Bona fide purchaser fans (including title insurance lawyers & agents, as well as home buyers making downpayment deposits on yet-to-be-built homes & condos, and construction lenders) may find the following butchered summary of some of the facts from a recent ruling of the South Carolina Court of Appeals
of some interest:
- Covington, an experienced real estate broker, enters into a contract with Wingard, a real estate developer, for the purchase of a yet-to-be built home.
- Covington gives Wingard two downpayment checks, one for $10,000, which was deposited shortly thereafter, and one for $276,700, which was given with the instruction that it was not to be deposited until after Wingard obtained a mortgage loan to commence construction of the premises.
- The $276,700 check given by Covington was a 'hot check' (ie. he did not have sufficient funds in his bank account to cover this amount).
- As a precondition for the yet-to-be obtained construction loan, lender required Wingard to sell the unit for each lot in the development.
- Wingard apparently met the condition, as lender subsequently provided a $7,000,000 construction loan.
- Shortly after the mortgage securing the construction loan was recorded, Wingard deposited Covington's $276,700 check which, because Covington had since deposited sufficient funds in his account to cover it subsequent to its issuance, was no longer 'hot', and cleared without incident.
- Wingard ultimately defaulted on the construction mortgage, and the lender initiated foreclosure.
- At some point thereafter, a question arose regarding the lien priority involving the competing interests of the lender's recorded construction mortgage, and Covington's equitable lien(1) (which, by its very nature, is an unrecorded lien) for the amount of his down payment deposit.
As between the competing interests of Covington's unrecorded equitable lien and the lender's recorded mortgage, which lien has priority on the premises?
If you guessed that the lender's recorded mortgage had priority over Covington's unrecorded equitable lien for the amount of his downpayment money, GUESS AGAIN.
Given the specific facts of this case, and as set forth in the court's ruling, Covington's equitable lien for his downpayment cash trumps the lender's construction loan, so that any foreclosure of the mortgage will leave Covington's lien for his downpayment unaffected (ie. the bank's construction loan is, in effect, treated as a 2nd mortgage subordinate to Covington's lien; if he does not recover his downpayment money, Covington (along with other would-be buyers who coughed up deposits on the struggling project) will then be able to foreclose on the bank to reclaim his cash).
Further, the court found this to be the case, notwithstanding the fact that Covington's $276,700 check:
- was held uncashed by Wingard until after the construction loan was made, and
- was written at a time when there were insufficient funds in the bank to cover the payment (although funds were ultimately made available when the check was eventually deposited).
For full facts, the ruling, and the court's application of the relevant law, see Regions Bank v. Wingard Properties, Inc., Opinion No. 4846 (S.C. Ct. App. June 22, 2011).
(1) I mention in passing that when a buyer pays a downpayment for any purchase of real estate, the buyer is generally entitled to an equitable lien on the premises for the amount of his deposit. The entitlement to such an equitable lien is usually not any big deal - except, of course, in those cases where the transaction ultimately fails to close and the seller and/or escrow agent refuses to refund the deposit back to the buyer.bona fide purchaser