Filby v Mortgage Express (No 2) Ltd.

Equitable subrogation is a restitutionary remedy available where a defendant has been unjustly enriched at a claimant’s expense. Enrichment is at the claimant’s expense where, in reality, the claimant’s money produced the financial benefit. The remedy may confer rights equivalent to an unsecured creditor’s personal rights and does not depend on either party intending that the money should discharge the relevant debt.

The claimant must not receive more than it bargained for. Once the necessary elements are established, the court has no residual general discretion to withhold or modify the remedy merely because its operation is harsh.

A lender advanced money in the mistaken belief that it would obtain a valid first legal charge over a jointly owned home. The wife’s signature on the mortgage documents had been forged. Part of the advance discharged an existing secured mortgage, while £60,801 reduced an unsecured joint debt owed by the spouses to Midland Bank.

HH Judge Behrens held that the lender was subrogated both to the former mortgagee’s secured rights and to Midland Bank’s unsecured personal rights. The wife appealed only against the latter conclusion. The central issues were whether the money remained legally and beneficially the lender’s money, whether the wife’s enrichment was at its expense, and whether equitable subrogation could confer rights equivalent to an unsecured creditor’s personal rights.

1. Appeal dismissed. May LJ, with whom Hooper and Kennedy LJJ agreed, held that the lender was entitled to a right against the wife equivalent to Midland Bank’s unsecured personal rights arising under the joint loan account.

2. The forged signature meant that the lender did not obtain the transaction for which it had bargained. The purported contract was void, including as between the lender and the husband. No proprietary interest in the advance passed to him. The money remained the lender’s property until Midland Bank received it and it disappeared into the overdrawn account.

3. The solicitors held the advance on an express trust which prohibited payment before proper execution of the mortgage deed. The lender’s beneficial interest continued because the payment was contrary to that trust. It was unnecessary to decide whether the solicitors were personally liable for breach of trust or could obtain relief under section 61 of the Trustee Act 1925.

4. Equitable subrogation is a restitutionary remedy which reverses unjust enrichment. A defendant is enriched where a financial burden is reduced. The enrichment is at the claimant’s expense where the claimant’s money produced that benefit in reality. Subject to defences, policy considerations and exceptional circumstances, enrichment is unjust where the claimant failed to obtain the bargained-for security and the defendant’s benefit is properly regarded as a windfall.

5. The remedy does not depend on either party intending that the advance should discharge the relevant debt. Nor is it confined to secured rights. It may give the claimant rights equivalent to an unsecured creditor’s personal rights, provided that the claimant receives no more than it bargained for. On the facts, the wife’s joint indebtedness was reduced by the lender’s money, so she was unjustly enriched at its expense.

6. The remedy declares a right having the characteristics and content of the discharged creditor’s right, subject to modifications needed to prevent over-recovery. It did not give the lender security over the proceeds of sale. Although judgment is required when determining whether each element exists, there is no residual discretion to refuse or alter an established remedy merely to avoid a harsh result.

1. Court of Appeal (Civil Division): By [2004] EWCA Civ 759, unanimously dismissed the wife’s appeal and upheld the lender’s entitlement to rights equivalent to Midland Bank’s unsecured personal rights.

2. Leeds County Court: HH Judge Behrens held on 6 August 2003 that the lender was subrogated to Midland Bank’s rights against the wife to the extent that £60,801.30 had reduced the joint loan account. He granted permission to appeal on that issue.