## **Learning Outcomes**

This article explains how subrogation and suretyship doctrines operate in mortgage and security device questions, including:

- When equitable and legal subrogation arise in common mortgage transactions, such as refinances, payoffs by third parties, and payments by sureties
- How to distinguish equitable subrogation for refinancing lenders from legal subrogation that automatically protects sureties and guarantors
- How sureties and guarantors obtain and enforce rights in the mortgage and underlying note after full or partial payment of the debt
- How subrogation preserves, shifts, or extinguishes lien priority among senior mortgages, junior mortgages, judgment liens, and other security devices
- When courts deny or limit subrogation, especially where the payor is a volunteer or where recognizing subrogation would materially prejudice intervening lienholders or bona fide purchasers
- How subrogation interacts with foreclosure strategy, deficiency judgments, and the distribution of sale proceeds among multiple claimants
- How to analyze MBE-style fact patterns involving surety discharge, impairment of collateral, modification of the principal obligation, and their impact on subrogation rights
- How to systematically approach priority questions by identifying who paid, why they paid, what priority they reasonably expected, and whether any junior interests are worse off

## **MBE Syllabus**

For the MBE, you are required to understand how subrogation and suretyship principles affect mortgages and security devices, with a focus on the following syllabus points:

- Recognizing when equitable subrogation arises for subsequent lenders and other payors
- Distinguishing legal subrogation in suretyship from equitable subrogation in refinancing
- Identifying the rights of sureties and guarantors in the mortgage and principal debt after payment
- Determining how subrogation preserves or shifts mortgage priorities among multiple liens
- Analyzing the effect of refinancing, modification, or discharge of a mortgage on junior lienholders
- Applying suretyship rules on discharge (e.g., impairment of collateral, material modification) where the debt is mortgage‑secured

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. Which party is most clearly entitled to equitable subrogation after paying off a prior mortgage on a property?
   a) The mortgagor using their own funds to pay off the mortgage early  
   b) A refinancing lender who pays off the prior mortgage intending to take its place  
   c) The original mortgagee whose loan has been fully paid  
   d) A relative who pays the debtor’s mortgage purely as a gift

2. If a surety pays the entire debt secured by a mortgage, what is the surety’s right regarding the mortgage?
   a) The surety is discharged from all obligations but acquires no rights  
   b) The surety is subrogated to the mortgagee’s rights in the mortgage and the debt  
   c) The surety must file a new mortgage to secure reimbursement  
   d) The surety is limited to an unsecured reimbursement claim

3. When does equitable subrogation most commonly arise in mortgage law?
   a) When a mortgagor pays off their own mortgage in the ordinary course  
   b) When a refinancing lender or other third party pays a mortgage to protect its own interest  
   c) When a mortgagee assigns the mortgage and note to another lender  
   d) When a mortgage is foreclosed and the purchaser pays the bid price

## **Introduction**

Subrogation and suretyship are core doctrines in mortgage law questions on the MBE. They decide:

- Who may enforce a mortgage after someone other than the original lender pays the debt
- Whether a later lender “steps into the shoes” of a prior mortgagee for priority purposes
- What security a surety or guarantor can reach after satisfying a mortgage‑secured obligation

These issues typically arise in multi‑party fact patterns involving refinancing, guaranties, junior liens, and foreclosure.

> **Key Term: Subrogation**  
> The substitution of one party for another with respect to a claim or security interest. A party who pays a debt is “subrogated” when they are allowed to assert the rights and remedies of the original creditor, including enforcing a mortgage.
>
> **Key Term: Surety**  
> A person or entity that agrees to be primarily or secondarily responsible for another’s debt or obligation. When the principal defaults and the surety pays, the surety may obtain rights in the principal debt and any collateral.
>
> **Key Term: Suretyship**  
> The relationship in which one person (the surety or guarantor) promises to answer for the debt or default of another (the principal obligor) to a creditor.
>
> **Key Term: Equitable Subrogation**  
> A court‑created remedy that places a payor who is not the original creditor into the position of that creditor to prevent unjust enrichment and protect a legitimate interest (often a later lender).
>
> **Key Term: Legal Subrogation**  
> Subrogation that arises by operation of law because of a recognized legal relationship, most notably when a surety or guarantor pays the debt.
>
> **Key Term: Volunteer (in subrogation)**  
> A person who pays another’s debt without any legal obligation or protectable interest. Volunteers generally are not entitled to subrogation.
>
> **Key Term: Refinancing Lender**  
> A new lender who advances funds to pay off an existing mortgage with the expectation of obtaining a new mortgage of similar or superior priority.
>
> **Key Term: Intervening Lienholder**  
> A creditor whose lien attaches to the property after an earlier mortgage but before a later transaction (such as a refinance); their rights can be affected by subrogation.

