Delaware Supreme Court Confirms Lien Discharge of Real Property Sold at Foreclosure Sale and Priority of Distribution of Proceeds

February 2013Articles In the Zone

In the case of Eastern Savings Bank, FSB v. CACH, LLC (Del. Supr. No. 88, 2012), the Delaware Supreme Court confirmed the lien status of real property sold at sheriff’s sale and the priority of distribution of sheriff’s sale proceeds between lienholders.

In this case, CACH, LLC (CACH) had obtained a judgment against its borrower, Aaron Johnson, to satisfy a deficiency balance on a car loan. CACH filed its judgment as a property lien on December 21, 2006. As of that date, Aaron Johnson owned real property in Newark, Delaware. On December 19, 2006, Aaron Johnson executed a deed conveying his owned real property to himself and his wife as tenants by the entireties, and later that day, Johnson and his wife mortgaged the property to Eastern Savings Bank, FSB (Eastern) for $168,000. The deed conveyance and the mortgage were not recorded at the New Castle County Recorder of Deeds Office until December 29, 2006.

In August 2008, Eastern filed a foreclosure action. In connection therewith, CACH notified Eastern that CACH’s judgment lien had priority over Eastern’s mortgage lien. CACH’s judgment lien totaled $16,041.28 as of the date Eastern filed its foreclosure action. In April 2009, the property was purchased at foreclosure sale by a third party bidder for $133,000, and the New Castle County Sheriff sent the sale proceeds to the attorney for Eastern. After sale costs and payment of proceeds to Eastern, no excess proceeds remained for CACH.

CACH filed a complaint in Court of Common Pleas against Eastern alleging misappropriation of funds received from the sheriff’s sale and unjust enrichment for not paying over to CACH funds from the sale sufficient to pay off CACH’s judgment lien. The Court of Common Pleas denied CACH’s motion for summary judgment and granted Eastern’s motion to dismiss for failure to state a claim. On appeal to Superior Court, the judgment of the Court of Common Pleas was reversed. On appeal to the Delaware Supreme Court, Eastern argued that the sheriff’s sale did not discharge CACH’s judgment lien and therefore CACH was not entitled to any sale proceeds.

As an initial matter, the Delaware Supreme Court stated that the interpretation of statutes is a question of law that the court reviews de novo, and also that when reviewing a grant or denial of summary judgment, the court views all facts in the light most favorable to the non-moving party and applies a de novo standard of review to determine whether there is a genuine issue of material fact in dispute. The court then cited two statutes, which it stated are based on the public policy of disencumbering lands as much as possible from liens when sold at foreclosure sale, as requiring the sheriff to discharge all nonmortgage liens when selling property at foreclosure sale.

First, according to 10 Del.C. §4985, real property purchased at a sheriff’s sale must be free from all liens against the previous owner. In pertinent part: “Real estate sold by virtue of execution process shall be discharged from all liens thereon against the defendant, or against one or more of the defendants, if there is more than one, whose property such real estate is, except such liens as have been created by mortgage or mortgages prior to any general liens.” Citing this statute, the court stated that the sheriff’s sale discharged all nonmortgage liens against the foreclosed property.

Second, according to 10 Del.C. §5066, land sold at foreclosure sale shall be discharged from all encumbrances incurred by the prior owner. In pertinent part: “The person to whom any lands and tenements shall be sold, or delivered, under §5065 of this title, and such person’s heirs and assigns, shall hold the same, with their appurtenances, for such estate, or estates, as they were sold, or delivered for, discharged from all equity or redemption, and all other incumbrances made and suffered by the mortgagor, the mortgagor’s heirs, or assigns; and such sale shall be available in law.” The court stated that this statute directs that property sold at a sheriff’s sale must be free of liens against the mortgagor. The court also stated that the fact that Aaron and Angela Johnson owned the property as tenants by the entireties was irrelevant. The court noted that Eastern’s mortgage document identified the borrowers as “Angela A. Johnson and Aaron Johnson, Jr.” and both signed in their individual capacity. When Eastern foreclosed on its mortgage, the sheriff’s sale discharged all liens against the individual defendants Aaron Johnson and Angela Johnson. In affirming the Superior Court’s holding that the foreclosure sale discharged all nonmortgage liens, the Delaware Supreme Court analyzed relevant case law, holding that longstanding statutory and common law precedent requires that land sold at sheriff’s sale be transferred free of all nonmortgage liens.

The Delaware Supreme Court then turned to the issue of determining the order in which proceeds from a sheriff’s sale must be distributed. The court discussed Delaware’s recording statutes which provide that Delaware is a pure race state. Noting that CACH recorded its judgment as a lien against the property on December 21, 2006, but Eastern did not record its mortgage against the property until December 29, 2006, due to CACH having the first recorded lien it was first in line to receive distribution of sale proceeds. In affirming the Superior Court’s holding that CACH’s judgment lien must be paid before Eastern’s mortgage lien even if the mortgagee filed the foreclosure action, the Delaware Supreme Court held that sale proceeds being distributed according to first in time, first in line priority of recording is consistent with prior case law and treatise analysis.