The doctrine of subrogation allows a lender to take priority - to leap-frog ahead - as lienholder even over a third party who recorded its lien first and did not have notice of the lender's lien. This article discusses the rule and its underlying principles.

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In mortgage lending litigation, subrogation is the exception to a doctrine known as the "first in time, first in right" rule for determining who has priority when multiple parties have recorded a lien on a property.¹ Before discussing the subrogation exception, however, it is important to understand the general rules governing lien priority.

The "first in time" rule in lien priority disputes

The "first in time" rule derives from the concept of lien priorities. A lien is a hold or claim that one party has on the property of another for a debt.² A lien that is recorded "first in time" with the proper recorder of deeds' office generally has priority and is entitled to prior satisfaction from the property that it binds.³

A mortgage is a type of consensual lien on real property.⁴ Specifically, a mortgage "is an interest in land created by written instrument providing security in real estate to secure the payment of a debt."⁵ Under both the Illinois Mortgage Foreclosure Act and the Illinois Conveyances Act, a mortgage lien is created and perfected upon the recording of the mortgage with the appropriate recorder of deeds.⁶

Thus, mortgages are not binding against third parties until they are recorded.⁷ The purpose of recording is to give third parties a chance to ascertain the status of title to the property and to protect them from un-recorded prior encumbrances.⁸ Under the Illinois Conveyances Act, a presumption exists that the lien recorded first has priority.⁹ For example, consider the following hypothetical.

First hypothetical -the "first in time" rule

Borrower seeks a loan from Lender in early 2004. At the time of the closing on March 1, 2004, Original Creditor holds a Lenders mortgage lien against the property. Lender loans money to Borrower and pays off Original Creditor's lien at the closing.

In exchange for the loan and the payoff of Original Creditor's lien, Borrower executes a promissory note ("Lender's note") and mortgage ("Lender's mortgage") in favor of Lender at the closing. Lender's note and mortgage contain express subrogation language.

On March 2, 2004, Original Creditor's lien is released.

Unaware of Lender's mortgage, which has yet to be recorded, Third Party records a claim for lien against the property on March 3, 2004. Lender's mortgage is subsequently recorded on March 4, 2004.

Under this hypothetical, Third Party's lien would take priority over Lender's mortgage under the "first in time" rule. The reasoning for this conclusion is (a) Third Party's lien is recorded first in relation to Lender's mortgage, (b) Third Party lacked notice of Lender's mortgage, and (c) there was no prior encumbrance - i.e., Original Creditor's lien was released at the time of the recording of the Third Party lien.¹⁰

The notice exception to the "first in time" rule

The "first in time" rule "'is not always as clear and obvious as it may seem.'"¹¹ Accordingly, "blind adherence" to the rule may be "'insufficient to demonstrate lien priority.'"¹² This is best demonstrated by noting the Illinois Conveyances Act's notice exception to the "first in time" rule.

Illinois is not simply a "race" jurisdiction. In other words, the first party who wins the race to the recorder's office and records its lien first against real property is not necessarily the party who wins a priority dispute.¹³ Rather, Illinois is a "race-notice" jurisdiction.¹⁴ Section 30 of the Illinois Conveyances Act states as follows:

All deeds, mortgages and other instruments of writing which are authorized to be recorded, shall take effect and be in force from and after the time of filing the same for record, and not before, as to all creditors and subsequent purchasers, without notice; and all such deeds and title papers shall be adjudged void as to all such creditors and subsequent purchasers, without notice, until the same shall be filed for record.¹⁵

In other words, if a third party wins the race to the recorder's office and lacks knowledge of a prior, unrecorded lien, the third party will win the priority dispute.¹⁶ Conversely, if the third party wins the race to the recorder's office but has knowledge (i.e. actual, constructive, or inquiry notice)¹⁷ of the prior but unre-corded encumbrance, the third party will lose the priority dispute.¹⁸

Consider another hypothetical.

Second hypothetical -
the notice exception

Borrower seeks a loan from Lender in early 2004. At the time of the closing on March 1, 2004, the Original Creditor's lien is recorded against the property. Lender loans money to Borrower and pays off Original Creditor's lien at the closing. In exchange for the loan and the payoff of Original Creditor's lien, Borrower executes the Lender's note and Lender's mortgage in favor of Lender at the closing. Lender's note and mortgage contain express subrogation language.

