Author(s): Steve Matta, Robert D. Goldstein

Commercial Law is a newsletter devoted to commercial law issues and published by Garan Lucow Miller, P.C.

MORTGAGE RECORDED AFTER A JUDGMENT LIEN HAS PRIORITY

In a case of first impression in Michigan, even though the plaintiff judgment creditor recorded her lien first on the defendant’s land contract interest in their former marital property, a purchase money mortgage that was recorded a month later has priority over the lien, the Michigan Court of Appeals has decided. The plaintiff logically argued that because her lien was recorded first it had priority over the purchase money mortgage. The Court of Appeals disagreed relying on the law treatise Restatement of Property as well as public policy considerations. According to the Court’s majority, “a promptly recorded purchase money mortgage takes priority over earlier creditors’ interests notwithstanding that the earlier interests were duly recorded.”

The case is Graves v American Acceptance Mortgage Corp, et al and by way of background in 1987 the plaintiff, Eileen Graves, and the defendant, Steve Diaz–then a married couple– executed a land contract for the purchase of property. In 1994, however, the couple divorced. As part of the divorce judgment, Eileen Graves was awarded a lien against the property for various debts including child support arrearage. On September 7, 1994, at approximately 9:00 a.m. the plaintiff recorded her lien. Later that same day the defendant entered into a mortgage agreement and used the proceeds to pay off the amount due under the land contract and obtained legal title to the property. The mortgage was recorded on October 5, 1994, and later assigned to another company which recorded its mortgage on April 13, 1995.

In January of 1996, the plaintiff sued the defendant and the two mortgage holders seeking to foreclose her lien. The plaintiff claimed her ex-husband owed her more than $15,000. The trial court found that the plaintiff’s lien had been recorded first, and therefore the defendants had constructive notice of the lien. The circuit court granted plaintiff’s motion for summary disposition.

In the appeal phase of the case, the Michigan Court of Appeals first referenced the Restatement of Property which provides “a purchase money mortgage, whether or not recorded, has priority over any mortgage, lien, or other claim that attaches to the real estate but is created by or arises against the purchase-mortgagor prior to the purchase-mortgager’s acquisition of title to the real estate.”

A purchase money mortgage is one that is used to obtain legal title to property.

The appellate court then noted that under the Restatement’s prioritization rationale it “encourages purchase money financing by vendors by operating to reduce title risk in connection with such transactions.”
In the case under consideration, because the defendant had defaulted on the land contract, he did not obtain legal title to the property until 1996 when he satisfied his land contract obligations by using the mortgage proceeds for that purchase. Accordingly, the appellate court held that the later mortgage constituted a purchase money mortgage because the defendant used the proceeds “to obtain legal title” to the property. As a purchase money mortgage, the plaintiff’s judgment lien could not “insert itself between the deed to the defendant and the purchase money mortgage by the defendant to the mortgage holder.”

The Court of Appeals’ ruling was consistent with cases from other jurisdictions which have considered the identical issue.

In sum, the Court of Appeals reversed the trial court and directed that summary disposition be entered in favor of the mortgage companies.

For further information about this case or other related issues please contact Steve Matta of GLM’s Real Estate Litigation Department in Troy at (800) 875-7600 or Robert Goldstein of GLM’s Real Estate Litigation Department in Grand Blanc at (800) 875-3700.