Daily Development for Monday, October 29, 2007
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

For sophisticated mortgage and title lawyers, this case has nothing new.  You can stop here.  But I know that many of our readers find themselves engaged in real estate practice but didn=E2=80=99t managed to take the real estate finance theory class in law school, and this case involves a useful rule that you might not have run across in practice.  It is noteworthy because Kentucky apparently recently accepted the establish purchase money priority rule, and because the case is a nice clean application of the rule.  Ed.

MORTGAGES; PRIORITY; PURCHASE MONEY MORTGAGES:  A purchase-money lien used to buy real estate has priority over a prior judgment lien. 

Citifinancial Mortgage Company, Inc. v. American Builders and Contractors Supply Company, Inc., No. 2006-CA-000507-MR, 2007 WL 491532 (Ky. Ct. App. Feb. 16, 2007). 

In January 2001, American Builders and Contractors Supply Company, Inc. (ABC) recorded a judgment lien against Donald R. Gordon that purported to attach to all of the right, title and interest of the Defendant, Donald R. Gordon, Jr., in and to any real property located in Warren County, Kentucky.  At the time, Gordon did not own any property in Warren County, but in April 2001, Citifinancial Mortgage Company, Inc. (Citifinancial) closed a loan to Gordon to finance his purchase of certain real estate in Warren County.  Subsequently, a deed was executed to Gordon and a mortgage to Citifinancial, and both were recorded on May 3, 2001.  Gordon later defaulted on the loan, and Citifinancial instituted foreclosure proceedings, naming ABC as a defendant to assert the priority of its lien. 

The trial court found that ABC had priority because its lien was the first to be recorded. 

The Kentucky Court of Appeals reversed, finding that it had recently switched its position in Kentucky Legal Systems Corp. v. Dunn, 205 S.W.3d 235 (Ky. Ct. App. 2006), adopting the view that purchase-money  mortgages have special priority over prior liens and judgments unless agreement or statute provides otherwise.  The court noted that Kentucky is typically a race-notice jurisdiction with priority of liens, and that in most circumstances, the first lien holder to record will prevail.  In cases involving a purchase-money mortgage, however,  the debtor would never have acquired the property if not for the mortgage, and thus other claimants would never have even had the opportunity to make claims against the land if not for the purchase-money mortgagor. 

The rule applies whether the mortgagor is the prior owner of the real estate or a third-party lender.  It applies even if the mortgagor has actual knowledge of the preexisting lien.  The court noted that its adoption of the rule is consistent with the stance taken by numerous other jurisdictions, and it refused to carve out any exception advocated by ABC.  In arguing for an exception, ABC relied on case authority that the court found to be inapposite.  The court dismissed ABCs reliance on ATS, Inc. v. Kent, 27 S.W.3d 923 (Tenn. Ct. App.), on the basis that it involved the priority of the sellers judgment creditor over the buyers purchase-money lender in a situation where the seller sold land to which a judgment lien had already attached to a buyer who borrowed money to purchase the land.  The judgment creditor prevailed in that case but only because his lien had attached to the specific land before any sale took place.  Thus, the exception did not follow the facts of this cas
e, and the court could not find any other reason to depart from the general rule.

Comment 1: Nothing much new here, other than the fact that Kentucky recently has adopted the purchase money priority rule.  This is a nice, clean application of the concept, and a good explication of its purposes. 

Note, however, that the beneficiary of the purchase money priority is not a seller take back purchaser money lender, but rather a third party lender.  This is a well established feature of the rule.  Not every student grasps this aspect of the rule. 

Comment 2:  Note that the application of this rule can lead to vicious circular priority issues.  Consider, for instance, J has a judgment lien against B, buyer.  B acquires property and gets a third party purchase money mortgage from L, lender.  But L fails to record its mortgage, and soon thereafter, S, a second mortgagee, records a mortgage and is a BFP vs. the unrecorded L mortgage.

J primes S, because Js lien, of course, was in the judgment lien records and S takes subject to it.  But S primes L, because L failed to record.  But, further, L primes J because of the purchase money mortgage rule. Note that J cant take advantage of the fact that L recorded late because J
is not a *subsequent taker of an interest.*   Voila!!  Circular priority. 

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