law-equitable-subrogation | subrogation | remedy for breach of express contract vs. equitable remedy and relief
Absent a contractual provision, subrogation is based on equitable principles and we will not disturb a trial
court's balancing of the equities unless "it would be inequitable to allow the judgment to stand." Esparza v.
Scott & White Health Plan, 909 S.W.2d 548, 552 (Tex.App.-Austin 1995, writ denied).[7] If either an insured or
an insurer "must to some extent go unpaid, the loss should be borne by the insurer for that is a risk the insured
has paid it to assume." Ortiz v. Great S. Fire & Cas. Ins. Co., 597 S.W.2d 342, 344 (Tex. 1980) (quoting Garrity
v. Rural Mut. Ins. Co., 77 Wis.2d 537, 253 N.W.2d 512, 514 (1977)). An insurer is not entitled to equitable
subrogation until the insured is "made whole" for his loss. Esparza, 909 S.W.2d at 552; Ortiz, 597 S.W.2d at
343.
EQUITABLE SUBROGATION
We also note that Texas courts have "long recognized a lienholder's common law right to
equitable subrogation." LaSalle Bank Nat'l Ass'n v. White, 246 S.W.3d 616, 618-19 (Tex. 2007)
(recognizing lender's equitable subrogation rights under common law and holding that lender was equitably
subrogated to prior lienholders' interest and, thus, could pursue recovery "for the refinance portion of the loan
proceeds" that were used to pay purchase-money and tax liens on homestead property); see also Benchmark
Bank v. Crowder, 919 S.W.2d 657, 661 (Tex. 1996) (holding that bank that loaned money to homeowners to
pay federal taxes was equitably subrogated to federal tax liens against property and stating that "[o]nce valid,
the lien [did] not become invalid against the homestead simply because the original debt [had] been
refinanced").
Sheppard v. Interbay Funding, LLC (Tex.App.- Houston [1st Dist.] Aug. 27, 2009)(Jennings)
(real estate transactions, deeds, refinancing, declaratory judgment lien priority status, equitable subrogation)
AFFIRM TC JUDGMENT: Opinion by Justice Jennings
Before Justices Jennings and Bland, The Honorable Hudson
01-07-00935-CV Leonard Sheppard, Jr., Trustee v. Interbay Funding, LLC
Appeal from 400th District Court of Ft. Bend County
Trial Court Judge: Hon Clifford J. Vacek
We further note that the Texas Supreme Court has explained the benefits of equitable subrogation as applied
in the context of a refinancing transaction, noting that equitable subrogation permits property owners "to renew,
rearrange, and readjust [an] encumbering obligation to prevent a loss" through foreclosure. Benchmark Bank,
919 S.W.2d at 661 (explaining benefits of applying equitable subrogation in context of refinancing transaction
involving homestead property); LaSalle Bank Nat'l Ass'n, 246 S.W.3d at 620 (stating that "[w]ithout equitable
subrogation, lenders would be hesitant to refinance [] property due to increased risk that they might be forced
to forfeit their liens"); see also Diversified Mortgage Investors v. Lloyd D. Blaylock Gen. Contractor, Inc., 576 S.
W.2d 794, 807 (Tex. 1978) (recognizing importance of equitable subrogation to lenders in Texas because
doctrine "serves to protect a lienholder from intervening liens, at least to the amount of the initial lien, when the
lienholder has discharged a prior superior lien"); Faires v. Cockrill, 88 Tex. 428, 437, 31 S.W. 190, 194 (1895)
(stating that "[p]erhaps the courts of no state have gone further in applying the doctrine of subrogation than
has the court of this state" and that "[o]ne who discharges the vendor's lien upon lands,--even the homestead,--
either by paying as surety, or at the request of the debtor, or at a judicial sale, which, for irregularities in the
process, fails to convey the title, is entitled to be subrogated to the lien of the creditor to the extent of the
payment so made"). Moreover, Texas courts have generally indicated that a refinancing lender's knowledge of
a subordinate lien does not automatically defeat a claim for subrogation. See Providence Inst. for Sav. v. Sims,
441 S.W.2d 516, 520 (Tex. 1969) (holding that, under circumstances presented in that case, "neither actual
nor constructive knowledge of the intervening lien [would] defeat the right of subrogation to which the debtor
agreed . . .").
Finally, we note that a recent, thorough opinion from the Supreme Court of Washington surveying equitable
subrogation cases from around the country has characterized Texas as one of several jurisdictions to have
followed the more liberal Restatement approach on equitable subrogation, which considers "actual or
constructive knowledge of intervening interests [to be] irrelevant." Bank of America, N.A. v. Prestance Corp.,
160 P.3d 17, 21, 25 (Wash. 2007) (citing Farm Credit Bank of Tex. v. Ogden, 886 S.W.2d 305, 311 (Tex. App.--
Houston [1st Dist.] 1994, no pet.); Chicago Title Ins. Co. v. Lawrence Invs., Inc., 782 S.W.2d 332, 334 (Tex.
App.--Fort Worth 1989, writ ref'd)); see also Restatement (Third) of Property (Mortgages) § 7.6 cmt. e (1997)
("[S]ubrogation can be granted even if the payor had actual knowledge of the intervening interest. . . . The
question in such cases is whether the payor reasonably expected to get security with a priority equal to the
mortgage being paid.")). As explained by the court in Bank of America, a rule that would preclude equitable
subrogation simply because a refinancing lender has knowledge of prior or intervening liens would defeat the
availability of equitable subrogation in many refinancing transactions. Bank of America, N.A., 160 P.3d at 22
(stating that such rule would "render[] equitable subrogation nearly useless since a refinancing mortgagee will
almost always have either actual or constructive knowledge of junior lienholders").
Farragut’s live pleading states only a claim for breach of contract, and an equitable right
to subrogation cannot exist where a contract governs the parties’ relationship. See
Fortis Benefits v. Cantu, 234 S.W.3d 642, 650 (Tex. 2007) (holding that equitable
subrogation right may arise only in absence of express agreement).
Bennett Truck Transport, LLC v. William Brothers Construction
(Tex.App. - Houston [14th Dist.] May 22, 2008)(Yates) (common carrier liability, equitable subrogation,
summary judgment reversed)
REVERSED AND REMANDED: Opinion by Justice Brock Yates
Before Justices Brock Yates, Fowler and Guzman
14-06-00923-CV Bennett Truck Transport, LLC v. William Brothers Construction
Appeal from County Civil Court at Law No 1 of Harris County
Trial Court Judge: R. Jack Cagle
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