Subrogation in mortgage cases appears in two main settings:

- A new or junior lender (or other interested party) pays off a prior mortgage and wants its priority
- A surety or guarantor pays a mortgage‑secured debt and wants the benefit of the mortgage

Understanding these patterns is important for resolving priority battles and enforcement questions on the exam.

### Types of Subrogation in Mortgages

Subrogation in mortgage law most often arises in two contexts:

- When a subsequent lender pays off a prior mortgage to protect its own security interest
- When a surety or guarantor pays the debt secured by a mortgage

#### 1. Equitable Subrogation

Equitable subrogation is an equitable doctrine that prevents unjust enrichment when someone with an interest to protect pays another’s secured debt.

> **Key Term: Equitable Subrogation**  
> A remedy that allows a party who pays a mortgage to protect its own interest to enforce that mortgage with its original priority, to the extent of the payment, so long as junior interests are not unfairly prejudiced.

Core ideas:

- The party seeking subrogation must not be a mere volunteer
- The party typically expects to obtain the same security and priority as the debt it pays
- Subrogation is limited to the amount actually paid
- Courts will deny subrogation if it would seriously prejudice intervening lienholders or bona fide purchasers

##### **Refinancing lenders**

Equitable subrogation most often protects a refinancing lender:

- A mortgagor has a first mortgage with Lender A
- Later, the mortgagor refinance with Lender B, who uses the proceeds to pay off A
- If there are junior liens between A and B’s new mortgage in time, B may seek equitable subrogation to claim A’s original first‑lien priority

Courts ask:

- Did B intend to take over A’s position (not to make an unsecured loan or clearly junior loan)?
- Did B reasonably expect a first‑priority lien?
- Would junior lienholders be unfairly harmed?

If satisfied, B is treated as if it held A’s mortgage to the extent of the payoff, even though A’s mortgage was released and B’s mortgage was recorded later in time.

##### **No subrogation for volunteers**

Equitable subrogation is not available to volunteers:

> **Key Term: Volunteer (in subrogation)**  
> A payor who has no legal obligation, contractual duty, or property interest to protect, and who pays another’s debt gratuitously.

- A parent who pays an adult child’s mortgage purely as a gift cannot enforce the mortgage by subrogation
- A stranger who pays off the mortgage without any stake in the property is also a volunteer

#### 2. Legal Subrogation (Suretyship)

Legal subrogation arises by operation of law, particularly in suretyship.

> **Key Term: Legal Subrogation**  
> Subrogation that flows automatically from a recognized legal status, such as a surety’s payment of the debt; no separate equitable balancing is required.

When a surety pays the mortgage‑secured obligation:

- The surety is subrogated to the creditor’s rights on the note and to the mortgage securing that note
- This includes the right to foreclose and the right to priority over junior interests, to the extent of the payment

> **Key Term: Guarantor**  
> A type of surety who promises to pay the debt only if the principal obligor does not; guarantors generally obtain the same subrogation rights as other sureties once they pay.

Key consequences:

- The mortgage does not disappear in equity; it becomes security for the surety’s reimbursement claim
- The surety’s subrogation arises only after payment; partial payment yields subrogation only to that portion
- The surety takes subject to any defenses the principal could assert against the creditor (e.g., lack of consideration, usury)

### Priority and Subrogation

Subrogation heavily affects lien priority.

