Does
the Doctrine of Equitable Subrogation apply in a purchase and sales situation as
opposed to a re-finance situation? Yes, says the Supreme Judicial Court in East
Boston Savings Bank V. Lois J. Ogan 428, Mass. 327/701 NE 2d 331 (1998).
In
this matter the property was subject to a first mortgage to East Boston S. B.
and a second mortgage to Ogan which, on its face was stated to be a second
mortgage. The property was sold. The new owner took out a loan with East Boston
S. B. to buy the property. The closing attorney missed the Ogan second mortgage,
paid off the old East Boston mortgage and recorded a new mortgage in favor of
East Boston S. B. As a result of the closing, the Ogan second mortgage jumped
into first lien position and affected the new owner’s estate.
The
SJC determined that the equities operating in support of the Doctrine of
Equitable Subrogation apply equally in a sales transaction. There are five basic
questions to be asked in support of the Doctrine of Equitable Subrogation:
1.
Was payment made by subrogee to protect its interests?
2.
Did subrogee act as a volunteer?
3.
Was subrogee primarily liable for the debt?
4.
Did subrogee pay-off the entire encumbrance?
5.
Will application of the Doctrine work a hardship on any junior lienholder?
The
Doctrine only applies to the extent funds are paid and actually applied towards
payment of a prior lien. Excess funds are not protected. The SJC declined to
adopt a rule stating that knowledge—actual or constructive—will defeat the
Doctrine. Equity determines application of the Doctrine. The Court reserves its
full powers of equity and shall not have its decision power circumscribed by the
element of knowledge. Knowledge has many levels and is not susceptible to any
clear rules in the equity process.
The
Doctrine does not undermine confidence in the recording system. A sale does not
cut-off all prior interests which can be assigned to a new owner.
This
is the latest in a long line of cases in support of the Doctrine of Equitable
Subrogation. The case contains a good historical review of Massachusetts
courts’ long tradition favoring the Doctrine.
For
another case relative to a federal tax lien and the Doctrine, see—Progressive
Consumers Federal Credit Union V. United States, 79 F 3rd 1228 (1st
Circuit, 1996). In this case, applying Massachusetts case law, a new mortgage
trumped a filed federal tax lien and survived a sale.