Equitable subrogation in Michigan clarified

By Peter C. Brown and Adam A. Holland Gallagher Law Firm In December 2011, the Michigan Court of Appeals issued an opinion in CitiMortgage, Inc. v MERS, Inc. that addressed and expanded the doctrine of equitable subrogation in Michigan. The Court held that if the refinancing lender is the holder of the original mortgage that is being refinanced, the new mortgage can be subrogated to take the position of the original mortgage and it may retain the original mortgage's priority over intervening mortgages. The doctrine of equitable subrogation arises in the following circumstances: * Borrower grants a mortgage on real property in favor of the original lender, who duly records the original mortgage. * Borrower subsequently grants second mortgage on the same real property in favor of an intervening lender, who duly records its junior mortgage. * Borrower subsequently refinances the original mortgage and grants a new mortgage on the same real property, contemporaneously applying the proceeds of the loan to pay off and discharge the original mortgage. Although this appears to be a traditional refinance transaction, the problem arises when an intervening mortgage is not paid off and discharged. The question then arises: Does the intervening mortgage have priority or is the new mortgage subrogated to take the priority of the original mortgage? For nearly the last century, Michigan case law has provided conflicting answers to this question. Unlike most jurisdictions, Michigan Courts have rejected the application of equitable subrogation in recent years. However, on December 15, 2011, the Michigan Court of Appeals issued an opinion in CitiMortgage, Inc. v MERS, Inc. and held that the doctrine of equitable subrogation is available and should be applied if the refinancing lender is the same lender that held the original mortgage before the intervening mortgage arose and the intervening lienholder is not materially prejudiced by the application of equitable subrogation. Despite the holding in CitiMortgage, it is important to note equitable subrogation will not be available to third-party refinancing lenders that have no preexisting interest in the property. Therefore, before closing a refinance transaction, lenders and their title insurers should be sure to closely examine the title of the subject property to conclusively determine the existence of any intervening liens. If an intervening lien is of record, the intervening liens must be paid off and discharged. However, in light of the Court's ruling in CitiMortgage, if an intervening mortgage is missed, a refinancing lender may have an opportunity to use the doctrine of equitable subrogation in certain circumstances to obtain priority over the intervening mortgage. ---------- Peter C. Brown can be contacted at pcb@thegallagherlawfirm.com. Published: Thu, Jan 26, 2012