enriched if the remedy is not granted.(fn7) Each of these elements, with reference to the law set forth in Home Owners' Loan and other decisions of the Connecticut Supreme Court, will be discussed below.

C. Subrogation Is Not Available To A Volunteer

Case law in Connecticut and throughout the united States uniformly holds that equitable subrogation will not be granted in favor of a volunteer.(fn8) However, jurisdictions differ in the application of this rule and one deemed a volunteer in one jurisdiction may not be considered a volunteer in another, though their conduct with reference to a particular set of facts in a...

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