The Priority Of Liens

Copyright (c) 2014 Mark Shapiro

One of my many judgment articles. There's lots of kinds of property liens, for example senior liens, junior liens, second trust deeds, first mortgages; and variations on these liens, and other names for the basic kinds of liens.

I'm a Judgment referral expert, not a lawyer, and this article is my opinion, please hire an attorney if you need legal advice.

A lien is the simple way to secure debts as it attaches itself to any property the debtor owns or may own in the future, so the creditor will get a chance to get paid.

Debts can usually be secured by recording a lien, which attaches debts to any debtor properties within the county or state, and the lien most often must get paid before the property can be sold. The lien makes real property collateral for the debt.

If the debtor doesn't pay as agreed, the lien holder may arrange to force the auction of their property in a foreclosure to try to be repaid.

There may be several liens on a property. If one of the lien holders forecloses on the property, what will happen to the other lien holders? This article explains who's entitled to get any possible excess money from an auction sale, if there is any left over.

Lien priority within California is usually based on which person or entity records their lien first. The first in time to record their lien usually gets priority over any liens which are recorded later.

Lien priority is covered by Civil Code 1367(d) which states: (d) A lien created pursuant to subdivision (b) shall be prior to all other liens recorded subsequent to the notice of assessment, except that the declaration may provide for the subordination thereof to any other liens and encumbrances.

As an example of how property lien priority works is if the debtor (owner) purchases a home for $600,000. They get a loan for the entire amount of $600K. This loan uses the property to secure the loan and will be in first position, and it will become the senior lien. The lender records their lien quickly, in California usually as a "deed of trust", often referred to as the first trust deed.

In our example, the debtor later takes out a credit line on his property for a credit limit of $40,000. His credit line will be secured by his property and that lien gets recorded after the (purchase-money) first trust deed. The line of credit lien is junior to the $600K lien.

The last property lien happens when the homeowner gets a $8,000 judgment against them. The judgment creditor records their lien that is in third place. This property lien is behind the first 2 liens.

Any later liens that get recorded will get a priority according to when they're recorded.

What happens when a lien is foreclosed upon? There are 2 variations, a junior lien foreclosing and a senior lien foreclosing.

When the 1st (senior) lender forecloses, most often all junior liens are wiped out. This does not remove the debts, only the collateral. Junior liens are unsecured creditors if a senior lien forecloses.

The 2nd variation is if a junior lien forecloses. The rules are the same for any lien recorded after the junior lien. Any liens recorded after the foreclosing junior lien will be extinguished. The senior liens are not disturbed. The property purchaser at the foreclosure sale buys it subject to the senior lien, and will have to make payment arrangements to the senior lien holder.

When no one bids at the foreclosure auction, the most senior lien holder usually gets the property, and the previous homeowner is most often liable for any losses that the senior lien holder suffers.

What happens after the debtor's property gets sold in foreclosure and the auction generates more cash than what is owed to the lien holder that foreclosed? These are called surplus funds, and the right to these funds are covered by law in California Civil Code 2924k.

California Civil code 2924k says that the first expense that will be paid when a foreclosing auction, is the expenses and costs of conducting the foreclosure auction. After that, the senior liens and the lien holder that foreclosed are paid. When there's any fund left, then all liens that are junior to the foreclosing lien get paid in the order of priority. Finally, if any money is left, they are paid to the debtor.

An example of how this works is when the most senior lien owner forecloses on the house and the house sells for $640K. First, all costs of the sale get paid, for example $5K, which leaves $635,000. After that, the senior lien of $600,000 is paid fully, leaving $35K. That $35K pays off the next most senior, the $40K line of credit, that may not be at the full $40,000 limit. Any funds that are left are paid to the third lien holder, the judgment owner.

What happens when a junior lien forecloses? As an example the line of credit forecloses and the property is sold at the auction for $50K. The property just sells for $50,000 as the winning bidding buyer at the auction buys the property subject to the previous $600,000 first mortgage.

For this example, first the costs of the auction sale are paid (e.g.) $5K, leaving $45,000 remaining. Next, the credit line is paid off in full for $30K, leaving $15K in surplus funds. The judgment owner is paid fully for their $8K judgment lien. This leaves $7,000 left, which is paid to the debtor. The senior lien holder is not paid as their status isn't changed by the foreclosure of a junior lien. The high bidder is purchasing the property subject to any senior lien holder(s).

An exception all lien holders should be aware of is the higher priority of property tax liens. These liens always get automatic priority over all other liens and it does not matter when they were recorded. Another problem would be if the homeowner applies for bankruptcy protection.


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Mark Shapiro - Judgment Broker - http://www.JudgmentBuy.com - where Judgments go to get Recovered!