Question

Hofflehaus Inc owns a large piece of land known as Schwarzermorgen. It wanted to use that land as security for loans totaling $6 million. When it explained the situation to Primus Bank, however, it was told that it qualified for a loan of only $4 million. The company accepted the offer of that loan and allowed Primus Bank to take a mortgage over Schwarzermorgen. Primus Bank did not, however, immediately register its mortgage. The next day, the company approached Deuce Bank, asked for a loan of $2 million, and offered security in the form of a mortgage over Schwarzermorgen. The company did not mention that it had already granted a mortgage to Primus Bank and Deuce Bank had no other way of knowing about that first mortgage. Deuce Bank then (1) checked the records at the land registration office and found that there were no interests registered against Schwarzermorgen, (2) loaned $2 million to the company, and (3) immediately filed its own mortgage. The next day, Primus Bank finally registered its mortgage. And later that same day, the company suffered a devastating financial loss. That loss wiped out virtually every asset that the company had, including the $6 million that it had borrowed from the two banks. The company's only remaining asset is Schwarzermorgen. The value of Schwarzermorgen has, however, dropped to $1.5 million. That land has now been sold and the only question before the court concerns the disposition of the $1.5 million in cash. Which of the following statements is TRUE? (a) Deuce Bank will receive $1 million and Primus Bank will receive $500 000. (b) Primus Bank will receive $1.5 million and Deuce Bank must pay $4.5 million to Primus Bank. (c) Each bank will receive half of the value of Schwarzermorgen. (d) Primus Bank will receive $1 million and Deuce Bank will receive $500 000. (e) Deuce Bank will receive $1.5 million.

Answer 1

Primus Bank will receive $1.5 million, and Deuce Bank must pay $4.5 million to Primus Bank. The correct option is B.

Step-by-step explanation:

Primus Bank holds the first mortgage on Schwarzermorgen, and even though it was registered later, it takes precedence due to the principle of "first in time, first in right." When Deuce Bank provided the loan without knowledge of Primus Bank's mortgage, it takes a subordinate position. Therefore, Deuce Bank is obligated to cover the shortfall after satisfying Primus Bank's claim. The $1.5 million from the sale of Schwarzermorgen goes to Primus Bank, and Deuce Bank is responsible for paying the remaining $4.5 million.

In legal terms, the concept of "priority" in mortgage law dictates that the first mortgage has a higher claim on the property. Since Primus Bank's mortgage was established before Deuce Bank's, it has the superior claim, and the foreclosure proceeds are distributed accordingly. Therefore, Primus Bank is entitled to the entirety of the $1.5 million from the sale.

In summary, the legal precedence of Primus Bank's mortgage grants it the full $1.5 million, and Deuce Bank is liable for the outstanding $4.5 million, illustrating the fundamental principle of mortgage priority in property law. The correct option is B.