An equitable principle by which a party who fully performs another's secured obligation steps into the shoes of the original creditor to the extent necessary to prevent unjust enrichment. The performing party acquires the creditor's rights against the primary obligor and any security, even when the original obligation would otherwise be discharged by payment. This right arises when the payor acts under legal compulsion or to protect its own interest rather than as a volunteer.
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How its tested
Common Examples
2
Promisee Pays Beneficiary Claim
Evelyn Ellison contracted with Elite Dynamics to pay a debt Evelyn owed to Edward Everett. When Elite Dynamics failed to pay, Edward Everett sued Evelyn directly and obtained a judgment. Evelyn paid the judgment in full to protect her own credit. Evelyn then asserted a claim against Elite Dynamics for the amount paid. The court recognized Evelyn's right to step into Edward Everett's position against Elite Dynamics because the payment satisfied the primary duty and equity prevents unjust enrichment of the promisor.
Guarantor Pays Senior Mortgage
Emma Erickson guaranteed a mortgage loan made by Elemental Pharmaceuticals to Elise Everly for a commercial building. After Elise Everly defaulted, Emma Erickson paid the full balance to Elemental Pharmaceuticals to avert foreclosure and protect her personal exposure. Elemental Pharmaceuticals marked the note and mortgage paid without assigning them. A junior lienholder claimed first priority. The court held that Emma Erickson succeeded to Elemental Pharmaceuticals' senior lien position by operation of law so that the junior lienholder received no windfall.
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Practice Questions5
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Uniform Acts
Restatements
Michoigan Hospital Service v. Sharpe63 N.W.2d 638 (Mich. 1954)
When does equitable subrogation arise in a mortgage transfer setting?
It arises when a party such as a guarantor or protecting creditor fully pays the mortgage obligation of another to prevent unjust enrichment of a junior lienholder. The payor succeeds to the original mortgagee's rights and priority against the land even if the mortgage is marked paid of record.
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Does a recorded satisfaction of the mortgage defeat a subrogation claim?
No. Equity looks beyond the record to prevent unjust enrichment. The payor who satisfies the debt to protect its own interest acquires the mortgage by operation of law regardless of a formal satisfaction.
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What limits the scope of subrogation rights acquired by the payor?
The payor steps into the shoes of the original creditor only to the extent of the payment made and only to prevent unjust enrichment. The right does not create new personal liability on parties who were not previously liable.
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How does subrogation interact with an intended beneficiary's rights under a contract?
When an intended beneficiary obtains satisfaction from the promisee, the promisee acquires a right of subrogation to the beneficiary's claim against the promisor. Satisfaction of one duty satisfies the other only to the extent of the payment.
Supporting sources
Real PropertyRights in real property · FixturesUBEIntermediate