The defendant held a second mortgage on M’s property. M told her that he was planning to refinance and asked her if she would postpone her mortgage to give the new mortgagee priority. The defendant refused to do so. M’s company then gave a mortgage to the plaintiff, and the first mortgage was paid out. The plaintiff ’s president claimed that he believed the plaintiff was to have a first mortgage on the property. When M’s company defaulted on the plaintiff ’s mortgage, power of sale proceedings were commenced without notice to the defendant and the property was sold. The defendant signed a discharge prior to closing in the belief that the property was being sold in the ordinary course of business. Part of the proceeds were paid into court and then replaced by a letter of credit from the plaintiff. In an action against the defendant, the plaintiff relied on the principle of equitable subrogation to assert that its charge had first priority. The defendant counterclaimed for recovery of the sum secured by the letter of credit. The defendant moved for summary judgment.
Held, the motion should be granted; the action should be dismissed and the counterclaim should be allowed. The doctrine of equitable subrogation is usually called into play because of a mistake or inadvertence. It provides a remedy if, as a result of an error, a lender loses or is denied a priority for which it had bargained. The plaintiff was not entitled to the remedy of equitable subrogation as it was aware of the defendant’s prior charge and knowingly took the risk of not addressing that charge. Even if the plaintiff was mistaken as to the priority of its charge, equitable subrogation would not be available as the plaintiff knew about the defendant’s mortgage prior to the refinancing and as the defendant would be severely prejudiced if her security were relegated to second position.
Equitable Subrogation
The principle of equitable subrogation, in the context of mortgage claims, was succinctly stated by Lord Jenkins, on behalf of the Privy Council, in Ghana Commercial Bank v. D.T. Chandiram, [1960] A.C. 732 (J.C.P.C.), at p. 745:
It is not open to doubt that where a third party pays off a mortgage he is presumed unless the contrary appears to intend that the mortgage shall be kept alive for his own benefit.
As noted in Mutual Trust Co. v. Creditview Estate Homes Ltd. (1997), 34 O.R. (3d) 583, [1997] O.J. No. 3258 (C.A.), the doctrine of equitable subrogation is usually called into play because of a mistake or inadvertence. It provides a remedy if, as a result of an error, a lender loses or is denied a priority for which it had bargained.
It is a remedy, however, that will not be available if it results in an injustice being done if that lender’s priority is restored: Brown v. McLean (1889), 18 O.R. 533, [1889] O.J. No. 136 (H.C.J.), at p. 537 O.R. Courts have consistently held that the fundamental principle underlying the doctrine is one of fairness in light of all of the circumstances.
*source: Ontario Reports
