The rule in Hopkinson v Rolt
The second mortgagee in this case invoked the rule the famous rule in Hopkinson v Rolt.
The rule states that the priority of a first mortgagee whose mortgage secures all moneys owing by the mortgagor, is relegated to third priority for any further advances made after the first mortgagee became aware of the existence of a second mortgagee.
Thus if you are a first mortgage lender and you become aware (because they write to you, or because you see their caveat on title) of a second mortgage, you must not lend any further money. This is because any further advances you make, will rank behind the second mortgage.
The second mortgage lender failed under Hopkinson v Rolt because it postponed by agreement with the first its priority it would otherwise have obtained under H v R. To put it in the words of the judge:
The rule must give way to agreement between the parties.
The second mortgage lender also failed under Hopkinson v Rolt because the first mortgage lender did not have notice of the second mortgage lenders mortgage at the time it made further advances. To put it in the words of the judge:
Before equity will regard it as fraudulent for a first mortgagee to insist on its priority for subsequent advances, it is necessary that it have had actual notice of the subsequent mortgage.
The second mortgagee also sought relief on the basis of the doctrine of marshalling. This is stated by Lord Eldon as:
If a party has two funds … a person having an interest in one only has a right to resort to the other, if that is necessary for the satisfaction of both . … So that it shall not depend upon the will of one creditor to disappoint another.
Thus, if the first mortgage lender has a first mortgage over property A and B and the second mortgage lender only has a second mortgage over property B and the first sells property B and takes all the money (leaving the second mortgage lender with nothing), the second mortgage lender is allowed to sell property A (even though he has no mortgage). This is because he stands in the shoes of the first mortgage lender. It is important to note (and is the reason why the second mortgage lender lost in this case) that the doctrine of marshalling imposes no obligations on the first mortgage lender.
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