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30. What are the rights of the investor's friend and the bank in the lot?
Both notes are now due, and both the investor and the buyer have refused to pay. The lot is now worth only $50,000.
The recording act of the jurisdiction provides: «No conveyance or mortgage of real property shall be good against subsequent purchasers for value and without notice unless the same be recorded according to law.»
Two years ago, the buyer needed funds. Although she told her bank of the mortgage claimed by the investor's friend, the bank loaned her $15,000, and she gave the bank a note for $15,000 due in two years secured by a mortgage on the lot. The bank promptly recorded the mortgage. At that time, the fair market value of the lot was $75,000.
Three years ago, the investor discovered that the friend had not recorded his mortgage and in consideration of $50,000 conveyed the lot to a buyer. The fair market value of the lot was then $50,000. The buyer knew nothing of the friend's mortgage. One month thereafter, the friend discovered the sale to the buyer, recorded his $25,000 mortgage, and notified the buyer that he held a $25,000 mortgage on the lot.
Five years ago, an investor who owned a vacant lot in a residential area borrowed $25,000 from a friend and gave the friend a note for $25,000 due in five years, secured by a mortgage on the lot. The friend neglected to record the mortgage. The fair market value of the lot was then $25,000.
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There are three types of recording acts: notice, race-notice, and race statutes. Under a NOTICE statute, a subsequent BFP prevails over a prior grantee who failed to record. The most important fact under a notice statute is that the subsequent BFP had no actual OR constructive notice at the time they purchased the property. Under a RACE-NOTICE statute, a subsequent BFP is protected only if they record before the prior grantee, without notice of the prior instrument. This gives an inducement to record quickly to reduce questions of title. Under a RACE statute, whoever records first wins, and actual notice of a prior grantee is irrelevant.
D is correct. In this question's fact pattern, the language of the recording statute is «no conveyance or mortgage of real property shall be good against subsequent purchases for value and without notice unless the same be recorded according to law.» The most important words in this statute are «without notice.» This signals that the statute is a notice statute, so a subsequent BFP who records without notice prevails over a previous grantee.
Generally, the priority of a mortgage is determined by the time it was placed on the property. When a mortgage is foreclosed, it will terminate interests junior to the mortgage being foreclosed, but will not affect senior interest. Under the lien theory, the mortgagee is considered the holder of a security interest only and the mortgagor is deemed the owner of the land until foreclosure. This is the majority position.
The friend had a mortgage for $25,000, but did not record it. The recording act in this question's fact pattern is a notice statute, so a subsequent BFP who took without notice prevails over a prior grantee who failed to record. The investor then sold the property to the buyer, who was a BFP (paid consideration and took without notice of the prior conveyance). Thus, the buyer took free and clear of the $25,000 lien owed to the friend. The buyer then took out a mortgage for $15,000, which the bank immediately recorded. Because the bank recorded, this lien attaches to the property.
A is incorrect. The friend did not record their mortgage before the investor conveyed the property to the buyer. Thus, even though the friend eventually recorded the mortgage, the buyer still had no notice of the mortgage, and the friend's lien does not attach.
B is incorrect. As explained above, the recording statute for this jurisdiction is a notice statute, which means a BFP will take free and clear of any mortgages if they bought the property without real or constructive notice. Thus, the friend's lien will not attach at all.
C is incorrect. The conveyer's intent is irrelevant to determining if the buyer is a BFP for the purposes of this question.