California Law on Priority of Purchase-Money Loan vis-à-vis Reattaching Junior Lien
California Appellate Court Resolves Matter of First Impression Regarding Reattaching Liens
Under California law, a wiped out junior lien reattaches if the trustor repurchases the real property that secured the debt. The question is, if the trustor obtains a purchase-money loan to buy the property, does the reattaching lien have priority over the purchase-money loan?
This was a matter of first impression when addressed by the court in DMC, Inc. v. Downey Sav. & Loan Assn., 99 Cal.App.4th 190 (2002). As the DMC Court explained at page 195,
The issue in this case, assuming that the original owner's repurchase of the property after a nonjudicial foreclosure revives the previously-extinguished junior lien, is whether the new purchase-money deed of trust has lien priority over the revived junior lien. This court and the parties have not found any California cases addressing this specific issue.
The junior lienor, DMC, argued that its lien was "first in time" and, accordingly, was entitled to priority. "In California, lien priority is determined by the "first in time, first in right" approach. In regards to real property, liens that are recorded first have priority over any later-recorded liens." DMC, at 195-96 (footnote and citations omitted).
The new lender, Downey Savings, on the other hand, argued that purchase-money loans are entitled to "super-priority" under California law:
A purchase-money mortgage, for example, has priority over all other liens on real property. Civil Code section 2898, subdivision (a) provides: "A mortgage or deed of trust given for the price of real property, at the time of its conveyance, has priority over all other liens created against the purchaser, subject to the operation of the recording laws."
DMC, at 196 (footnote and citations omitted).
After analyzing cases from sister jurisdictions, the court held that both equity and law required that the purchase-money mortgage be given priority:
In this case, the foreclosure sale extinguished DMC's lien. Without Downey's loan, DMC would have been left holding a wiped out junior lien without any legal claim to repayment. The money advanced by Downey, therefore, afforded DMC a second bite at the apple. Regardless of whether the unexpected opportunity would be fruitful, DMC was no worse off than before the repurchase. Under these circumstances, we conclude that, when the original owner's repurchase of the property after a trustee's sale revives the junior deed of trust, that lien remains second to the purchase-money deed of trust that essentially replaced the original senior lien and made possible the repurchase, and hence, the revival of the junior lien.
DMC, at 200 (footnotes and citations omitted).