Unrecorded Mortgages, Judgment Liens, & Bona Fide Purchaser - Who's On First?

A recent court case decided by the Maryland Court of Special Appeals sets forth the following facts:

1. On July 15, 2005, Bank makes a $150,000 home loan secured by a deed of trust to a homeowner on a home located in Baltimore County.
2. Through inadvertence, the deed of trust was not recorded in the Baltimore County Land Records.
3. On May 11, 2007, as a result of an unrelated lawsuit against the homeowner brought by a third party individual, a judgment for $2,000,000 is obtained against the homeowner; the judgment was recorded and indexed in the Circuit Court for Baltimore County on the day it was docketed (May 11, 2007), and it became a lien against the home that same day for $2,000,000, plus post-judgment interest.
4. The now-$2,000,000 judgment lienholder had no notice (either actual or constructive) of the earlier-created, but as of yet recorded, $150,000 deed of trust on the home.
5. Post-judgment, the $2,000,000 judgment creditor/lienholder sought and obtained a writ of execution and the Sheriff levied on the home by posting notice that it was to be sold. The Sheriff's Sale was scheduled and advertised for October 25, 2007.
6. On October 9, 2007, after the Sheriff's Sale was advertised, Bank finally records its deed of trust in connection with the home loan given on July, 15, 2005, some 2+ years earlier.
7. On October 18, 2007, a week before the Sheriff's Sale, Bank and its title insurer filed suit seeking to enjoin the Sheriff's Sale and to obtain a judgment declaring that, by reason of its now-recorded deed of trust, it has a lien against the home that takes priority over the judgment creditor's earlier-recorded $2,000,000 judgment lien.

Question: Does the $2,000,000 lien held by the judgment creditor have lien priority over Bank's earlier-created, but later-recorded, deed of trust?

• If you said the earlier-recorded $2,000,000 judgment lien has lien priority over the later recorded $150,000 deed of trust, you're wrong!

The court ruled that the earlier-created mortgage has priority over the later-created judgment lien, even though the judgment lien was actually recorded prior to the mortgage.

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This case provides a reminder that simply because one interest in real estate is recorded before another doesn't mean that the earlier-recorded interest has priority over the latter.

Further, the ruling provides an illustration of the general rule in determining the priority of competing liens encumbering real estate that one who holds a lien against real estate by reason of he/she/it being a judgment creditor is not a bona fide purchaser for value because it does not "purchase" its lienholder's interest in the property "for value." The judgment lien is obtained simply by recording a money judgment in the county land records. Accordingly, its lien will be inferior in priority to an earlier-created, but later recorded, deed, deed of trust, or mortgage.

In Maryland, this general rule is codified in the state recording statutes at Section 3-201, which appears in Subtitle 2 of Title 3 of the Real Property Article. Title 3 governs "Recordation" and Subtitle 2 is entitled "Priorities Based on Recording." In its ruling, the Maryland Court of Special Appeals noted:

• Section 3-201 further provides, in relevant part, that "[e]very deed, when recorded, takes effect from its effective date as against . . . every purchaser with notice of the deed, and every creditor of the grantor with or without notice." Mary B. is not a "purchaser" of the Property, whether bona fide for value or otherwise. Eastern Shore Bldg & Loan Corp. v. Bank of Somerset, 253 Md. 525, 530 (1969) (quoting Stebbins-Anderson Co., Inc. v. Bolton, 208 Md. 183, 188 (1955) (stating that a judgment creditor is not a bona fide purchaser for value)). Within the meaning of the words in RP section 3-201, Mary B. only can be a "creditor" of Petr.

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• That position also is supported, even more strongly, by Knell v. Green St. Bldg. Ass'n, 34 Md. 67 (1871), which holds that a judgment obtained after the execution, but before the recording, of a previously executed mortgage does not take priority over the mortgage. Indeed, the wording of RP section 3-201 incorporates the holding in Knell.

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For one to be considered to be a bona fide purchaser (aka good faith purchaser) in the context of real estate transactions, one must acquire, or purchase, its interest:

• in good faith,
• for value, and
• without notice (either actual or constructive) of any third-party claim, or other legal or equitable interest.

This case merits attention here from a legal standpoint(1) because it is a reminder that to receive the special protection of the recording statutes, all three of the above requirements must be met. Failure to meet all three requirements renders the protections of the recording statutes inapplicable, in which case priority is determined on the date the competing interests are created (and without regard to when they are actually recorded in the county land records).

(Earlier posts in this blog on the bona fide purchaser doctrine have focused on the issue of notice - more specifically, constructive notice - in the context of undoing or unwinding certain real estate scams like bogus sale leaseback foreclosure rescue ripoffs and other unwitting title transfers.(2))

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For the court ruling referenced above, see Chicago Title Insurance Company v. Mary B., No. 2219/08, 2010 Md. App. LEXIS 1 (January 4, 2010).

Thanks to Bill Collins of Crossroads Abstract, Rochester, NY for the heads-up on this court case.

(1) From a human interest standpoint, the story within the story is that, Mary B., the judgment creditor in this case, was a minor female who was sexually victimized on numerous occasions over a period of years, beginning when she was 13 years old, by the homeowner/judgment debtor Petr, who was also her aunt's then-boyfriend, and soon-to-become uncle by marriage. Mary B. lived in the home with Petr and her aunt. By the time Mary B. was 14, she had been impregnated twice by Petr: the first pregnancy ended in a miscarriage; the second resulted in the birth of a son, Jesse B.

Mary B. ceased living in the home in 2006, when the local department of social services intervened, removing Mary and Jesse from Petr's home and placing them in foster care. The civil lawsuit she filed for battery that yielded the $2,000,000 judgment was in connection with the rape committed against her by Petr. Prior to filing, and during the pendency of, the civil suit for battery, Mary B.'s representatives conducted multiple title searches on the home to determine that their were no recorded liens against the home. Undoubtedly, learning of the existence of the earlier-created, unrecorded mortgage shortly before the scheduled Sheriff's Sale must have caught Mary B.'s representatives by surprise. Further, the ruling of the Maryland appeals court must have hit them all like a ton of bricks, particularly since the lower court in this matter ruled in Mary B.'s favor, finding that her judgment lien had priority over the Bank's $150,000 deed of trust, only to be reversed by the appeals court.

By the way, Petr is now a ward of the Maryland Department of Corrections, where he is serving a 20-year prison sentence for second-degree rape.

(2) See, for example:

• Lack Of Knowledge Or Partcipation In Fraud Not Enough To Sustain Bona Fide Purchaser Status In Equity Stripping, Foreclosure Rescue Deal,
• Bona Fide Purchaser Doctrine, Possession Of Property By Occupants Other Than The Vendor & The Duty To Inquire.