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31 July 2000

JUSTICE GEIGER delivered the opinion of the court:

This appeal arises from a dispute concerning lien priority ina mortgage foreclosure proceeding. The issue is whether amortgagee that pays off a priority mortgage pursuant to arefinancing agreement is entitled to be subrogated to the prioritymortgage lien recorded by the original mortgagee.

On October 17, 1986, Patrick Wangler and Diane Wanglerexecuted a note and mortgage in favor of Hinsdale Federal Savingsand Loan that was later assigned to Standard Federal Bank(Standard). The note and mortgage were filed with the Du PageCounty recorder's office on November 7, 1986. Thereafter, theWanglers executed junior mortgages in favor of Suburban Bank ofElmhurst (Suburban) that were recorded on July 12, 1988, June 30,1989, January 31, 1990, and July 30, 1991.

On April 26, 1996, the defendant-appellee, Interstate Bank ofOak Forest (Interstate), obtained a judgment against the Wanglersin the amount of $75,891.06. Interstate recorded a memorandum ofjudgment with the Du Page County recorder's office on September 4,1996.

On August 28, 1996, the Wanglers executed a note and mortgagefor the sum of $174,000 in favor of Pacific Thrift and Loan Company(Pacific) pursuant to a refinancing agreement whereby Pacific wouldpay off the mortgages to Standard and Suburban. The mortgagedocument executed by the parties is the Fannie Mae/Freddie MacUniform Instrument for Illinois (Uniform Instrument). Pacific'smortgage was later assigned to plaintiff-appellant, Aames CapitalCorporation (Aames). The Wanglers did not receive any funds fromthe refinancing. The closing agent issued checks to Standard andSuburban on September 4, 1996, in payment of the balance due underthe mortgages held by them. On September 20, 1996, Pacificrecorded its mortgage. On September 24, 1996, Suburban filedreleases of its mortgages, but no release had been filed of theStandard mortgage.

On June 6, 1997, Aames filed this foreclosure action after theWanglers defaulted on the note. In its foreclosure complaint,Aames alleged that Interstate's judgment lien was inferior andsubordinate to Aames's first mortgage lien.

Both Aames and Interstate filed motions for summary judgmentas to lien priority. The trial court entered an order denyingAames's motion and granting Interstate's motion, ruling thatInterstate's judgment lien took priority because it was recordedprior to Aames's mortgage lien.

On appeal, Aames argues that, even though Interstate'sjudgment lien predates its mortgage with the Wanglers, it nevertheless holds first priority position because it is equitablysubrogated to the priority mortgage liens perfected by Standard andby Suburban. Aames argues that the doctrine of equitablesubrogation provides that a refinancing mortgage assumes thepriority position of the prior mortgage that is satisfied throughthe refinancing. Interstate responds that the doctrine of first intime, first in right applies such that the judgment lien takespriority as the lien prior in time. Interstate also argues thatthe doctrine of equitable subrogation is only applied when there isan express agreement that the refinancing mortgage will assume thepriority position.

I. FIRST IN TIME, FIRST IN RIGHT

We review the trial court's summary judgment order de novo. Wiseman-Hughes Enterprises, Inc. v. Reger, 248 Ill. App. 3d 854,857 (1993). A lien is a hold or claim that one party has on theproperty of another for a debt. Podvinec v. Popov, 266 Ill. App.3d 72, 77 (1994), rev'd on other grounds, 168 Ill. 2d 130 (1995). A lien that is first in time generally has priority and is entitledto prior satisfaction of the property it binds. Cole Taylor Bankv. Cole Taylor Bank, 224 Ill. App. 3d 696, 704 (1992).

A mortgage is a type of consensual lien on real property. See735 ILCS 5/15-1207 (West 1996). Specifically, it is an interest inland created by written instrument providing security in realestate to secure the payment of a debt. Resolution Trust Corp. v.Holtzman, 248 Ill. App. 3d 105, 111 (1993). Under the IllinoisMortgage Foreclosure Law, a mortgage lien is created upon recordingof the mortgage with the recorder of deeds. See 735 ILCS 5/15-1301(West 1996); see also Firstmark Standard Life Insurance Co. v.Superior Bank FSB, 271 Ill. App. 3d 435, 439 (1995).

