March 28, 2018Client Alert

Equitable Subrogation as a Tool for Lenders

Equitable Subrogation under Wisconsin law is a common law doctrine whereby one who has paid another’s debt is treated as the owner of the debt. As an equitable doctrine, Subrogation may be invoked by a lender to avoid unjust enrichment of a third-party. It may apply whenever a lender satisfies a prior mortgage which in equity should be satisfied by another. The situation arises occasionally in loan default litigation following re-financings involving a husband and wife or other family members.

The case of Wachovia Mortgage v. Dallas, 2011 WI App. 54, 332 Wis. 2d 426, 797 N.W.2d 930, is an example. See also U.S. Bank v. Stehno, 2017 WI App. 57, 902 N.W.2d 270 (discussing equitable subrogation applied to a husband and wife with a premarital agreement). In Dallas, Rogers and Dallas were brother and sister who received a home via Quit Claim deed from their mother. To enable Rogers to purchase a different house, Dallas and Rogers granted a mortgage on the first house to Fair Finance Corporation. Wachovia subsequently lent money to Rogers to purchase his house, with the loan secured by a mortgage on the first house and the proceeds from the loan also paying off the Fair Finance loan. Only Rogers, however, signed the Wachovia mortgage. Rogers defaulted on the mortgage note to Wachovia and the bank foreclosed on the mortgage Rogers signed; but the bank also foreclosed on Dallas’ interest in the first house. The circuit court granted summary judgment to Wachovia and entered a judgment of foreclosure. Dallas appealed on the basis that she had not signed either the Wachovia mortgage or note.

The Court of Appeals affirmed the foreclosure judgment against Dallas in favor of Wachovia. The Court reasoned that, although only Rogers signed the Wachovia loan documents, the proceeds of that loan extinguished Rogers’ and Dallas’ obligations on the Fair Finance Corporation mortgage against the house their mother gave them. Dallas signed the Fair Finance mortgage and would have been liable had it not been for the Wachovia loan. Under the circumstances, Wachovia stepped into Fair Finances’ shoes; the Court found nothing unfair about that result. In fact, absent application of the Equitable Subrogation doctrine, Dallas would have been unjustly enriched at Wachovia’s expense.

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