Legal Blog

Subrogation

Subrogation is often used in an insurance setting. An insurance company pays its insured for a loss that the insurance policy covers. The insurer then commences an action to recover its payment from the person whose acts or omissions caused the loss to the insured. The insurer commences the action in the insured’s name, but the risk and benefits of the action are the insurer’s. The insurer is said to be subrogated to the rights of the insured.

Subrogation can also be applicable in a mortgage situation. The doctrine was summarised in a 1908 English case as follows: “where a third party at the request of a mortgagor pays off a first mortgagee with a view of becoming himself a first mortgagee of the property, he becomes, in default of evidence of intention to the contrary, entitled in equity to stand, as against the property, in the shoes of the first mortgagee.”

That proposition has been refined over the years, but the basic proposition still stands. Do frustrated would-be mortgagees still rely on it? Sure. Mortgage money often goes astray, prior mortgages are repaid, and somehow the proper mortgage is not registered. Toronto-Dominion Bank v. Nedem is a 2012 Ontario Superior Court of Justice decision that deals with the proposition.

Mess

A bank approves a purchaser for a $380,000 mortgage on a $538,000 purchase of property from a seller. Purchaser retains a lawyer to act for him on the mortgage and, as is usual, lawyer also acts to protect bank’s interests. Seller has three existing mortgages, which presumably have to be discharged on the completion of the transaction: a first of $273,000, a second of $60,000, and a third of $30,000.

In anticipation of the closing, bank provides lawyer with $373,000. Lawyer is to use the funds to allow purchaser to close the transaction and to register a first mortgage on the property in favour of bank. So far, this is a run-of–the-mill real estate transaction.

Now a few wrinkles appear. Unbeknownst to bank, lawyer also acts for seller. This is completely improper.

The transaction does not close as scheduled. Lawyer pays bank’s money into court on behalf of seller – we are not told why – without lawyer informing bank that he was doing this. The money paid into court is then, without bank’s knowledge, paid out of court to discharge the first mortgage.

The second mortgagee, who has not been paid, commences or has already commenced power of sale proceedings and, on agreement between bank and the second and third mortgagees, the second mortgagee sells the property for $420,000. Bank pays all of the expenses associated with the sale. The second mortgagee’s lawyer holds the money in trust so that the  bank and the two mortgagees, can fight over it.

Actions

Bank first brings an action against seller for unjust enrichment and lawyer for breach of contract and negligence. After being led a merry chase for a number of years, bank obtains a judgment for $369,000.

Bank also commences an action against the two remaining mortgagees for priority to the sale money that is being held in trust. Bank relies on the equitable doctrine of subrogation. In this case, bank’s money was used to discharge the existing first mortgage. Although bank’s mortgage was never registered, or probably even signed, bank claims that it should receive the same priority rights as the first mortgagee whose mortgage was discharged with bank’s money. Bank argues that it would be unfair to allow the second and third mortgagees to take advantage of bank’s discharge of the first mortgage and, in doing so, move up the priority ladder and obtain money that they would not have been able to receive had the first mortgage remained outstanding.

With expenses and interest, bank’s claim exceeds the money held in trust. Accordingly, if bank has priority, the mortgagees get nothing. This, the mortgagees say, is not fair. They say that they had no knowledge of the relationship between seller and lawyer, their mortgages were registered in priority to bank’s claim, and they should be paid in order of the registered mortgages.

Bank brought a motion for summary judgment claiming that there was no genuine issue requiring trial.

Winner Is…

The mortgagees argued that:

1.   Bank was negligent in advancing funds and therefore should not be entitled to equitable relief. The record contained a letter from the first mortgagee’s lawyer to bank’s lawyer warning bank that purchaser’s mortgage application was fraudulent. Bank advanced regardless. The problem with this argument is that the mortgagees just submitted the letter. They did not adduce any evidence that it was sent to or received by bank’s lawyer. The motions judge held that the letter was hearsay and inadmissible. The mortgagees had a duty on a motion for summary judgment to lead their best evidence. A letter out of the blue from a third party is not good evidence.

2.   Bank’s expenses on the sale under power of sale were far higher than they ought to have been because of seller’s actions. Somehow, this was bank’s fault. The motions judge held that, had the original first mortgage not been discharged, whoever was selling the property would have incurred the same expenses that were incurred in the sale under power of sale about which the mortgagees complained. After all, real estate commission is real estate commission regardless who sells the property.

3.   Bank should not get priority because it can look to lawyer on the judgment against him. The motions judge held that this was not a sufficient reason:

In this case, there is no evidence of any reliance by the Defendants on the priority provisions pursuant to the Land Titles Act. The fact that TD (bank) has a judgment against (seller and lawyer) is one factor to consider in this case. In applying the above-noted principle set out by the Court of Appeal, this court concludes that these Defendants would not have been in any better position if TD had not advanced the funds used to pay off the first mortgage. To deny TD the remedy they seek would, in my view, therefore result in the unjust enrichment of these Defendants. The reason for this is that these Defendants would then be in a better position than they would have been, had the first mortgage not been paid out, if this court denies TD the subrogation remedy. This would not be fair in the circumstances of this case.

The judge awarded summary judgment in favour of bank.

We are unclear what role the lawyer’s insurer (“LawPro) played in this matter. From a search we conducted, we note that the lawyer was not subject to a disciplinary action by the Law Society. Had the lawyer merely been negligent, LawPro would presumably have covered the loss. However, we see no evidence of LawPro’s involvement. The bank had the same lawyer in this action as it did in the action against the lawyer; LawPro was probably not running the show.

Costs

It seems that the parties agreed, before the hearing, that the successful party would be awarded $20,000 in costs on a partial indemnity basis. Based on  the judge’s interpretation of the agreement, she ordered that the bank receive $40,000, $20,000 from each of the mortgagees.