The perfection of mortgage liens is governed also by theConveyances Act (765 ILCS 5/1 et seq. (West 1996)). Section 28 ofthe Conveyances Act provides that deeds, mortgages, and otherinstruments relating to or affecting the title to real estate shallbe recorded in the county in which such real estate is situated. 765 ILCS 5/28 (West 1996). The purpose of this section is to givethird parties the opportunity to ascertain the status of title tothe property. Lubershane v. Village of Glencoe, 63 Ill. App. 3d874, 879 (1978). The purchaser of real estate may rely on thepublic record of conveyances and instruments affecting title,unless he has notice or is chargeable with notice of a claim orinterest that is inconsistent with the record. Bullard v. Turner,357 Ill. 279, 283 (1934).

Section 30 of the Conveyances Act provides as follows:

"All deeds, mortgages and other instruments of writingwhich are authorized to be recorded, shall take effect and bein force from and after the time of filing the same forrecord, and not before, as to all creditors and subsequentpurchasers, without notice; and all such deeds and titlepapers shall be adjudged void as to all such creditors andsubsequent purchasers, without notice, until the same shall befiled for record." 765 ILCS 5/30 (West 1996).

The purpose of this section is to protect subsequentpurchasers against unrecorded prior instruments. Farmers StateBank v. Neese, 281 Ill. App. 3d 98, 106 (1996). A presumptionexists that the first mortgage recorded has priority. Firstmark,271 Ill. App. 3d at 439. An unrecorded interest in land is noteffective as to a bona fide purchaser without notice. SchaumburgState Bank v. Bank of Wheaton, 197 Ill. App. 3d 713, 720 (1990). However, where a party has constructive notice of a prior interestin real estate, the failure to record is not necessarily fatal tothe rights of the prior interest holder. See Dana PointCondominium Ass'n, Inc. v. Keystone Service Co., 141 Ill. App. 3d916, 922 (1986).

The doctrine of first in time, first in right is not always asclear and obvious as it may seem. For instance, a separate body oflaw governs lien priority in cases involving renewal notes andmortgages. A renewal note and mortgage do not ordinarily operateas payment and in discharge of an original note for purposes ofdetermining whether the renewal note maintained priority position. State Bank v. Winnetka Bank, 245 Ill. App. 3d 984, 991 (1993). Incases of a dispute concerning priority when the original note andmortgage are renewed, the court looks to the intent of the partiesin determining whether the renewal extinguishes the originalmortgage lien. Winnetka Bank, 245 Ill. App. 3d at 991. InWinnetka Bank, the court was persuaded that the mortgage liensurvived the renewal of the original mortgage and the tender of anadditional loan because there was no evidence that the originalmortgage was ever canceled or released. See Winnetka Bank, 245Ill. App. 3d at 991.

Another area of interest concerns the priority position ofmortgage assignees. Relying in part on Community Bank v. Carter,283 Ill. App. 3d 505 (1996), we recently held in Federal NationalMortgage Ass'n v. Kuipers, No. 2--99--0933, slip op. at 10 (June28, 2000), that an assignee of a mortgagee was not required torecord the assignment of mortgage in order to maintain the originalmortgagee's priority position. In Carter, the court held that theassignments of the mortgage did not extinguish the mortgage debtand, therefore, the assignees acquired the same rights andinterests as the original mortgagee, including the right to collectunder a property insurance policy. Carter, 283 Ill. App. 3d at510.

Yet an additional consideration to first in time, first inright is the law surrounding subrogation. Subrogation is a methodwhereby one who had involuntarily paid a debt of another succeedsto the rights of the other with respect to the debt paid. DixMutual Insurance Co. v. LaFramboise, 149 Ill. 2d 314, 319 (1992). Subrogation has been applied to subrogate one party to the lienpriority of another. See Home Savings Bank v. Bierstadt, 168 Ill.618 (1897); Detroit Steel Products Co. v. Hudes, 17 Ill. App. 2d514 (1958); Kankakee Federal Savings & Loan Ass'n v. Arnove, 318Ill. App. 261 (1943). These cases are discussed in greater detailbelow. However, two principles emerge from the above discussionthat lead us to reject Interstate's contention that the onlyrelevant inquiry is the date of recording of its lien. The firstis that blind adherence to the first in time, first in rightdoctrine is sometimes insufficient to determine lien priority. Thesecond is that whatever case-law doctrines operate as exceptions tothe first in time, first in right doctrine must comport with thepurpose of the recording requirement, namely, to provide notice ofliens to third parties.

