In its decision yesterday in Wells Fargo Bank v. Comeau (pdf), the Massachusetts Appeals Court rejected the plaintiff mortgagee’s attempt to use the doctrine of equitable subrogation in a novel way: to impose on a surviving wife the obligation to pay a note signed by her late husband where the wife had not signed either the note or the mortgage.

The boiled down facts are as follows. Husband and wife owned a home as tenants by the entirety. In 2003 the property was mortgaged to a local bank. Husband alone signed the note; husband and wife signed the mortgage. In 2005 husband refinanced with a different bank. This time husband alone signed both the note and mortgage. In 2008 husband died, leaving a balance due on the note. Wells Fargo, successor of the refinancing bank, did not assert a claim against husband’s estate before the statute of limitations expired. Instead Wells Fargo sued wife, claiming its mortgage should be equitably subrogated to the position of the 2003 mortgage – the one signed by husband and wife – so as to encumber wife’s interest in the property. The Superior Court flatly rejected Wells Fargo’s attempt to make a silk purse out of, well, out of absolutely nothing.

The Appeals Court gave Wells Fargo’s claim similarly short shrift. While crediting its novelty, the court found the claim to be “fundamentally at odds with the framework [for equitable subrogation] established by the Supreme Judicial Court . . . .” Helpfully, the Appeals Court took the occasion to review that framework in detail. As laid out in East Boston Savings Bank v. Ogan (pdf), the five factors courts consider in deciding if equitable subrogation applies are whether:

  • the subrogee made a payment to protect its own interest
  • the subrogee did not act as a volunteer
  • the subrogee was not primarily liable for the debt paid
  • the subrogee paid off the entire encumbrance
  • subrogation would not work any injustice to the rights of the junior lienholder

The Appeals Court noted that the subrogee’s knowledge and expectations at the time it changed position may also be relevant. The court summarized the three main approaches to this analysis described in the Restatement (Third) of Property (Mortgages), and concluded that the best approach is to eschew bright lines and simply apply equitable considerations.

Based on the five Ogan factors plus the expectations of Wells Fargo’s predecessor when it refinanced the loan without getting a mortgage from wife, the Appeals Court found no basis for applying equitable subrogation. The court observed that the ultimate purpose of equitable subrogation is to prevent unjust enrichment, and while wife may have been enriched, “she was not unjustly enriched.” Quoting the trial judge, the court held that, absent any wrongful or misleading conduct or mistake by a third party, Wells Fargo should not “now obtain exactly what its predecessor-in-interest . . . chose to forego,” namely, a lien on wife’s interest in the property.

Besides the useful primer on equitable subrogation, this decision is a pointed reminder that courts will carefully scrutinize a party’s claim of entitlement to an equitable remedy, and will exercise their discretion to grant such remedies only to the truly deserving.