> **Key Term: Intervening Lienholder**  
> A creditor whose lien attaches after an earlier mortgage but before a later transaction (like a refinance) and whose rights may be affected by subrogation.
>
> **Key Term: Refinancing Lender**  
> A lender who uses new funds to retire an older mortgage, usually expecting to obtain the same priority as that mortgage.

When a subsequent lender pays off a prior mortgage:

- Equitable subrogation allows the new lender to assert the same priority the paid‑off mortgage enjoyed
- This can “leapfrog” over junior liens recorded after the original mortgage but before the new mortgage
- However, courts are cautious if junior lienholders would be materially prejudiced

Common limits:

- If the new lender had actual knowledge of the junior lien and nonetheless clearly agreed to take a junior position, courts may decline subrogation
- If junior lienholders have changed their position in reliance on the apparent discharge of the senior mortgage, subrogation may be denied

On the MBE, assume courts favor equitable subrogation when:

- The payoff was clearly intended to preserve senior priority
- There is no clear evidence that the new lender intended to take a junior lien
- The junior lienholder is simply in the same position they were in before the refinance (no added prejudice)

### Suretyship and Security Devices

When a debt secured by a mortgage is guaranteed, suretyship rules intersect with mortgage law.

Basic suretyship rights on payment include:

- **Reimbursement (indemnity):** the surety can demand repayment from the principal obligor
- **Subrogation:** the surety can enforce the creditor’s rights against both the principal and the collateral
- **Exoneration:** even before paying, the surety may, in some circumstances, force the principal to perform or pay

In mortgage contexts:

- The surety can foreclose the mortgage in the creditor’s name or in its own name as subrogee
- The surety takes the mortgage with its existing priority, ahead of junior lienholders
- If the creditor has impaired the mortgage (e.g., by releasing collateral or subordinating the lien) without the surety’s consent, the surety may be discharged to that extent

This last point is frequently tested:

- A creditor who releases valuable mortgage collateral or extends time materially without the surety’s consent may discharge the surety, at least partially
- If the surety is discharged, there may be no subrogation to that impaired security

### Subrogation vs. Assignment

Subrogation is distinct from assignment:

- **Assignment**: the creditor voluntarily transfers the note and mortgage to another party
- **Subrogation**: arises by operation of law; the creditor may have been fully paid and no longer has any claim

Practical differences:

- An assignee takes exactly what is assigned, subject to all defenses and equities
- A subrogee takes only to the extent of its payment and only where equity or law recognizes subrogation

On the exam, if the fact pattern mentions an express assignment of the mortgage, analyze as an assignment. If it mentions payoff and a claim to “step into the shoes” of the prior mortgagee, analyze as subrogation.

### Mortgagor’s Own Payment

A common trap involves the mortgagor’s payment of their own mortgage:

- When the mortgagor pays off the mortgage using their own funds, the mortgage is simply discharged
- The mortgagor is not subrogated to the mortgage because they are just performing their own obligation; there is no need to step into the creditor’s shoes

This becomes important when the mortgagor then tries to use the old mortgage as a weapon against junior lienholders or co‑owners. That effort should fail: the mortgage is extinguished rather than reassigned by subrogation.

### **Worked Example 1.1**

A homeowner borrows $200,000 from Bank A, secured by a first mortgage. Later, the homeowner borrows $50,000 from Bank B, secured by a second mortgage. Bank B then refinances the homeowner’s primary loan: it advances $210,000, which is used to pay off Bank A in full and to cover closing costs. Bank B records its new mortgage after a third creditor has recorded a $30,000 judgment lien against the property.

Bank B seeks to foreclose. What is Bank B’s position relative to the judgment lien?

> **Answer:**  
> Bank B is equitably subrogated to the rights and priority of Bank A’s first mortgage to the extent its funds paid off Bank A. To that extent, Bank B’s lien retains first priority ahead of the judgment lien, even though Bank B’s mortgage was recorded later. The judgment lien remains junior to the subrogated portion of Bank B’s claim. If Bank B advanced additional funds not used to pay Bank A (e.g., cash‑out to the homeowner), that excess portion would typically be junior to the judgment lien.

