Woulda, Coulda, Shoulda – Equitable Subrogation and Mortgage Priorities
The Court of Appeal’s reasons in L-Jalco Holdings v. MacPherson reminds us that the concept of subrogation extends beyond the realm of insurance and into the realm of mortgage priority claims. In L-Jalco, the plaintiff lender advanced funds to a property owner who discharged only one of two prior mortgages with the funds advanced, while registering a new mortgage in its favour. The prior (then undischarged) second mortgage moved into first position and the plaintiff’s mortgage fell into second position. When the property owner defaulted, the plaintiff sold the property under power of sale and sought an order that its mortgage had priority against the first mortgage and in so doing attempted to in effect cut the first mortgagee out of participation in the sale proceeds.
The plaintiff floated two arguments:
- the ‘new’ first mortgagee had undertaken to discharge its mortgage and failed to do so and would be unjustly enriched if they maintained priority; and
- the plaintiff could have preserved the priority by taking an assignment of the original first mortgage and therefore it would be equitable that the plaintiff receive priority through being subrogated to the discharged first mortgagees priority position
The court rejected both arguments.
Importantly there was a finding that the plaintiff was aware of the undischarged mortgage and seemed not to care at the time of the original closing. This knowledge was critical to the court’s finding because it took it out of the realm of cases where there was a mistake that lead to an unjust result. The Court of Appeal’s 1997 decision in Mutual Trust v. Creditview was referred to in the underlying reasons to juxtapose circumstances where a mortgagee has knowledge of prior encumbrance vs a circumstance where a mortgagee has no knowledge as a result of a mistake. Mutual Trust involved a mortgagee who was unaware of CPL’s registered on title when its mortgage was registered and when it discharged first mortgages held by Scotia. The court held that Mutual Trust was unaware of the CPL’s as a result of its solicitor’s mistake. They found that if Mutual Trust was not subrogated to Scotia’s interest as the prior first charge, the holder of the CPL would be unjustly enriched as a result of a solicitor’s error. The court also identified that the plaintiff could have taken an assignment of the discharged mortgagee’s interest. However, the lack of knowledge was critical to the court’s finding.
Subrogation in the context of mortgage priorities embraces the same underlying concept as traditional subrogation – one party standing in the shoes of another. However, there is no automatic statutory or common law right of subrogation for mortgagees. Rather it is available only if facts support the fairness of granting it.