On March 2, 2004, the Original Creditor's lien is released.

Although Lender's mortgage is unre-corded, Third Party is aware of Lender's mortgage when it records its lien against the property on March 3, 2004. Lend-er's mortgage is subsequently recorded on March 4, 2004.

Under this hypothetical, a court would likely find that Third Party's lien is subordinate to Lender's mortgage pursuant to section 30 of the Illinois Conveyances Act. This is true despite the fact that (a) Third Party's lien is recorded "first in time" in relation to Lender's mortgage and (b) there was no prior encumbrance in that Original Creditor's lien was released at the time of Third Party's recording. What distinguishes the second hypothetical from the first is that Third Party possessed knowledge of the existence of the prior, unrecorded Lender's mortgage when it recorded the lien.

The subrogation exception to the "first in time" rule

A good way to describe the subrogation exception to the "first in time" rule is by analogy to the game leap-frog. Subrogation allows a lender to defeat a third party in a lien priority dispute by allowing lender's mortgage to "leap" over the third party lien into the first lien position of the original creditor.

Understanding subrogation. The doctrine of subrogation is a "favorite of law."¹⁹ It is a method whereby one who has paid a debt or claim of another succeeds to the rights of the other with respect to that claim or debt.²⁰

One of the basic principles of subrogation is that the successor party seeking the benefit of subrogation (the "subrogee") does not seek to exercise the means and remedies in its own right.²¹ Rather, the subrogee only seeks to exercise its rights and remedies as a successor to the legal rights of the party that received the benefit of the subrogee's payment (the "subrogor").²² In other words, under the doctrine of subrogation, the subrogee "steps into the shoes" of the subrogor.²³

The right of subrogation is equitable in nature and will be allowed to prevent injustice.²⁴ The doctrine of subrogation rests on the principle that "justice should be attained by placing ultimate responsibility for the loss upon the one against whom in good conscience it ought to fall."²⁵ No general rule can be laid down to determine whether a right of subrogation exists, since it depends upon the equities of each case.²⁶

"Equitable" and "conventional" subrogation. There are two types of subrogation: equitable and conventional.²⁷
Subrogation that is grounded in equity and applied as a matter of law is "legal" or "equitable" subrogation.²⁸ Equitable subrogation "is a creature of chancery" used to prevent unjust enrichment.²⁹ It does not depend on any set of circumstances, only on the equities of each case.³⁰ Equitable subrogation's well-established history under Illinois law has long recognized that, even independent of a contractual obligation, equity requires that a party is entitled to reimbursement for payments made to the benefit of the land.³¹

In the context of mortgage lending litigation, the courts have labeled equitable subrogation as an "elusive" doctrine and often either reject or avoid it.³² Illinois law holds that conventional subrogation is the primary doctrine in the context of mortgage lending litigation.³³

Conventional subrogation is founded on an express (although not necessarily written)³⁴ agreement "with the debtor, by which one advances money to pay a claim for the security of which there exists a lien, and by such agreement he is to have an equal lien to that paid off."³⁵ Conventional subrogation also requires a showing of no harm to a third party and an absence of gross negligence by the lender.³⁶ Additional equitable principles, which are relevant to equitable subrogation analysis, are inapplicable to conventional subrogation analysis.³⁷

Finding conventional subrogation in the lender's mortgage documentation. Like other lien priority disputes, subrogation arises where a property does not have enough monetary value to satisfy all lien claimants. In this situation, the lender will contend with a third party for limited funds.

