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What Is A “Purchase-Money” Mortgage, And Does It Have Priority Over A Pre-Existing Judgment Against The Mortgagor?

Lesson.  If a loan involves a “purchase-money” mortgage, then the mortgage will have priority in title over a pre-existing judgment against the purchaser/mortgagor.  The law favors lenders over judgment creditors in this instance.   

Case cite.  Amici Resources v. Nelson, 49 N.E.3d 1046 (Ind. Ct. App. 2016).

Legal issue.  What constitutes a purchase-money mortgage, and will such a mortgage lien be senior to a pre-existing judgment against the purchaser? 

Vital facts.  Matthies obtained a judgment against SFIP in 2012.  In 2013, HSBC agreed to sell its real estate to SFIP, but HSBC required the transaction to be a cash deal.  SFIP needed financing for the purchase, however, and on April 29, 2013 it executed a mortgage in favor of Nelson for the purchase of the real estate.  Payment for the purchase came via wire transfer from Nelson to SFIP at 4:00 p.m. that day.  However, the actual closing was not until the next day, meaning that SFIP signed the promissory note to Nelson and HSBC executed the deed to SFIP on April 30th.  The Matthies judgment against SFIP remained outstanding following the sale.    

Procedural history.  Matthies sought to enforce her judgment lien against SFIP.  The trial court ruled against Matthies, and she appealed.

Key rules.  A purchase-money mortgage is “one which is given as security for a loan, the proceeds of which are used by the mortgagor to acquire legal title to the real estate.”

The test used to determine whether a mortgage is purchase money is (1) “whether the proceeds are applied to the purchase price” and (2) “whether the deed and mortgage are executed as part of the same transaction.”

Generally, the law protects the superior equity of the mortgagee to be paid the purchase money before the property shall be subjected to other claims against the purchaser:

when the deed and mortgage are executed as part of the same transaction the purchaser does not obtain title to the property and then grant the mortgage; rather, he is deemed to take the title already charged with the encumbrance.  Because there is no moment at which the judgment lien can attach to the property before the mortgage of one who advances purchase money, the prior judgment lien is junior to the purchase-money mortgage.

Holding.  The Indiana Court of Appeals in Amici affirmed the trial court’s finding that Nelson’s mortgage was a purchase-money mortgage, which had priority over Matthies’s judgment lien. 

Policy/rationale.  First, the proceeds of Nelson’s loan to SFIP were applied as payment for the purchase of the property.  Second, the parties executed the deed and the mortgage as part of the same transaction.  In short, the Court concluded that SFIP and Nelson intended for the loan to be used to purchase the property.  “The mere fact that some of the financing documents were signed on the day before the closing took place does not, in and of itself, indicate that the execution of the documents was a separate transaction.”  Additionally, public policy favors providing a system under which a purchaser can obtain funding to purchase property. 

Related posts. 

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I frequently represent judgment creditors and lenders, as well as their mortgage loan servicers, that are entangled in lien priority and title claim disputes.  If you need assistance with a similar matter, please call me at 317-639-6151 or email me at john.waller@woodenmclaughlin.com.  Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.

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