Chapter 11 - § 11.10 • SUBROGATION

• Jurisdiction: Colorado

§ 11.10 • SUBROGATION

§ 11.10.1—In General

Subrogation is the substitution of another person in the place of a creditor, so that the person in whose favor it is exercised succeeds to the rights of the creditor in relation to the debt. It is an equitable principle that allows a party not primarily²⁴³ liable who has paid the debt of the party who is primarily liable to institute a recovery action in order to be made whole. Thus, within the context of mortgages, equitable subrogation permits the substitution of a later lienholder into the lien-priority status of a prior lienholder.²⁴⁴

Ordinarily, when one deed of trust is released, junior lienholders move up the line in priority. However, if the deed of trust has been released due to mistake, it may be restored through equitable subrogation.²⁴⁵ A lienholder who successfully invokes the doctrine is called a subrogee.²⁴⁶

A right of subrogation arises when a debt, for which a party other than subrogee is primarily liable, is discharged by the subrogee for the protection of his or her own right or interests.²⁴⁷ In particular, the elements of equitable subrogation are: (1) the subrogee made the payment to protect his or her own interest, (2) the subrogee did not act as a volunteer, (3) the subrogee was not primarily liable for the debt paid, (4) the subrogee paid off the entire encumbrance, and (5) subrogation would not work any injustice to the rights of the junior lienholder.²⁴⁸

With regard to the factors enumerated above:

1. When a new purchaser without actual notice of a junior encumbrance satisfies a senior encumbrance, it is presumed that he or she does so for his or her own benefit and not for the benefit of any junior lienholders.²⁴⁹ Where there is actual notice on the part of the new purchaser, it is unnecessary to go further and consider the five factors and the principles of equity.²⁵⁰
2. A person who lends money to pay off an encumbrance on property and secures the loan with a deed of trust on the property is not a volunteer for purposes of equitable subrogation.²⁵¹
3. One cannot claim subrogation for payments upon an obligation for which he or she is primarily liable,²⁵² because there is no unjust enrichment in paying one's own debts.²⁵³
4. Partial subrogation is not permitted because it would have the effect of dividing the security between the original obligee and the subrogee, imposing unexpected burdens and potential complexities of division of the security and marshaling upon the original mortgagee.²⁵⁴
5. An intervening lienholder suffers no prejudice merely because he or she is not elevated in priority. The intervening lienholder has no right to be better off after the transaction than he or she was beforehand. If there were no subrogation, the intervening lienholder would receive an unwarranted and unjust windfall.²⁵⁵ The fact that the intervening lien has been foreclosed does not preclude the application of the doctrine of equitable subrogation, but the fact that a foreclosure sale has already occurred is one factor to be considered in determining whether an intervening lienholder would be prejudiced.²⁵⁶

If no prejudice would result and the remaining factors are satisfied, courts must then consider the putative subrogee's knowledge of the intervening lien, its negligence in failing to discover the intervening lien, and its degree of sophistication.²⁵⁷

Actual notice of an existing lien precludes the application of the doctrine of equitable subrogation,²⁵⁸ but constructive notice does not,²⁵⁹ for "without actual notice of the junior judgment lien, it will be presumed that [the subrogee] paid the same for his own benefit, and equity will treat him as the assignee of the original [encumbrance]."²⁶⁰ The payment of a prior charge or encumbrance by one who claims ownership in fee does not merge the charge or encumbrance, and he or she may keep the lien alive as a security for himself or herself as against other encumbrances or titles, and thus prevent a merger.²⁶¹ A subrogee steps into the shoes of the subrogor and cannot possess rights greater than those of the subrogor.²⁶² There is no right of subrogation as to amounts in excess of the amount paid to discharge the prior lien. Not only is the subrogation limited to the amount of the advance actually applied to payment, but the subrogee also may not enforce mortgage terms (e....