As discussed above, mortgage lending litigation primarily focuses on the doctrine of conventional subrogation. Although conventional subrogation is based in contract, there is limited analysis of the mortgage loan documents in early Illinois decisions.³⁸ Rather, the analysis of conventional subrogation in early Illinois decisions is largely based on equitable grounds.³⁹

Recent Illinois decisions require and provide more analysis of the mortgage loan documents before finding an "express agreement" of subrogation.⁴⁰ Certain Illinois courts are more liberal than others in interpreting the mortgage loan documents. For example, some will infer subrogation through form language contained in the lender's note and mortgage.⁴¹

Some Illinois courts will liberally find conventional subrogation through mortgage loan closing documents, including title insurance policies, closing instructions, ALTA statements, first lien letters, commitment letters, escrow agreements, loan applications, the loan agreement, and other title documents.⁴² However, a court may reject applying conventional subrogation when the lender's note and/or mortgage contradict the other closing documents.⁴³

Creditor's lien still "of record" when third party lien is recorded. The key to subrogation is the status of the original creditor's lien at the time of the recording of the third party lien. The doctrine of subrogation will apply if the original creditor's lien is in full force and effect at the time of the recording of the third party lien.⁴⁴

Conversely, if the original creditor's lien is released before the third party records its lien, the "first in time" rule would apply.⁴⁵ The legal basis for this conclusion is that the original creditor's lien remains in effect under the Illinois Conveyances Act until a release is recorded.⁴⁶ Consider the following hypothetical.

Third hypothetical - subrogation and the leap-frog effect

Borrower seeks a loan from Lender in early 2004. At the time of the closing on March 1, 2004, Original Creditor's lien is recorded against the property. Lender loans money to Borrower and pays off Original Creditor's lien at the closing. In exchange for the loan and the payoff of Original Creditor's lien, Borrower executes the Lender's note and Lender's mortgage in favor of Lender at the closing. The Lender's note and mortgage contain express subrogation language.⁴⁷

Unaware of Lender's mortgage, Third Party files its lien against the property on March 3, 2004. At the time of the recording of the Third Party's lien, Original Creditor's lien remains unreleased and still of record.

On March 4, 2004, Original Creditor's lien is released and Lender's mortgage is recorded. Lender is unaware of Third Party's lien prior to March 4, 2004.

At first blush, this hypothetical seems to be the same as the first, in which Third Party would prevail under the "first in time" rule. Again, (a) Third Party's lien is recorded "first in time" compared to Lender's mortgage and (b) Third Party lacked notice of Lender's mortgage.

Under this hypothetical, however, a court would likely find under the doctrine of conventional subrogation that the Lender (the subrogee) is entitled to "leap" over Third Party and into the first lien position of Original Creditor's (the subrogor's) lien.⁴⁸

Like the notice exception to the "first in time" rule, Third Party has knowledge of prior encumbrances at the time it records its lien. Like the notice exception to the "first in time" rule, Third Party has knowledge at the time it records its lien that it will not hold a first lien position on the property.⁴⁹

The difference between the notice exception and the subrogation exception is that instead of possessing notice of Lend-er's mortgage (i.e., the notice exception), Third Party possesses notice of Original Creditor's lien (i.e., the subrogation exception).

Notably, the fact that Original Creditor's lien was released after the recording of Third Party's lien is irrelevant. Subrogation will treat Original Creditor's lien as if still in effect even though it was actually released.⁵⁰

Subrogation produces an equitable result in mortgage lending litigation. Numerous equitable factors support application of subrogation in the third hypothetical. These reasons are best summarized as follows:

There are numerous policy reasons to apply the doctrine of conventional subrogation to a case involving a refinancing mortgage. A debtor in bankruptcy, who has outstanding judgments and has defaulted on his mortgage, may find relief in refinancing his home, albeit under less favorable loan terms. Similarly, any time a mortgage note is accelerated or matures is a prime opportunity for a debtor to enter into a refinancing agreement. Absent subrogation of the original mortgage lien, these consumers would be hard-pressed to find a lender willing to refinance. In addition, if subrogation were not applied in cases of mortgage refinancings, then the intervening [third party] would receive a windfall from the payoff [to the original creditor] by the [lender].⁵¹

Competing equities - where the lender possesses knowledge of the third party lien

As discussed above, conventional subrogation will only be found in the absence of "gross negligence" by a lender. To date, only a few Illinois decisions discuss the concept of gross negligence. The cases suggest that whether the lender is guilty of gross negligence depends on the nature of its knowledge of the third party lien.

