Lien Priorities: KENTUCKY LEGAL SYSTEMS CORP. V. DUNN (COA; 4/14/2006)

KENTUCKY LEGAL SYSTEMS CORP. V. DUNN
PROPERTY – Lien priorities; judgment liens

2004-CA-002352

PUBLISHED
AFFIRMING (TACKETT)
DATE: Apr. 14, 2006

Kentucky Legal Systems Corporation (KLS) appeals from the judgment finding that its judgment lien against all property owned by the Dunns was inferior to the mortgage held by Community Trust Bank, where the mortgage enabled the purchase of the subject real property.

KLS argued that Kentucky law requires that its first-recorded judgment lien have priority over the Community Trust mortgage, but the COA thought otherwise and affirmed the lower court.

The judgment held by KLS was entered in 1992, and the judgment lien filed and properly recorded in 1998 against all real property owned by Dunn. KLS argues that the bank was on constructive notice of its judgment lien and that it failed to exercise due care before giving Dunn a loan.

Dunn later defaulted on the mortgage and the bank sought foreclosure and a declaration that its mortgage held priority over the judgment lien. The circuit court agreed that the mortgage should be considered a purchase money mortgage in accord with the Restatement (Third) of Property, Mortgages § 7.2. The circuit court adopted the Restatement’s reasoning and held the bank’s mortgage was superior to KLS’s judgment lien.

Community Trust, citing the Restatement (Third) and other treatises, argues that the judgment was correct because without its grant of a loan with a mortgage reserved, the debtor would have no interest in the property at all to which KLS’s judgment lien could attach, and cites many cases in other jurisdictions which follow this rule. With respect to KLS’s argument that Community Trust did not exercise due care in failing to discover its judgment lien, for the reasons stated in the Restatement (Third) COA held that Community Trust, as a purchase money lender, did not need to search for judgment liens, as they should be given first priority over a judgment lien regardless of whether they had notice of any kind of the interest.

Even had Community Trust discovered the lien by exercise of due diligence, it should be granted priority over the judgment creditor’s lien due to its status as a purchase money lender.

digested by Michael Stevens

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