Real Property: Mortgages: Priorities

  • As to creditor, you must record. (Recording system protects creditors, and until you record, you have to priority.)
  • Once recorded, priority is determined by the norm of first in time, first in right.
  • Purchase Money Mortgage: A mortgage given to secure a loan that enables the debtor to acquire the encumbered land.
    • EX: C lends O $100,000 so that O can purchase Blackacre. C takes as collateral a security interest in Blackacre, the very parcel that C’s extension of value enabled O to acquire.
      • C is a purchase money mortgagee.
      • Assuming that C records properly, he has first priority as to the parcel he financed.
      • The purchase money mortgagee’s “superpriority”:
    • EX: C1 lends $200,000 to O, taking a security interest in all of O’s real estate holdings, “whether now owned or hereafter acquired.” (Clause called an after-acquired collateral clause. It is permissible.)
    • C1 records the mortgage note. 6 months later, C2 lends O $50,000 to enable O to acquire a parcel known as Blueacre, taking back a security interest in Blueacre and recording that interest. Subsequently, O defaults on all outstanding obligations. All that he has left is Blueacre. Does C1 or C2 have first priority in Blueacre? C2 does. The purchase money mortgagee has 1st priority as to Blueacre—the very parcel that he enabled O to acquire.
    • Subordination agreements: Are OK. By private agreement, a senior creditor may always agree to subordinate its priority to a junior creditor.