What is Equitable Subrogation in the Foreclosure Context?

Equitable subrogation allows a party discharging another party’s debt to step into the shoes of the creditor who held the discharged debt. In the context of mortgages, it is generally the law in Florida that the first mortgagee has priority to any subsequent creditors, including other mortgagees. In the context of a foreclosure, a second mortgagee generally holds a junior lien on the property. This means that in the event of a foreclosure, the primary mortgagee, or original lender, has priority and will recoup its money prior to the second mortgagee. However, there are times when a creditor may take priority even though there was a lender before them. A creditor may generally invoke the doctrine of equitable subrogation if it satisfies the following five conditions:

• The subrogee (party seeking subrogation) must pay the debt to protect its own interest.
• The subrogee must not act as a volunteer.
• The subrogee must not be primarily liable for the debt;
• The subrogee must pay off the entire amount of the debt; and
• Subrogation must not harm the rights of any third party.

Equitable subrogation is most commonly invoked by companies that refinance a mortgage. The refinancing company may pay off the original lender and as such, they want to have the rights. Put differently, equitable subrogation is available to substitute (subrogate) a refinancing lender to the position of the mortgage or lien that the lender satisfied. This second lender, who anticipated taking the subrogated position, is now permitted to take the lien priority of the loan it satisfied.

This issue has been the source of much litigation in recent years. One issue is that of second mortgages who argue that after the first mortgage is satisfied, then they are next in line. Unfortunately, the Appellate Courts have not weighed in on equitable subrogation and most of the case law we have is from the early 1900’s. As we are seeing more and more mortgages that are void, the issue of equitable subrogation is coming up more frequently and hopefully more case law will come down soon.