A Note to Sellers – Is Your Mortgage a “Purchase Money Mortgage?”

August 2011Newsletters In the Zone

In a recent Delaware Superior Court case, Baffone v. Brady, 2011 WL 2165136 (Del. Super. Ct. N2011), the Superior Court strengthened its preference for a strict application of the Parol Evidence Rule in mortgage priority disputes. In Baffone, the Bradys defaulted on their home mortgages with two private lenders, the Galantinos and the Baffones. The Galantinos, as “sellers,” claimed their later recorded mortgage of $400,000 held the status of a “purchase money mortgage” and had priority over the Baffone’s first recorded mortgage of $500,000. The Galantinos asserted they only agreed to increase their original loan offer of $200,000 to $400,000 on the understanding they would have priority. They also asserted that, as a purchase money mortgage, the loan qualified for a statutory exception under 25 Del. Code § 2108.

25 Del. Code § 2108 allows later recorded purchase money mortgages priority over other earlier recorded liens or mortgages. It provides that priority is given to subsequently recorded purchase money mortgages if such mortgages “are recorded within five days, after the deed is recorded.” In this case, the court was required to decide if the mortgage granted by the seller, the Galantinos, qualified as a “purchase money mortgage” and would be given priority over the earlier recorded mortgage by the Baffones.

Although the court determined the extrinsic evidence favored priority for the Baffone mortgage, the court carefully noted its decision was not based on extrinsic evidence. Instead, the court determined it had to adhere to Delaware’s Parol Evidence Rule. Thus, determination of the issue of whether this was a purchase money mortgage entitled to priority under 25 Del. Code § 2108 must be based on the terms of the mortgage alone. However, even after an evaluation of the mortgage alone, the court still found the Baffone’s $500,000 had priority over the Galantino’s $400,000. In reaching this decision, Judge Parkins noted the words “purchase money mortgage” never appeared in the Galantino mortgage, thus the mortgage could not be characterized as a “purchase money mortgage.” Furthermore, the court found there was nothing to distinguish the Galantino mortgage from the Baffone mortgage. Consequently, the court determined it must rely on the general rule that priority is awarded to the first recorded mortgage.

Delaware real estate practitioners advising their clients in similar transactions should keep in mind the court’s hesitancy to use parol evidence in lien priority disputes and should specifically identify a lien as a purchase money mortgage and record any information about lien priority directly in the mortgage.

For more information, please contact Michael J. Isaacs at 302.622.4213 or [email protected].