Delaware Superior Court Rules on Satisfaction of General Lien on Property Sold at Foreclosure Sale

December 2011Newsletters In the Zone

The Delaware Superior Court recently ruled that general liens on property sold at a foreclosure sale, including those liens senior in priority to the foreclosing mortgage, are discharged from the property at the time of the sale.

On December 7, 2006, the plaintiff, CACH LLC, obtained a judgment lien against Aaron Johnson, Jr., the sole owner of property located in Newark, Delaware. The plaintiff transferred the judgment to the Superior Court and recorded its judgment as a lien on the Newark property on December 21, 2006.

Johnson conveyed the Newark property to himself and his wife as tenants by the entirety on December 19, 2006, the same date on which Johnson and his wife also mortgaged the property with Eastern Savings Bank for $168,000. The deed and mortgage were recorded on December 29, 2006. Accordingly, a title search of the property revealed the general lien in favor of the plaintiff as a first position lien and the Eastern Savings Bank mortgage as a second position lien.

Two years later, Eastern Savings Bank filed a foreclosure action on its mortgage. In April 2009, the property was sold at sheriff’s sale to a third-party for $133,000. At that time, the plaintiff’s judgment lien was approximately $16,000. The New Castle County Sheriff sent the entire sale proceeds to counsel for Eastern Savings Bank.

The plaintiff brought an action against Eastern Savings Bank alleging misappropriation of funds and unjust enrichment. The Court of Common Pleas granted summary judgment in favor of Eastern Savings Bank. The plaintiff appealed the decision to the Superior Court.

In its decision, the court noted that 10 Del. C. § 4985 provides that real estate sold at a sheriff sale shall be discharged from all liens except liens created by mortgages. Accordingly, the court ruled that a third-party purchaser at a sheriff sale takes the property unencumbered by judgments against prior owners; even those judgments that have a superior lien position to the foreclosing mortgage unless the judgment is supported by a mortgage.

The court noted that while the foreclosure sale discharged all liens on the property, the proceeds should have been distributed to the lien holders in the order of their priority. As the senior lien holder, the plaintiff was entitled to receive satisfaction of its judgment lien from the proceeds of the sale before the balance of Eastern’s mortgage was satisfied. However, as to the third-party purchaser, the general judgment lien was discharged from the property.

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

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