In this case, the original mortgage liens were created byagreement and perfected between November 1986 and July 1991 byrecording with the Du Page County recorder of deeds. The mortgageliens acted to secure payment of the mortgage debts. Henceforwardfrom those dates, third parties examining chain of title to thereal estate were put on notice of the existence of the debts and ofthe liens on the real estate. Because no release of lien had beenfiled pursuant to section 2 of the Mortgage Act, there was noindication to third parties that the liens were ever extinguished.See 765 ILCS 905/2 (West 1996).

Those liens were still in effect when Interstate recorded itsjudgment lien on September 4, 1996. Because Interstate had noticeof prior mortgage liens when it recorded its judgment lien, we seeno reason why the doctrine of first in time, first in right wouldrequire us to reject, at the outset, Aames's argument thatsubrogation may apply. Therefore, we take a closer look atequitable and conventional subrogation.

II. COMPARISON OF EQUITABLE AND CONVENTIONAL SUBROGATION

There are two broad categories of subrogation rights:contractual or conventional rights, and common-law or equitablerights. Schultz v. Gotlund, 138 Ill. 2d 171, 173 (1990). Equitable subrogation is a creature of chancery that is utilized toprevent unjust enrichment. LaFramboise, 149 Ill. 2d at 319. Thereis no general rule that can be laid down to determine whether aright of equitable subrogation exists, since the right depends uponthe equities of each particular case. LaFramboise, 149 Ill. 2d at319. Conventional subrogation, on the other hand, arises from anagreement between the parties that the subrogee pay a debt onbehalf of a third party and, in return, be able to assert therights of the original creditor. See Home Savings Bank v.Bierstadt, 168 Ill. 618, 624 (1897).

In Bierstadt, the court held that the appellee, who hadadvanced funds to discharge certain prior deeds of trust, wassubrogated to the priority lien rights of the holders of the deedsof trust. The court defined conventional subrogation as a rightspringing from an express agreement with the debtor where thesubrogee advances money to pay a claim, which carries a lien, andwhere the subrogee and the debtor agree that the subrogee is tohave an equal lien to the one paid off. Bierstadt, 168 Ill. at624. As such, the court reasoned, the subrogee is entitled to thebenefit of the security that he has satisfied with the expectationof receiving an equal lien. Bierstadt, 168 Ill. at 624.

The Bierstadt court described the agreement between the debtorand the appellee as being "to the effect" that the appellee wouldadvance sufficient funds to pay off the prior deeds of trust andthen would receive from the debtor a first mortgage as security forthe funds advanced. Bierstadt, 168 Ill. at 624-25. In applyingconventional subrogation, the court noted, "[t]hat was thesubstance of the transaction, and equity will effectuate the realintention of the parties, where no injury is done to an innocentparty." Bierstadt, 168 Ill. at 625.

Although conventional subrogation is seen sporadically inIllinois case law, equitable subrogation is even more elusive. Oneof the few modern applications of equitable subrogation is seen inDetroit Steel Products Co. v. Hudes, 17 Ill. App. 2d 514, 517(1958). In Hudes, the court found that equitable subrogation wouldapply to advance the claims of the mortgagee bank in a mechanics'lien foreclosure where the bank had required that the borrower paycertain claims of a material provider from the loan proceeds. Thetrial court found that the bank's mortgage would be subrogated tothe priority position of the material provider to the extent thatthe material provider had been paid from the loan proceeds.

The court held that equitable subrogation prevents theunearned enrichment of one party at the expense of another and willbe granted only where an equitable result will be reached. Hudes,17 Ill. App. 2d at 520. The court noted that no prejudice resultedto the material providers who had not been paid because, but forthe mortgage, they would have been required to share the saleproceeds with the material provider whose claim had been paid fromthe loan proceeds. Hudes, 17 Ill. App. 2d at 521. The courtfurther noted that to deny subrogation would be to grant anunearned enrichment to the unpaid material providers due to thereduction of outstanding claims. Hudes, 17 Ill. App. 2d at 521.

III. APPLICATION OF CONVENTIONAL AND EQUITABLE SUBROGATION TOMORTGAGE REFINANCING

Although Aames cites cases applying conventional subrogation,it argues that equitable subrogation applies; Aames does notconsider that Illinois case law has specifically held that the twoare separate and distinct doctrines. It appears that there is noprecise definition of equitable subrogation that is applicable tothis case. It also appears that Illinois courts, including thosecases cited by Aames, have previously considered whetherconventional subrogation applies to a mortgage refinancingagreement. See Bierstadt, 168 Ill. at 625; Arnove, 318 Ill. App.at 265. For these reasons, we decline to analyze the present caseunder equitable subrogation and, instead, consider whetherconventional subrogation, as outlined in Aames's argument and inBierstadt, may be applied.

