This was revised by adding a new comment 3:
Daily Development for
By: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of
Of Counsel: Blackwell Sanders Peper Martin
Kansas City,
prandolph@cctr.umkc.edu
MORTGAGES; PRIORITY; PURCHASE MONEY MORTGAGE:
http://www.michbar.org/opinions/home.html?/opinions/supreme/2002/10
2202/16690.pdf
Mortgagor and his wife had an existing vendee's interest
under an installment land contract. In a
divorce settlement, mortgagor obtained the sole right to the equitable interest
existing under that contract. The divorced wife, however, obtained a lien in her for child support in arrears, rent for the
property (apparently relating to the mortgagor's period of sole occupancy
during the divorce proceedings) and for arrearages on the installment contract
itself as they existed at the time the lien was ordered.
The former wife's lien was recorded about a month after the
divorce settlement. On that same day,
mortgagor entered into a mortgage with a lender to refinance the balance due
under the installment land contract, including, apparently, those arrearages
which were mentioned in the earlier lien.
Subsequently, the mortgage lender assigned the mortgage to Assignee.
Mortgagor subsequently defaulted on the mortgage and the
issue was whether the foreclosing mortgagee could
sell the property free of the judgment lien.
The wife argued that her lien had priority over the mortgage because the
race/notice recording statute gave her priority over all parties who took with
notice of her prior lien or, in the alternative, who took without notice but
failed to record their interest before hers.
The mortgagee argued that its lien
was a purchase money mortgage and had priority based upon the traditional
common law rule that gives priority to such mortgages as against prior recorded
judgments and other "after acquired property" claims against the
mortgagor, whether the mortgagee has notice of them
or not. The rationale for this rule is
that parties providing purchase money financing ought to be encouraged to do so
through the recognition of a "super priority status." The lien of their purchase money mortgage
necessarily covers only that portion of the value of the property that does
not, at the time of the mortgage, represent any "equity" in the
property held by the mortgagor. Any
preexisting liens against the mortgagor's interest, although subordinated to
the purchase money mortgage, still enjoy attachment to the extent of the
mortgagor's preexisting equity in the property, and consequently suffer no
diminution in their security rights.
That part of the value in the property covered by the purchase money
mortgage is essentially value made possible by the mortgage itself.
The purchase money mortgage priority rule is articulated in
the Restatement of Mortgages.
The Court of Appeals apparently concluded that the
"take out" of the installment land contract was a purchase money
lien. It acknowledged that the question
of whether Michigan would follow the doctrine favoring purchase money mortgagees was one of first impression in Michigan,
although a 1930's-era case provided some support for the doctrine.
On appeal: held: Reversed.
The Michigan Supreme Court's opinion is a sweeping rejection
of the purchase money priority rule in the context of
Comment 1: It is
hard to know just how far the court will go with its strict "first in
time" interpretation. Although, the
issue didn't arise in the two opinions, the mortgagee
here might have made an argument that it was entitled to equitable subrogation to the rights of the installment land contract vendor that
it payed. It
is not clear whether the "literalist" interpretation of the court
would have prohibited the mortgagor from arguing the priority of the
installment contract over the wife's lien.
The court still might have argued that the rights being asserted are
those of a party recording subsequent to the wife's lien.
Comment 2: It is clear that it made no difference to the court that an installment contract was involved. Further, it made no difference that the lien arose from child support. The Supreme Court of Michigan simply read the statue and drew its conclusion.
Comment 3: Although the court specifically rejects the "purchase money priority" theory, even as against after acquired property interests, there is certainly an argument, based upon what the court tells us about this case, that we didn't have a purchase money mortgage superpriority situation at all. The purchase money mortgage, under the doctrine, takes priority over liens that attach to the grantee prior to the grantee's obtaining the property. If there is already a lien on the property itself, put there by the grantor, then the purchase money mortgage, in all jurisdictions, is subordinate to that..
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