Liens; Mortgages

Aames Capital Corp v Interstate Bank of Oak Forest, 315 Ill App 3d 700, 734 NE2d 493, 248 Ill Dec 565 (2nd D 2000).

Facts: In October 1986, the Wanglers executed a mortgage and note in favor of Hinsdale Federal Savings & Loan. Hinsdale Federal Savings & Loan assigned this mortgage and note to Standard Federal Bank (Standard), and this assignment was recorded in November 1986. In 1991, the Wanglers executed junior mortgages to Suburban Bank (Suburban) and these were also recorded. On September 4, 1996, Interstate Bank of Oak Forest recorded a judgment lien against the Wanglers. The Wanglers refinanced the Standard and Suburban mortgages with Pacific Thrift and Loan Company in August 1996. In the mortgage the Wanglers signed with Pacific, the Wanglers and Pacific agreed that Pacific's mortgage would be a first priority mortgage and that any other prior mortgages of record would be paid off by Pacific.

The Wanglers were to discharge any lien that had priority over the mortgage. Pacific paid the outstanding loans owed to Standard and Suburban, but only Suburban released its lien. Pacific then assigned its mortgage to Aames Capital Corporation (Aames). Aames never recorded its assignment. The Wanglers defaulted on the Aames mortgage and Aames filed a foreclosure action. Aames argued that Interstate's lien was subordinate to its mortgage lien. Aames and Interstate both filed for summary judgment based on lien priority. The trial court granted summary judgment in favor of Interstate because Interstate's judgment lien was recorded "first in time."

Holding: Reversed and remanded. A lien that is recorded first in time usually has priority and is entitled to first recovery from the property it binds. But the first in time doctrine is not the only relevant factor in determining lien priority. When Pacific assigned its mortgage to Aames, the mortgage debt was not extinguished, therefore Aames was not required to record the assignment to maintain the original mortgage lien priority.

The doctrine of subrogation should be considered when determining lien priority. Under Illinois law, there are two distinct categories of subrogation: equitable subrogation and conventional subrogation. Equitable subrogation prevents unjust enrichment and is not applicable to the present case. Conventional subrogation is a right springing from an express agreement with a debtor where the subrogee advances money to pay the debt and in exchange, the subrogee receives a lien equal to the one paid off. This is the definition of mortgage refinancing. Conventional subrogation applies in the present case because the provisions of the original mortgage state that the Wanglers were to discharge any lien that had priority over the mortgage and Pacific would pay any lien that had priority over the mortgage. The doctrine of conventional subrogation therefore entitles the refinancing mortgagee to be subrogated to the original lien, and its corresponding position, up to the amount that the original mortgage secured at the time of its perfection. From a policy perspective, without subrogation of the original lien, lenders may be unwilling to refinance mortgages and intervening lenders would benefit from the payoff by the refinancing mortgagees.

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