Interstate argues that subrogation does not apply becausethere was no agreement that Pacific would move into the prioritypositions established by Standard and by Suburban. This contentionforms the real crux of this case. Relying on Firstmark StandardLife Insurance Co. v. Superior Bank, 271 Ill. App. 3d 435 (1995),Interstate argues that subrogation requires that there be anagreement that the refinancing mortgage move into the position ofthe mortgage that it is paying off. A careful review of Firstmark,however, reveals that its holding is inapplicable to the presentcase.

In Firstmark, at the time that the property owners executed arefinancing mortgage in favor of the appellant, there were foursenior mortgages on the property. Firstmark, 271 Ill. App. 3d at437. The appellant paid off three of the four mortgages. Theremaining senior mortgage was held by the appellee. The mortgageheld by the appellant provided that it was subject to certainexceptions, including the mortgage held by the appellee. Theappellee later filed a foreclosure proceeding, and the partiesfiled motions for summary judgment as to lien priority. The trialcourt ruled that the appellee's mortgage took priority.

On appeal, the appellant argued that the doctrine ofconventional subrogation should be applied such that it would moveinto the priority position of the three initial mortgages it hadpaid off pursuant to the refinancing. Firstmark, 271 Ill. App. 3dat 439. It does not appear from the court's analysis either thatthe appellant requested review under equitable subrogation or thatthe court considered the distinction between equitable andconventional subrogation as defined in Schultz.

The Firstmark court reviewed early case law on the issue ofthe application of conventional subrogation and found that theremust be an express agreement that the interests of the refinancingmortgagee are to be advanced to a first mortgage. Firstmark, 271Ill. App. 3d at 440-41. The court held that there was no suchexpress agreement in that case. Pointing to the language in therefinancing mortgage that the mortgage held by the appellant wassubject to the mortgage held by the appellee, the court held thatthe doctrine of conventional subrogation would not apply. Firstmark, 271 Ill. App. 3d at 441.

We do not find that the holding in Firstmark controls thepresent case. In Firstmark, the refinancing mortgage expresslystated that it was subject to the prior liens. In the presentcase, however, no such provision appears in either the note or theUniform Instrument. It specifically provides that the Wanglerswere to discharge any lien that had priority over the mortgage. The Uniform Instrument further provides that Pacific may pay anysums secured by a lien that had priority over its mortgage and thatany such sum paid would become additional debt secured by themortgage.

Although there is no provision in the Uniform Instrument thatspecifically states that the mortgage is a first mortgage, webelieve that the above-referenced provisions, when read together,indicate that the agreement of the parties was that the mortgageheld by Pacific would be a first priority mortgage, and that anyother prior mortgages of record would be paid off by Pacific, withthe new mortgage securing that debt. In addition, we do notbelieve that such a specific provision in the mortgage documentregarding the assumption of the first priority position is requiredby the holding in Bierstadt. As noted earlier, the Bierstadt courtdescribed the agreement as being "to the effect" of paying off apriority lien and assuming that priority position. The Bierstadtcourt makes no reference to any specific provision in the mortgagedocuments.

In short, we do not believe that Firstmark may be read toconclude that the Uniform Instrument is somehow inadequate toconsummate the refinancing of a mortgage in Illinois. Moreover, wenote that, even if there were an additional provision thatspecifically stated that Pacific would have a first priority lien,it would be of little effect, as lien priority is determined bylaw, any agreement of the parties notwithstanding.

