Sunday, August 4, 2013

MBE Fast Fact: Judgment Liens

Questions concerning judgment liens have been showing up more often on the MBE. If you are sued in court for a sum of money and lose the case, the prevailing party will be granted a judgment. That party may then file a judgment lien, which is a lien that attaches to your real estate.

Once a judgment lien is placed on the real estate, this acts as assurance that the money that was the subject of the judgment will be paid to the creditor. On the MBE, these liens are placed on property already owned, and sometimes also on property acquired within a given period of time in the future. (These after-acquired clauses are quite common.)

Generally, the priority of a judgment lien is determined by its recording date. So, if the judgment lien is filed on property, and later there is a mortgage taken out on that same property, the judgment lien will be senior to the mortgage, and therefore the judgment creditor will have priority over the mortgagee.

But the rules change for purchase-money mortgages. A purchase-money mortgage ("PMM") is a mortgage to secure part or all of the purchase price of the property mortgaged. The mortgage can be given by the buyer to the seller of the property or to a third-party, such as a bank. It is a general rule that a PMM is entitled to preference (or priority) over all liens, even those liens arising earlier than the PMM. The rationale behind the rule is that even if the judgment lien was one that contained an after-acquired clause, the property that was the subject of the PMM cannot be deemed to have been acquired by the buyer, because by taking out the mortgage to purchase the property, the buyer merely obtained equitable title, subject to his obligation to re-pay the loan to the legal title holder (the mortgagee). Because the property was not later acquired by the buyer, it is not subject to the judgment lien, and the purchase-money mortgagee retains priority.

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