A lender's constructive knowledge of a third party lien per se appears to be insufficient to defeat its claim of conventional subrogation. In one of the earliest decisions on the topic of conventional subrogation in the context of mortgage lending litigation, Home Savings Bank v Bierstadt, the Illinois Supreme Court found that a lender will not be found to be grossly negligent where it possessed constructive, but not actual, notice of the third party lien.⁵² This principle was recently upheld by the fifth district in Union Planters Bank v FT Mortgage Companies.⁵³

Less clear is whether a lender will be found grossly negligent or otherwise barred from raising the conventional subrogation exception when it possesses actual notice of the third party lien. According to early conventional subrogation decisions, lender's knowledge of third party liens is irrelevant for purposes of conventional subrogation analysis.⁵⁴ A competing principle, however, is that a lender "may not pick and choose which liens it will pay off...."⁵⁵

Notably, the Northern District of Illinois in Mortgage Electronic Registration Systems, Inc v Phylactos recently addressed the issue of a lender's actual notice of a third party lien. The court found that the lender who possessed actual notice of a third party lien could not prevail against the third party under the doctrine of subrogation absent evidence of an express agreement on the subject of priority.⁵⁶

Because the court was not presented with evidence of an express agreement by the lender, however, it did not reach the question of whether the lender's actual knowledge of the third party lien also constituted gross negligence.⁵⁷

Thus there remains the open question of whether an Illinois court will find that a lender who possesses actual knowledge of a third party lien yet declines to pay off the third party is "grossly negligent" and precluded from recovery under the doctrine of conventional subrogation.

Conclusion

Although the doctrine of conventional subrogation traces its origins to early Illinois decisions, the concept is still evolving. Each outcome is based upon the equities of each case. It is impossible to predict the future of conventional subrogation in Illinois.

What is clear from recent Illinois decisions on conventional subrogation is that lenders should incorporate express subrogation language into their mortgage documents, including the lender's note and lender's mortgage. Moreover, lenders should exercise caution before lending when they have actual knowledge of prior third party liens.

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Barbara Andersen Gimbel (barbara.gimbel@hklaw.com) is an associate with Holland & Knight LLP, where her primary practice area is real estate litigation. Edward James Andersen (eandersen@fnf.com) is senior vice president and Midwest claims manager at Fidelity National Financial. The views expressed in this article are strictly those of the authors and not their employers.

Thanks to Douglas M. Karlen and John Laird for their assistance.

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1. Mortgage Electronic Registration Systems, Inc v Phylactos (hereinafter "MERS"), 2005 WL 735969 *5 (ND Ill 2005); Aames Capital Corp v Interstate Bank of Oak Forest, 315 Ill App 3d 700, 705, 734 NE2d 493, 497 (2d D 2000) ("The second [principle that leads the court to reject the contention that the only relevant inquiry is the recording date of the liens] is that whatever case-law doctrines operate as exceptions to the first in time, first in right doctrine must comport with the purpose of the recording requirement, namely, to provide notice of liens to third parties."); Union Planters Bank, NA v FT Mortgage Companies, 341 Ill App 3d 921, 925, 794 NE2d 360, 364 (5th D 2003).

2. Federal Nat Mort Assn v Kuipers, 314 Ill App 3d 631, 634, 732 NE2d 723, 726 (2d D 2000).

3. MERS at *4 (finding that third party's lis pendens recorded prior to lender's mortgage was recorded first in time); Union Planters at 924-25, 794 NE2d at 363-64; Kuipers at 634, 732 NE2d at 726; Aames at 703, 734 NE2d at 496; Firstmark Standard Life Ins Co v Superior Bank FSB, 271 Ill App 3d 435, 439, 649 NE2d 465, 468 (1st D 1995) ("It is likewise long-established that this rule gives rise to a presumption that the first mortgage recorded has priority.").

4. 735 ILCS 5/15-1207 ("Mortgage. 'Mortgage' means any consensual lien created by a written instrument which grants or retains an interest in real estate to secure a debt or other obligation. The term 'mortgage' includes, without limitation: (a) mortgages securing 'reverse mortgage' loans as authorized by subsection (a) of Section 5 of the Illinois Banking Act; (b) mortgages securing 'revolving credit' loans as authorized by subsection (c) of Section 5 of the Illinois Banking Act, Section 1-6b of the Illinois Savings and Loan Act and Section 46 of the Illinois Credit Union Act; (c) every deed conveying real estate, although an absolute conveyance in its terms, which shall have been intended only as a security in the nature of a mortgage; (d) equitable mortgages; and (e) instruments which would have been deemed instruments in the nature of a mortgage prior to the effective date of this amendatory Act of 1987."); Kuipers at 634, 732 NE2d at 726.