Although Firstmark tells us when conventional subrogation willnot apply, it does not tell us when it will. There are no Illinoiscases of recent vintage that explain when subrogation will apply toa mortgage refinancing. We are persuaded by Aames's argument thatthe holding in Bierstadt should be resurrected to determine whenconventional subrogation should apply to a case involving amortgage refinancing. Conventional subrogation is a rightspringing from an agreement with the debtor where the subrogeeadvances money to pay a claim that carries a lien and where thesubrogee and the debtor agree that the subrogee is to have an equallien to the one paid off. See Bierstadt, 168 Ill. at 624. Theholding in Bierstadt fits the precise definition of a mortgagerefinancing. In this case, Aames, as the assignee of the subrogee,is entitled to the benefit of the security attaching to the debtthat it satisfied with the expectation of receiving an equal lien. See Bierstadt, 168 Ill. at 624; see also Arnove, 318 Ill. App. at264 (holding that it is "settled law" that, when a refinancingmortgage is made, the lien of the old mortgage continues in effectwithout interruption and the new mortgage does not becomesubordinate to an intervening lien attaching between the time ofthe recording of the old mortgage and the effective date of the newone).

There are numerous policy reasons to apply the doctrine ofconventional subrogation to a case involving a refinancingmortgage. A debtor in bankruptcy, who has outstanding judgmentsand has defaulted on his mortgage, may find relief in refinancinghis home, albeit under less favorable loan terms. Similarly, anytime a mortgage note is accelerated or matures is a primeopportunity for a debtor to enter into a refinancing agreement. Absent subrogation of the original mortgage lien, these consumerswould be hard-pressed to find a lender willing to refinance. Inaddition, if subrogation were not applied in cases of mortgagerefinancings, then the intervening lienor (in this case Interstate)would receive a windfall from the payoff by the refinancingmortgagee.

Subrogation has been applied in cases of mortgage refinancingsin many jurisdictions (see Mort v. United States, 86 F.3d 890 (9thCir. 1996); Harley J. Robinson Trust v. Ardmore Acres, Inc., 6 F.Supp. 2d 640 (E.D. MI 1998); In re Cutty's-Gurnee, Inc., 133 B.R.934 (N.D. Ill. 1991); East Boston Savings Bank v. Ogan, 428 Mass.327, 701 N.E.2d 331 (1998); Wolf v. Spariosu, 706 So. 2d 881 (Fla.App. 1998); G.E. Capital Mortgage Services, Inc. v. Levenson, 338Md. 227, 657 A.2d 1170 (1995); Rock River Lumber Corp. v. UniversalMortgage Corp., 82 Wis. 2d 235, 262 N.W.2d 114 (1978); cf. FirstFederal Savings Bank v. United States, 118 F.3d 532 (7th Cir. 1997)(refusing to apply subrogation under Indiana law where subrogationwould benefit a negligent title insurer that had not discovered afederal tax lien on behalf of the insured, which was asophisticated mortgage lender)).

We hold that a refinancing mortgagee that records its mortgagelien is entitled to be subrogated to the original lien, and itscorresponding priority position, established by the originalmortgagee, under the doctrine of conventional subrogation, up tothe amount that the original mortgage secured at the time of itsperfection. The doctrine of conventional subrogation will apply ifthe original mortgage lien is in full force and effect at the timethat the refinancing mortgage lien is recorded. However, nothingin our holding modifies in any way the ability to extinguish theoriginal mortgage lien. If the original mortgagee files a releaseof lien prior to the recordation of the refinancing mortgagee'slien and if a third party records its lien after the release isrecorded but before the refinancing lien is recorded, thenconventional subrogation will not apply. We also note that, underconventional subrogation, a refinancing mortgagee may not pick andchoose which liens it will pay off. The refinancing mortgagee willonly be subrogated to the liens it pays off which predate theintervening third-party lien. Nothing in our holding, however,limits the court from considering whether the doctrine of equitablesubrogation may apply.

Having determined that conventional subrogation applies tomove Aames into the priority positions established by Suburban andby Standard, we must remand this case to determine the extent towhich Aames is subrogated. Under our holding, Aames is onlyentitled to be subrogated up to the amount that the originalmortgages secured at the time of perfection. We have searched therecord for evidence of the value secured by the Standard andSuburban mortgages, but we have been unable to locate the necessaryinformation. Although Aames has entered into the record evidenceof the amounts it paid to Standard and Suburban, these amounts areirrelevant. What is relevant is the value of the prior liens asdetermined by the mortgage documents. That is to say, a findingthat Aames has paid a certain sum to the prior mortgage holdersdoes not necessarily translate into a finding that whatever sum waspaid was indeed owed under the mortgages of record. Therefore, onremand, the trial court should determine the amount to which Aamesis subrogated.

For the foregoing reasons, the judgment of the circuit courtof Du Page County is reversed, and the cause is remanded.

Reversed and remanded.

INGLIS and GALASSO, JJ., concur.