This follows up on my June 21, 2007 and August 24, 2009 posts on Indiana’s doctrine of equitable subrogation, specifically the opinions arising out of the Gibson v. Neu case. The Indiana Supreme Court wrote the final chapter in Neu v. Gibson, 2010 Ind. LEXIS 376 (Ind. 2010) (.pdf), which is Indiana’s definitive statement regarding the scope of the doctrine.
Circumstances. Nowak owned a residence with a mortgage loan from lender Irwin. He subsequently granted a second mortgage to Gibson. Nowak later sold the residence to Neu, who utilized a mortgage loan from Wells Fargo to pay off the Irwin mortgage. Neu and Wells Fargo (and their title insurance company) overlooked Gibson’s junior mortgage, which survived the sale. In the first Gibson v. Neu opinion (the subject of my June 21, 2007 post), the Court of Appeals granted priority to Neu and Wells Fargo over Gibson. Because that decision remained undisturbed by the Indiana Supreme Court, Indiana law appears to be settled that the amount of the equitable lien is at least the amount of money that was used to pay off the prior mortgage. The Supreme Court’s opinion dealt with the additional rights and remedies, if any, to which the subrogees (Neu and Wells Fargo) may have been entitled.
Foreclosure. Gibson had not exercised his foreclosure rights, evidently due to “the presently depressed real estate market.” It seems that Gibson was biding his time for the value of the home to turn around. On the other hand, Neu sought a sheriff’s sale, presumably to quiet title to his real estate. This likely would have extinguished Gibson’s lien and netted no proceeds to him, resulting in a substantial financial loss. The Court of Appeals previously determined that Neu and Wells Fargo were permitted to request a sheriff’s sale to enforce their equitable lien. Indeed the Irwin mortgage included that right. But Nowak’s obligation under the Irwin mortgage ended when Neu and Wells Fargo satisfied that debt. Since the Irwin mortgage was discharged, “no party can possibly foreclose under the terms of the Irwin mortgage any longer.” The Court therefore drew “the equitable subrogation line at priority [because] these circumstances [do] not unfairly prejudice [Neu yet they] preserve Gibson’s rights as an inferior lienholder.”
Interest. Both the Court of Appeals and the Supreme Court denied Neu’s and Wells Fargo’s claim to include mortgage interest in the amount of the equitable lien based upon the Irwin mortgage. The Court of Appeals concluded that some interest could be recovered at the statutory post-judgment rate of 8% from the date of the payoff of the prior mortgage, but the Supreme Court would not even go that far. “The trial court’s earlier ruling giving [Neu] priority ahead of [Gibson] seems like a substantial step of equity that largely rescued [Neu] from the calamity that might have otherwise befallen [him] (namely, ending up in line behind Gibson).”
Attorney’s fees. Similarly, the Supreme Court held that “the equities weigh against [Neu] recovering fees . . ..” Again, the Irwin mortgage was not in default, so that mortgage could not form the basis for including attorney’s fees and costs in the equitable lien under the circumstances of the Neu case.
Prevailing theme – fairness. “The key to subrogation is an equitable result,” the Court said. Equitable subrogation:
Substitutes one who fully performs the obligation of another, secured by a mortgage, for the owner of the obligation and the mortgage to the extent necessary to prevent unjust enrichment. This avoids an inequitable application of the general principle that priority in time gives a lien priority in right. In considering whether to order subrogation and thus bypass the general principle of priority, courts base their decisions on the equities, particularly the avoidance of windfalls and the absence of any prejudice to the interests of junior lienholders.
The line of Neu v. Gibson decisions provides substantial clarity to the equitable subrogation doctrine and specifically the nature and extent of the equitable lien. The lien exists primarily to establish priority, but the scope of the lien is limited. What is fair will carry the day.