5. Id.

6. 735 ILCS 5/15-1301 ("Lien Created. Except as provided in Section 15-1302, from the time a mortgage is recorded it shall be a lien upon the real estate that is the subject of the mortgage for all monies advanced or applied or other obligations secured in accordance with the terms of the mortgage or as authorized by law, including the amounts specified in a judgment of foreclosure in accordance with subsection (d) of Section 15-1603."); 765 ILCS 5/30; Aames at 703-04, 734 NE2d at 496; Kuipers at 634, 732 NE2d at 726.

7. Id.

8. Id at 635, 732 NE2d at 726; Aames at 703-04, 734 NE2d at 496.

9. 765 ILCS 5/30; Aames at 704, 734 NE2d at 496; Kuipers at 634, 732 NE2d at 726; Firstmark at 439, 649 NE2d at 468.

10. See Doyle v Teas, 1843 WL 4067 (1843); see also Aames at 710, 734 NE2d at 501.

11. Union Planters at 925, 794 NE2d at 364, quoting Aames at 704, 734 NE2d at 497.

12. Union Planters at 925, 794 NE2d at 364, quoting Aames at 704-05, 734 NE2d at 497-98; MERS at *5.

13. Bryan A. Garner, ed, Black's Law Dictionary 1286 (West 8th ed 2004) ("Race statute. A recording act providing that the person who records first, regardless of notice, has priority.")

14. Id ("Race-notice statute. A recording law providing that the person who records first, without notice of prior unrecorded claims, has priority."); Doyle at **40-41. But see Taylor Mattis, Recording Acts: Anachronistic Reliance, 25 Real Prop, Prob and Tr J 17 for the legal opinion that Illinois is not just a race-notice jurisdiction, but a notice jurisdiction; Garner, ed, Black's Law Dictionary at 1093 (cited in note 13) ("Notice statute. A recording act providing that the person with the most recent valid claim, and who purchased without notice of an earlier, unrecorded claim, has priority."). For purposes of this article, the debate as to whether Illinois is properly classified as a race-notice or notice jurisdiction is not critical.

15. 765 ILCS 5/30 (emphasis added).

16. Kuipers at 635, 732 NE2d at 726.

17. Garner, ed, Black's Law Dictionary at 1090-91 (cited in note 13) ("actual notice. Notice given directly to, or received personally by, a party....constructive notice. Notice arising by presumption of law from the existence of facts and circumstances that a party had a duty to take notice of, such as a registered deed or a pending lawsuit; notice presumed by law to have been acquired by a person and thus imputed to that person....inquiry notice. Notice attributed to a person when the information would lead an ordinarily prudent person to investigate the matter further; esp., the time at which the victim of an alleged securities fraud became aware of facts that would have prompted a reasonable person to investigate.").

18. Aames at 704, 734 NE2d at 497 ("However, where a [third party] has constructive notice of a prior interest in real estate, the failure to record is not necessarily fatal to the rights of the prior interest holder [the lender]"); see also Haas v Sternbach, 156 Ill 44, 59-60, 41 NE 51, 55 (1894) (finding actual knowledge of unrecorded mortgage); Phillips v South Park Comissioners, 119 Ill 626, 10 NE 230 (1887) (finding actual knowledge of contract to purchase land); Stokes v Riley, 121 Ill 166, 11 NE 877 (1887) (finding inquiry, actual and constructive notice of tax deed proceeding and tax deed); Life Sav and Loan Assn v Bryant, 125 Ill App 3d 1012, 1019, 467 NE2d 277, 283 (1st D 1984) (finding that mortgagee with knowledge of vendee's possession of the property took subject to vendee's purchase contract); Griffin v Haskins, 22 Ill App 264, 1887 WL 5582 (2d D 1886) (finding possession of land puts other parties on inquiry notice).

