Daily Development for
Thursday, November 13, 1997

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
randolphp@umkc.edu

MORTGAGES; PRIORITY; PURCHASE MONEY MORTGAGES: Bank's purchase money mortgages have priority over interests of vendees under purchase agreements with mortgagor executed prior to mortgagor's acquisition of property, but only to extent of amounts expended for acquisition of parcels and not as to construction amounts.

BancFlorida v. Hayward, 689 So.2d 1052 (Fla. 1997).

Developer had options to purchase certain parcels. Prior to purchase, developer would enter into contracts with "pre qualified" buyers to construct homes on the parcels. Buyers paid deposits. Developer then would borrow money from Bank to acquire the parcels and construct the homes. In a few cases, where the lot had not been "pre sold" but developer wished to acquire the title, developer first borrowed purchase money only and, then, after contracting to sell the house and lot to a buyer, borrowed the construction money from Bank and "took out" the bank's original loan for the purchase money only, paying for the "take out" with money from the construction loan.

When the developer failed, the contract purchasers argued that they had vendee's liens on the parcels with priority ahead of the Bank's mortgages.

Lower court decisions had fouind for the contract purchasers on several theories, the most plausible being that the Bank was equitably subordinated to the claims of the purchasers becaause it knew of them and of the overall development scheme at the time that it made its loans.

On appeal: Held: Reversed. Bank has priority for monies advanced for acquisition of the parcels, but not for improvement of them.

The court held that the contract purchasers did not have vendee's liens at all at the time of the purchase money loans, because the developer had only an option in the parcels in question at the time he contracted to resell them to the contract purchasers. An option in Florida does not create a real property right sufficient to "carry" a vendee's lien. (The court does not expressly preclude the notion the purchasers might have acquired a vendee's lien later through some notion of "after acquired title," although its language in this part of the opinion does not suggest that it would so hold - but note later developments.)

Moreover, the court ruled, even if the purchasers had a lien prior to the creation of the purchase money liens, the established rule for purchase money mortgage priority in Florida is that such mortgages, even in the hands of third party lenders, prime prior liens, known or unknown. Thus, the bank's liens would have priority in any event.

As to the situations in which the bank's purchase money mortgages had been "taken out" as part of subsequent construction loan agreements, the court concluded that equitable subrogation gave the bank the priority of the original purchase money mortgages to the amount of those mortgages.

In all cases, the bank's liens were limited to the amounts expended for purchase. Mortgage claims for construction loan proceeds did not have priority.

As to the equitable subordination argument, the court basically rejected the application of prior Florida authority in which a purchase money mortgagee was subordinated to mechanics lienholders where the mortgagee recorded late and the lienholders made improvements to the property prior to recording. Here, the bank did nothing that would have misled the contract purchasers.

Comment 1: It is interesting to note that, although the court in one part of the opinion suggests that the contract purchasers had no vendee's liens at all, by the end of the opinion the court is indicating that the Bank had priority over the purchasers only to the extent of the monies actually expended to purchase the parcels. Since we can assume that the Bank recorded its construction loan mortgages long before the purchasers obtained any judgments against the developer, and in most cases at time of the developer's acquisition of the property, the only way that the purchasers would have had priority over the construction mortgages would be if they *did* have vendee's liens at some level.

Comment 2: The court's conclusion that a purchase money mortgage that includes money for construction improvements does not enjoy "superpriority" for its whole amount is not without dissent. See Resolution Trust Corp. v. Bopp, 830 P.2d 939 (Kan. App. 1993). The rationale that purchase money mortgages ought to enjoy priority over prior judgment liens because they essentially add value to the judgment debtor's estate would appear to also be available to construction lenders.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 1-6, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Stacy Walter at the ABA. (312) 988 5260 or stacywalter@staff.abanet.org

Items reported here and in the ABA publications are for general information purposes only and should not be relied upon in the course of representation or in the forming of decisions in legal matters. Accuracy of data and opinions expressed are the sole responsibility of the DIRT editor and are in no sense the publication of the ABA.