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Kentucky Court of Appeals Resolves Inconsistent Holdings and Finds That Purchase Money Mortgages Do Not Have Priority Over Previously Recorded Judgment Liens
Posted in Tax and Finance

In the recent Kentucky Court of Appeals decision Hays v. Nationstar Mortgage LLC, the court resolved two conflicting holdings and determined that judgment liens filed prior to purchase money mortgages have priority over purchase money mortgages.

This decision resolved the conflicting decisions on this issue found in the Kentucky Court of Appeals 2006 decision Kentucky Legal Sys. Corp. v. Dunn and the Kentucky Supreme Court 2012 case Mortg. Elec. Registration Sys., Inc. v. Roberts by determining that Roberts overruled Dunn, and that purchase money mortgages do not have priority over previously filed judgment liens.

Dunn Decision

The Dunn case involved a judgment lien that was filed four years prior to the recording of a mortgage that secured the purchase of the subject property.  In determining the relative priorities of the judgment lien and mortgage, the lower court found in favor of the holder of the mortgage, and the holder of the judgment lien appealed to the Kentucky Court of Appeals.

The Court determined that this was a purchase money mortgage pursuant to Restatement (Third) of Property, Mortgages § 7.2 (1997), and that pursuant to the Restatement, “a vendor’s purchase money mortgage is senior to any previous judgment liens that arise against the purchaser-mortgages” even if the vendor has actual knowledge of the judgment.

The Court also analyzed the Kentucky statute relating to the priority of recorded documents, KRS § 382.280, which indicates that mortgages and deeds are effective in the order in which they are acknowledged and recorded. The Court noted judgment liens were not specifically addressed, and that only mortgages and deeds were specifically mentioned. Since there was no definitive statue or case law relating to the priority of judgment liens, the Court decided to follow the Restatement (Third)’s view and held that “third parties who lend money used to purchase real estate in exchange for a mortgage hold special priority over all other recorded liens and judgments except where agreed otherwise by the parties or specified by statute.”

Roberts Decision

The Roberts case also involved a judgment lien that was filed prior to the recording of a mortgage, which in this case was a mortgage refinancing, not a true purchase money mortgage.

The Court of Appeals found in favor of the judgment lien holder and rejected the mortgage holder arguments that the mortgage should be superior to the judgment lien under the doctrine of equitable subordination. The mortgage holder appealed to the Kentucky Supreme Court.

Although the facts under Roberts and Dunn case were very similar, Robertsmade no mention of Dunn. The court spent the majority of the case discussing the doctrine of equitable subordination in general, the various approaches to equitable subordination, and the possible use of equitable subordination in this situation. The court determined that the requirements for equitable subordination had not been satisfied since the mortgage lien holder had constructive notice of the judgment liens and no fraud or misrepresentation was involved. The court also indicated that equitable subordination is only available in those rare circumstances where it is truly required by equity.

Since equitable subordination was not available to the mortgage holder, the court looked at the judgment lien and mortgage lien to determine which party had the superior lien position. The court noted that Kentucky was a race-notice jurisdiction (KRS 382.270-280), and that the judgment lien should have priority over the mortgage since it was recorded prior to the mortgage. As stated by the court “a prior interest in real estate takes priority over a subsequent interest that was taken with notice, actual or constructive, of the prior interest.” The court noted that there was no disputing the priority of the judgment lien if the recording statutes applied.

In summary, the court found that the doctrine of equitable subordination was not available and that since the judgment lien was filed before the mortgage, it should have priority over the mortgage.

Hays Decision

In Hays v. Nationstar Mortgage, LLC, No. 2015-CA-000121-MR, 1/6/2017, a published opinion, the Kentucky Court of Appeals recognized the inconsistencies in Dunn and Roberts and concluded that Roberts implicitly overruled Dunn.

In Hays, a judgment lien was filed against a parcel of property, and a holder of a purchase money mortgage that was recorded after the judgment lien was recorded filed a foreclosure action against the property, claiming its purchase money mortgage was superior to the judgment lien pursuant to Dunn. The judgment lien holder claimed that its judgment lien, which was filed prior to the mortgage, was superior to the mortgage pursuant to Roberts.

The court concluded that Dunn and Roberts were at odds and sought to determine if Roberts overruled Dunn by implication, or if Dunn was a limited exception to Kentucky’s long recognized race-notice rule.

The court determined that Dunn was in opposition to a long line of decisions endorsing the race-notice rule, and that this line of decisions had guided mortgage lenders for years. The court determined it was bound by Roberts, a Kentucky Supreme Court case, and reaffirmed that “Kentucky is a race-notice jurisdiction” and that “a prior interest in real property takes priority over a subsequent interest that was taken with notice, actual or constructive, of the prior interest.” The court further determined that “Dunn is not a limited exception to the general race-notice rule, but rather is supplanted by the most recent expression of Kentucky’s mortgage lending law as set out in Roberts.”

This decision resolves the confusion regarding the relative priority of recorded judgment liens and subsequently recorded mortgage, and endorses the longstanding race-notice “first to file” rule in Kentucky.



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