19. Remsen v Midway Liquors, Inc, 30 Ill App 2d 132, 145, 174 NE2d 7, 13 (2d D 1961).

20. Union Planters at 925, 794 NE2d at 364; Aames at 705, 734 NE2d at 497; Walker v Ridgeview Const Co, Inc, 316 Ill App 3d 592, 597, 736 NE2d 1184, 1188 (1st D 2000). The exact quotation refers to the payment as "involuntary." This concept is not addressed in this article in that the payment is always considered involuntary in the context of mortgage lending litigation. Home Savings Bank of Chicago v Bierstadt, 168 Ill 618, 624-26, 48 NE 161, 162 (1897) ("Where a payment is made at the request of the [borrower], the person so paying [the lender] is never a volunteer; and in this case, the payment having been made at the request of the [borrower], [lender] was not a volunteer merely.")

21. Garner, ed, Black's Law Dictionary at 1468 (cited in note 13) ("Subrogee. One who is substituted for another in having a right, duty, or claim.")

22. Dworak for Use of Allstate Ins Co v Tempel, 18 Ill App 2d 225, 232, 152 NE2d 197, 201 (3d D 1958); Garner, ed, Black's Law Dictionary at 1468 (cited in note 13) ("Subrogor. One who allows another to be substituted for oneself as creditor, with a transfer of rights and duties."); see also Henry C. Black, ed, Black's Law Dictionary (West 6th ed 1990) ("Subrogor. The person who substitutes another for himself; one who performs the subrogation.")

23. Dix Mutual Ins Co v LaFramboise, 149 Ill 2d 314, 319, 597 NE2d 622, 624 (1992); CNA Ins Co v DiPaulo, 342 Ill App 3d 440, 442, 794 NE2d 965, 968 (1st D 2003)("A subrogee 'steps into the shoes' of the person whose claim he has paid and may only enforce those rights which the latter could enforce."); Dworak at 232, 152 NE2d at 201; London & Lancashire Indem Co of America v Tindall, 377 Ill 308, 313, 36 NE2d 334, 337 (1941).

24. Walker at 597, 736 NE2d at 1188; Nelson v Phillip State Bank & Trust Co, 307 Ill App 464, 30 NE2d 771, 773 (1st D 1940) ("Subrogation does not owe its origin to a statute or custom nor is it a doctrine of the common law. It originated in equity and is a creature of equity, a doctrine of equitable jurisprudence which was adapted by equity from the Roman or the civil law.")

25. Dix at 319, 597 NE2d at 624; Walker at 597, 736 NE2d at 1188; CNA Ins Co at 442, 794 NE2d at 967; Nelson, 30 NE2d at 773 ("In this country, under the initial guidance of Chancellor Kent, its principles have been more widely developed than in England.... It is treated as the creature of equity, and is so administered as to secure real and essential justice without regard to form....It is broad enough to include every instance in which one party pays a debt for which another is primarily answerable, and which in equity and good conscience should have been discharged by the latter."). Id, quoting Bouvier.

26. Dix at 319, 597 NE2d at 624; Aames at 704-05, 734 NE2d at 498; Remsen at 142, 174 NE2d at 12 ("[Subrogation] rests on the principle that substantial justice should be attained regardless of form, that is, its basis is the doing of complete, essential and perfect justice between the parties without regard to form.").

27. Union Planters at 925, 794 NE2d at 364.

28. Bierstadt at 624, 48 NE at 162; Wausau Ins Co v All Chicagoland Moving & Storage Co, 333 Ill App 3d 1116, 1126, 777 NE2d 1062, 1072 (2d D 2002).

29. Dix at 318, 597 NE2d at 624; Union Planters at 925, 794 NE2d at 364; Aames at 706, 734 NE2d at 498.

30. Dix at 318, 597 NE2d at 624; Union Planters at 925, 794 NE2d at 364; Aames at 706, 734 NE2d at 498.

31. See, for example, Lidster v Poole, 1905 WL 2209 *4 (2d D 1905).

32. MERS at *6 ("The court will not allow MERS to claim a right of equitable subrogation when it had an available and easy method to advance to first priority, namely, an express agreement to that effect."); Aames at 707, 734 NE2d at 499 ("we decline to analyze the present case under equitable subrogation and, instead, consider whether conventional subrogation...may be applied."); Firstmark at 441, 649 NE2d at 468 (not discussing equitable subrogation).

