Priority of Purchase-Money Mortgage
Under Indiana law, a “purchase-money mortgage” is given as security for a loan used by the mortgagor (buyer) to acquire legal title to a property. Indiana Code § 32-29-1-4 provides that “[a] mortgage granted by a purchaser to secure purchase-money has priority over a prior judgment against the purchaser.” Therefore, if a mortgage is considered a purchase-money mortgage, it has priority over a previously recorded judgment lien. This issue was recently addressed by the Indiana Court of Appeals.
In Amici Resources, LLC; et al. v. The Alan D. Nelson Living Trust; et al. (http://www.in.gov/judiciary/opinions/pdf/01191602cjb.pdf), Sabine Matthies (“Matthies”) obtained a judgment against Solid Foundation Investment Properties, Inc. (“SFIP”) in December 2012. In April 2013, SFIP purchased real estate in Indianapolis. SFIP financed the purchase of the property through a loan from The Alan D. Nelson Living Trust (the “Trust”), and SFIP executed a promissory note and mortgage in favor of the Trust to evidence and secure repayment of that loan. At the time of the closing, SFIP also entered into an agreement with Amici Resources, LLC (“Amici”) whereby Amici agreed to finance renovations and improvements to the property with a loan to be secured by a second mortgage against the property.
Matthies brought an action to enforce her judgment lien, and argued that her judgment lien should be deemed “senior”, or “first”, among all of the liens.
Matthies argued that the Trust’s mortgage was not a purchase-money mortgage because it was signed the day before SFIP closed on the purchase of the real estate. If the Court had agreed with Mattheis, her lien would have been first in line. However, the Court did not agree. While the Court noted that there is case law that indicates that the mortgage must be executed “simultaneously” with the deed in order to be considered a purchase money mortgage, literally requiring simultaneous execution can be impractical and the more important question is whether the deed and real estate acquisition are part of the same transaction. Here, the Trust wired money for the acquisition of the real estate to SFIP and the mortgage was executed on April 29, while the note and deed were executed and loan proceeds delivered to the seller on April 30. Therefore, the court determined that the lending of the money and the execution of the mortgage were all part of the same transaction, and the Trust’s mortgage constituted a purchase-money mortgage that had lien priority over Matthies’ prior recorded judgment lien.
Amici’s second priority mortgage secured future advances for the improvement of the real estate after its acquisition, rather than the acquisition itself. Accordingly, the second mortgage was not a purchase-money mortgage, which meant that it was subject to the general rule that interests in real estate take priority based on the order in which they are recorded. The judgment lien in favor of Matthies and against SFIP instantly attached to the property upon SFIP recording the deed to the property and therefore had priority over any subsequently recorded mortgage (other than a purchase-money mortgage). Therefore, the Court determined that the Trust’s mortgage was first; Matthies’ judgment lien was second; and Amici’s was third.
There are a couple of takeaways from this case. First and most obviously, a lender financing improvements to a property rather than the acquisition of the property must complete a judgment lien search pre-closing because that lender does not enjoy any type of super-priority over prior judgment liens in the same way that a purchase-money mortgage lender would.
With that being said, even if a lender has a purchase-money mortgage, that lender should still determine whether there are any judgment liens outstanding against the borrower. Even though the purchase-money mortgage enjoys priority over the prior recorded judgment lien, the judgment lien is still a lien that must be released in order to complete the sale of the property. Therefore, the judgment lien holder has leverage to require a payment before releasing the judgment lien even if the judgment lien does not attach to any equity in the property given the superior mortgage. Although that does not appear to have been an issue in this case due to an agreement of the parties that facilitated a sale of the property, it would be in the borrower’s and lender’s best interest if the borrower could sell the property without litigation and/or making any payments on the judgment lien.
As an aside, although it is not covered in the appellate decision, it would be interesting to know why SFIP closed on the real estate acquisition with the judgment lien outstanding rather than forming a new limited liability company for the sole purpose of owning this one property. Had it created a separate limited liability company, it would have avoided the judgment lien attaching to the real estate and left the Amici mortgage in second position.
Let me know what you think about this recent Indiana Court of Appeals decision below: