The Docket: Equitable Subrogation Prevails Over Forged Instrument Defenses

August 19, 2021

The Docket is a monthly TitleNews Online feature provided by ALTA’s Title Counsel Committee which reviews significant court rulings and other legal developments and explains the relevance to the title insurance industry. 

Ron Damashek, a partner at Dickinson Wright PLLC, provided today’s review of a ruling by an Illinois Appellate Court that held an equitable lien can be asserted despite a forged mortgage. Damashek can be reached at [email protected].

Citation: Bank of America, N.A. v. Schroeder, 2021 IL App (3d) 200339

Equitable subrogation imposes an equitable lien to provide a remedy for a debt that cannot be legally enforced. The lien prevents injustice and unjust enrichment based on considerations of what should be, rather than on legal technicalities that might prevent enforcement of claims against the debtor's property and result in a windfall to the debtor.

In Illinois, the doctrine of equitable subrogation remains strong.  Under the doctrine, a party that involuntarily pays the debt of another can succeed to the rights of the original creditor, essentially stepping into the shoes of that creditor to enforce its rights in the creditor's collateral.  A refinancing lender’s payoff of a pre-existing mortgage is considered to be an involuntary payment made to establish the priority of the refinancing lender’s lien. 

In this case, the Third District of the Illinois Appellate Court made it clear that such an equitable lien can be asserted even in the face of allegations of a forged mortgage. In this case, a refinancing lender paid off the debtor's pre-existing mortgage debt, resulting in the release of the pre-existing mortgage. The debtors claimed that their signatures on the new mortgage were forged.

Nevertheless, the court found that the refinancing lender could assert an equitable lien notwithstanding the alleged forgery of its mortgage (or other infirmities that would prevent its enforcement, such as an allegedly forged deed) because an equitable lien is not dependent on the enforceability of the mortgage.  See, e.g., Shchekina v. Washington Mutual Bank, No. 08 C 6094, 2012 WL 3245957, @*4-6 (N.D. Ill. Aug. 7, 2012). Rather, the refinancing lender steps into the shoes of the creditor whose lien it paid off up to the amount of the payoff (as distinct from the full amount of the refinancing lender's mortgage loan).  To hold otherwise would allow the debtor to own its property free and clear of the indebtedness for which its property was pledged as collateral to secure the pre-existing mortgage loan.

Yet, equitable subrogation cannot overcome wrongdoing on the part of the party asserting it because the doctrine is based on a balancing of the equities. For instance, in Schroder, the defendants raised the defense of unclean hands, which theoretically could have defeated the equitable subrogation claim, but the defendants failed to prove that the foreclosing lender was responsible for the alleged fraud. In fact, the court found that the defendants' signatures on the mortgage were genuine, and that at least one of them had acknowledged the refinance loan in a loan modification request. Yet, advocates will want to make sure that there are no skeletons in the refinancing lender's closet before pursuing an equitable subrogation claim. 

Importance to the Title Industry: This case is important to the title industry because it provides a tool to enforce a lien where the validity and enforceability of an insured mortgage is challenged, thereby permitting recovery by the insured up to the amount of the lien paid off, while preventing unjust enrichment.

Contact ALTA at 202-296-3671 or [email protected].