33. Kaminskas v Cepauskis, 369 Ill 566, 569, 17 NE2d 558, 560 (1938) (engaging only in conventional subrogation analysis); Aames at 706, 734 NE2d at 498 ("It also appears that Illinois courts, including those cases cited by Aames, have previously considered whether conventional subrogation applies to a mortgage refinancing agreement. [Cite omitted]. For these reasons, we decline to analyze the present case under equitable subrogation and, instead, consider whether conventional subrogation, as outlined in Aames's [sic] argument and in Bierstadt, may be applied."); MERS at *6.

34. MERS at *5; Western United Dairy Co v Continental Mortgage Co, 28 Ill App 2d 132, 135, 170 NE2d 650, 651 (1st D 1960); Firstmark at 441, 649 NE2d at 469.

35. Bierstadt at 624, 48 NE at 161.

36. Id at 624, 48 NE at 162; Union Planters at 925, 794 NE2d at 364 (finding no gross negligence when lender's title company missed the third party lien).

37. See Wausau at 1126, 777 NE2d at 1072 ("Various equitable principles, such as the denial of subrogation to a volunteer or to a subrogee who has not paid the claim in full, are not applicable to conventional subrogation."). Id, quoting American Nat Bank and Tr Co of Chicago v Weyerhaeuser Co, 692 F.2d 455, 460 FN 12; Eddy v Sybert, 335 Ill App 3d 1136, 1140, 783 NE2d 106, 109 (5th D 2003) ("Where the right [of subrogation] is created by an enforceable subrogation clause in a contract, contract terms, not the common law or equitable principles, apply"). Id, relying on Capitol Indemnity Corp v Strike Zone, SSB & B Corp, 269 Ill App 3d 594, 596, 646 NE2d 310, 312 (4th D 1995).

38. Bierstadt at 624, 48 NE at 162 ("Here the agreement between the debtor and the appellee who advanced the money was to the effect that appellee was to advance sufficient money to discharge...[the debt], and should receive from the debtor, by way of security for the money so advanced, a first mortgage on [the property].") (emphasis added); Kaminskas at 569-72, 17 NE2d at 560-62 (finding an express agreement without discussing the lender's mortgage documents in the opinion); Kankakee Federal Sav & Loan Assn v Arnove, 318 Ill App 261, 268, 47 NE2d 874, 877 (2d D 1943) (finding that lack of written subrogation agreement did not impair conventional subrogation analysis).

39. Id.

40. MERS at *5. (refusing to find conventional subrogation where the lender failed to offer evidence of an express agreement).

41. Union Planters at 926, 794 NE2d at 365 (finding conventional subrogation and commenting, "[w]e find that the form of the language at issue is not nearly as important as the intent of the parties to the contract."); Aames at 708, 734 NE2d at 500:

Although there is no provision in the Uniform Instrument that specifically states that the mortgage is a first mortgage, we believe that the above-referenced provisions, when read together, indicate that the agreement of the parties was that the mortgage held by Pacific would be a first priority mortgage, and that any other prior mortgages of record would be paid off by Pacific, with the new mortgage securing that debt. In addition, we do not believe that such a specific provision in the mortgage document regarding the assumption of the first priority position is required by the holding in Bierstadt. As noted earlier, the Bierstadt court described the agreement as being 'to the effect' of paying off a priority lien and assuming that priority position. The Bierstadt court makes no reference to any specific provision in the mortgage documents.

42. Union Planters at 923, 794 NE2d at 362 (noting that the lender required in its closing instructions that the title company provide it with a first lien letter and instructed the title company that "NO SUBORDINATE LIENS TO REMAIN OPEN AT CLOSING."); see also LaSalle Bank, NI v First American Bank, 316 Ill App 3d 515, 522, 736 NE2d 619, 625 (1st D 2000) (examining the lender's construction loan agreement and lender's mortgage and finding that both expressed an intent to give the lender a first and prior mortgage on the subject property).

43. Firstmark at 441, 649 NE2d at 469 (finding that lender's title insurance policy and accompanying escrow information was inadequate to maintain conventional subrogation claim where lender's mortgage specifically acknowledged that it was subject to the third party lien). See also Aames at 708, 734 NE2d at 500 (limiting the holding of Firstmark on the grounds that the lender's mortgage "expressly stated that it was subject to the prior liens").