### **Worked Example 1.2**

A company’s debt to Bank C is guaranteed by an individual surety. The debt is secured by a mortgage on the company’s warehouse. The company defaults, and the surety pays the entire debt to Bank C. Bank C marks the note paid and records a satisfaction of the mortgage.

The surety wants to recover from the company and reach the warehouse as security. What can the surety do?

> **Answer:**  
> The surety is legally subrogated to Bank C’s rights on both the note and the mortgage. In equity, the mortgage is treated as assigned to the surety even though it was formally satisfied. The surety may enforce the mortgage against the warehouse, including by foreclosure, to recover the amount paid. The surety’s lien enjoys the same priority over any junior liens as Bank C originally had.

### **Worked Example 1.3**

A homeowner has a first mortgage to Bank A and a second mortgage to Bank B. Bank C, a new lender, agrees to lend money secured by a mortgage. Bank C’s loan is used entirely to pay off Bank A’s first mortgage. Bank C is aware of Bank B’s second mortgage and expressly agrees in writing that its new mortgage will be junior to Bank B.

Later, the homeowner defaults, and Bank C claims equitable subrogation to the former first‑priority position of Bank A. Bank B objects.

> **Answer:**  
> Bank C is unlikely to obtain equitable subrogation. Even though it paid off Bank A, Bank C expressly agreed to take a junior position to Bank B. Equity will not override that express agreement. Bank C’s mortgage remains junior to Bank B’s mortgage, and Bank C cannot claim the benefit of Bank A’s former first‑lien priority.

### **Worked Example 1.4**

A debtor owes $100,000 to Bank D secured by a mortgage. A friend, intending a gift, pays the entire debt to Bank D. Bank D records a satisfaction of the mortgage. Later, the debtor defaults on another obligation, and the friend tries to foreclose the mortgage to recover the $100,000 from the property.

> **Answer:**  
> The friend was a volunteer; the payment was intended as a gift and not made to protect any legal interest or pursuant to any obligation. As a volunteer, the friend is not entitled to subrogation. The mortgage was extinguished by the payment and cannot be foreclosed by the friend.

### Exam Warning

> Subrogation is generally unavailable to a volunteer who pays a mortgage without any duty or protectable interest. On the other hand, subsequent lenders, sureties, co‑obligors, and purchasers who must pay off liens to protect their interests are strong candidates for subrogation.

### Revision Tip

> In mortgage priority questions, always ask:
>
> - Who paid?
> - Why did they pay (interest to protect, legal duty, or pure volunteer)?
> - What was the reasonable expectation about priority?
> - Would recognizing subrogation unfairly prejudice an intervening lienholder or purchaser?

If the paying party had a clear interest to protect and no one is worse off than before the payment, subrogation is usually allowed.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Subrogation substitutes a paying party for the original creditor with respect to the debt and any mortgage securing it.
- Equitable subrogation typically benefits refinancing lenders and other parties who pay to protect their own interests, not volunteers.
- A refinancing lender that pays off a senior mortgage is often equitably subrogated to that mortgage’s priority, ahead of intervening junior liens, absent prejudice.
- Legal subrogation arises automatically when a surety or guarantor pays the debt; the surety is subrogated to both the creditor’s claim and any mortgage security.
- A surety who pays a mortgage‑secured obligation may foreclose the mortgage and has the same priority the creditor had, to the extent of the payment.
- Mortgagors paying their own mortgage do not obtain subrogation; the mortgage is simply discharged.
- Subrogation is denied to volunteers and may be limited or denied where junior lienholders would be unfairly prejudiced or the paying party agreed to take a junior position.
- Creditors who materially impair mortgage collateral or modify the principal obligation without the surety’s consent may discharge the surety’s obligation to that extent, reducing or eliminating subsequent subrogation rights.
- Subrogation is distinct from assignment: assignment is a voluntary transfer by the creditor, while subrogation arises by law or equity upon payment.

## **Key Terms and Concepts**

- Subrogation
- Surety
- Suretyship
- Equitable Subrogation
- Legal Subrogation
- Guarantor
- Volunteer (in subrogation)
- Refinancing Lender
- Intervening Lienholder

Mortgages/security devices - Application of subrogation and suretyship principles