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20. Is the credit card company's motion likely to be granted?
Five months later, the man defaulted on the mortgage loan and the bank initiated judicial foreclosure proceedings. After receiving notice of the proceedings, the credit card company filed a motion to have its judgment lien declared to be the first lien on the land.
Two years later, the man purchased land for $200,000. He made a down payment of $20,000 and borrowed the remaining $180,000 from a bank. The bank loan was secured by a mortgage on the land. Immediately after the closing, the deed to the man was recorded first, and the bank's mortgage was recorded second.
A credit card company obtained and properly filed a judgment against a man after he failed to pay a $10,000 debt. A statute in the jurisdiction provides as follows: «Any judgment properly filed shall, for 10 years from filing, be a lien on the real property then owned or subsequently acquired by any person against whom the judgment is rendered.»
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A «purchase-money mortgage» is a mortgage issued to a borrower by a seller of a home, a third party, or both, as part of the purchase transaction. Also known as a seller or owner financing, this is usually done in situations where the buyer cannot qualify for a mortgage through traditional lending channels. A purchase-money mortgage can be used in situations where the buyer is assuming the seller's mortgage, and the difference between the balance on the assumed mortgage and the sales price of the property is made up of seller financing. A mortgage is a purchase-money mortgage where: (i) the proceeds are applied to the purchase price; and (ii) the deed and mortgage are executed as part of the same transaction.
Liens that have attached to the title before the mortgage lien are said to be senior to, or prior to, the mortgage lien. Those attaching afterward are said to be junior or subordinate. The purpose of this priority is to establish the order in which lienholders are entitled to foreclose their liens in order to recover their debts. If a property's title has multiple mortgage liens and the loan secured by a first mortgage is paid off, the second mortgage lien will move up in priority and become the new first mortgage lien on the title.
However, a different situation arises when a loan involves a purchase-money mortgage. When the deed and mortgage are executed as part of the same transaction, the purchaser does not obtain title to the property and then grant the mortgage; rather, he is deemed to take the title already charged with the encumbrance. Because there is no moment at which the previous judgment lien can attach to the property before the mortgage of one who advances purchase money, the prior judgment lien is junior to the newer purchase-money mortgage. In sum, a purchase-money mortgage executed simultaneously with the purchase of encumbered real property takes precedence over all other claims or liens, including previously-filed judgment liens. The law favors lenders (i.e., the mortgagee of a purchase-money mortgage) over judgment creditors in this instance.
A is correct. This is not a situation in which a judgment lien was attached to the land prior to a mortgage lien, where the judgment lien would be senior to the mortgage lien. Here, the man's mortgage with the bank was a purchase-money mortgage because it was executed at the same time that the man purchased the land. The credit card company's judgment lien could not attach to the land before the man's mortgage with the bank attached, and as a result, when the man purchased the land, the credit card company's judgment lien became junior to the newer purchase-money mortgage with the bank. Subsequently, the credit card company's motion will be denied and its lien will be second.
B is incorrect. This answer reaches the correct answer with the wrong reasoning. The credit card company's motion will be denied, but not because the man's down payment exceeded the amount of debt he owed to the company. The amount the man paid down on the land has no effect on whether the credit card company's judgment lien or the bank's mortgage will be senior. As explained above, the fact that the bank's mortgage was a purchase-money mortgage renders its interest in the land senior to the judgment lien from the credit card company, regardless of whether the man paid $20,000 down on the land while already owing the credit card company $10,000.
C is incorrect. It is true that the credit card company's judgment lien was properly filed and thus provided the bank with constructive notice of the lien. The bank's mortgage, however, is a purchase-money mortgage, meaning the funds advanced by the bank were used to purchase the land. As previously explained, purchase-money mortgages present a special scenario where the law favors lenders over creditors and the purchase-money mortgage takes precedence.
D is incorrect. A purchase-money mortgage may be granted by multiple parties, including both a seller and a third party, only a seller, or only a third party, such as the bank in this case. Because the bank's mortgage is a purchase-money mortgage, and the credit card company's judgment lien is not, the bank's mortgage will be senior, even though it was executed after the judgment lien was filed.