44. Aames at 710, 734 NE2d at 501.

45. Id ("If the [original creditor] files a release of lien prior to the recordation of the refinancing mortgagee's lien and if a third party records its lien after the release is recorded but before the refinancing lien is recorded, then conventional subrogation will not apply.").

46. 765 ILCS 5/30; Kuipers at 634-35, 732 NE2d at 726.

47. Sample language of what the fifth district found as evidence of an "express agreement" can be found in Union Planters at 924, 794 NE2d at 364:

Borrower shall promptly discharge any lien which has priority over this Security Instrument.... If Lender determines that any part of the Property is subject to a lien which may attain priority over this Security Instrument, Lender may give Borrower a notice identifying the lien. Borrower shall satisfy the lien or take one or more of the actions set forth above within 10 days of the giving of notice.... If Borrower fails to perform the covenants and agreements contained in this Security Instrument, or there is a legal proceeding that may significantly affect Lender's rights in the Property....then Lender may do and pay for whatever is necessary to protect the value of the Property and the Lender's rights in the Property. Lender's actions may include paying any sums secured by a lien which has priority over this Security Instrument....Any amounts disbursed by Lender under this paragraph...shall become additional debt of Borrower secured by this Security Instrument.

However, notwithstanding this decision, the authors suggest that a lender should consider implementing additional language into the lender's note and lender's mortgage which explicitly states that the doctrine of subrogation shall apply to any liens that were paid off with the lender's loan proceeds.

48. Union Planters at 925, 794 NE2d at 364 ("Subrogation applies in the context of lien priority in that one party is subrogated to the lien priority of another.") Id, relying on Aames at 705, 734 NE2d at 497.

49. Bierstadt at 625, 48 NE at 162; LaSalle at 523, 736 NE2d at 626 ("The...[original creditor's lien], despite being released, is deemed to have continued uninterrupted through the doctrine of conventional subrogation and thus preceded the [third-party lien] in time. Therefore, it is the... [original creditor's lien] that was "first in time" and...[lender], as subrogee to the... [original creditor's lien], that is "first in right".)

50. Bierstadt at 625, 48 NE at 162; LaSalle at 521-22, 736 NE2d at 625; Remsen at 143-44, 174 NE2d at 12 ("Subrogation presupposes an actual payment and satisfaction of the debt or claim to which the party is subrogated, although the remedy is kept alive in equity for the benefit of the one who made the payment under circumstances entitling him to contribution or indemnity while assignment necessarily contemplates the continued existence of the debt or claim assigned."); Kankakee at 268, 47 NE2d at 877 ("[I]t is the settled law of this state that when a refunding mortgage [lender's mortgage] is made, the lien of the old mortgage [original creditor's mortgage] continues in effect without interruption and the new mortgage [lender's mortgage] does not become subordinate to an intervening lien or interest [third-party lien] attaching between the time of the recording of the old mortgage [original creditor's mortgage] and the effective date of the new one [lender's mortgage], even though the old mortgage [original creditor's mortgage] be released.").

51. Aames at 709, 734 NE2d at 500; see also Bierstadt at 623, 48 NE at 162 (conventional subrogation may be applied "as against a subsequent incumbrancer, whose incumbrance has not been taken or his position changed because of the record showing the discharge of the senior incumbrance."); LaSalle at 523, 736 NE2d at 626.

52. Bierstadt at 626, 48 NE at 162 (finding no gross negligence where the third-party lien did not appear on the title abstract and lender had no other knowledge of the third-party lien).

53. Union Planters at 926, 794 NE2d at 365 (finding no gross negligence where lender's title company, not lender, failed to discover the third-party lien in the chain of title).

54. Kaminskas at 571, 17 NE2d at 561 ("Moreover, we are of the opinion the question of knowledge [of a third party's interest in property] is immaterial as far as the principle of conventional subrogation is concerned. Because of the agreement [with the lender] equity simply assigns the security to him [lender]."); Kankakee at 268-69, 47 NE2d at 877-78 (citing to Kaminskas with approval).

55. Aames at 710, 734 NE2d at 501.

56. MERS at *6.

57. Id.

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