Equitable subrogation: Filby v Mortgage Express (No 2)

Introduction

In Filby v Mortgage Express (No 2) Ltd ([2004] EWCA Civ 759) the English Court of Appeal (May LJ giving the judgment) explained the circumstances in which a lender who supplies funds to pay off earlier loans made by another creditor is subrogated to the rights of that creditor. It also decided that subrogation can apply to unsecured rights of the creditor whose loan has been repaid.

Facts

H and W were joint owners of a house. They granted a charge to Halifax BS and had an unsecured loan from the Midland Bank. H borrowed money from Mortgage Express. He purported to grant a charge over the property to Mortgage Express but forged his wife’s signature on the charge. It was not therefore binding on her.

The loan from Mortgage Express was partly used to pay off the Halifax loan and it was accepted that Mortgage Express was subrogated to the Halifax’s secured rights. The rest of the loan was used to reduce the couple’s unsecured loan indebtedness to the Midland Bank.

The question was whether Mortgage Express could be subrogated to Midland Bank’s unsecured rights against H and W.

The law

May LJ explained that A’s right to equitable subrogation arises:

1.  to reverse what would otherwise be an unjust enrichment of B at A’s expense;
2.  B is enriched if her financial position is materially improved (usually where, as here, B is relieved of a financial burden);
3.  the enrichment is at A’s expense if A’s money has been used to relieve B of the financial burden;
4. the enrichment is unjust if A does not get the security that they had bargained for;
5.  B’s financial improvement is properly seen as a windfall;
6.  it is enough that A’s money is in fact used to bring about the improvement (the intention of A or B or both as to how the money would be used is irrelevant). ([62])

Equitable subrogation does not give A more than they bargained for.

‘The essence of the remedy is that the court declares the claimant to have a right having characteristics and content identical to that enjoyed, in this instance, by Midland Bank (see Birks, at page 95), subject to any modification (for example as to rates of interest) necessary to ensure that the claimant does not get more than he bargained for. ‘ ([63])

The decision

Mortgage Express was entitled to be subrogated to the unsecured rights of the Midland Bank arising under the joint loan account ([64]).

Michael Lower