In Insight Assets v. Farias, 2013 UT 47, the Supreme Court of Utah allowed laches to trump the Purchase Money Rule. According to the Purchase Money Rule, a Trust Deed securing seller financing will generally take first-position priority over a prior recorded Trust Deed securing third-party financing. However, when the seller sits by doing nothing while the third-party financer forecloses the prior recorded Trust Deed, the seller might forfeit his equitable right to first position.
In Insight, the buyer in a real estate transaction, purchased property with both third-party financing through a bank and seller financing. The Trust Deed securing the bank's financing was recorded moments before the Trust Deed securing the seller's financing. Subsequently, the buyer defaulted on both loans. Exercising its rights under its Trust Deed, the bank sold the property at a foreclosure sale. The property then changed hands with other parties, the last of which was Farias. Later, Insight purchased the seller's rights under the seller's Trust Deed and attempted to foreclose to collect the seller's financing. Farias sued to stop the foreclosure. The District Court ruled in favor of Farias and stopped the foreclosure.
Insight appealed based on the argument that the Purchase Money Rule placed the Trust Deed securing the seller's financing in first position. The Purchase Money Rule is that instruments securing seller financing ordinarily take priority over any other instrument securing third-party financing when both parties have had notice of each other's security instruments.
Under the seller's Trust Deed, Insight still had plenty of time to foreclose because the six-year statute of limitations had not run. Accordingly, Insight was confident it was in first position and could still foreclose regardless of the bank's prior foreclosure.
The Supreme Court disagreed. While reminding us of the continued viability of the Purchase Money Rule in Utah, the Supreme Court held in Farias's favor because the seller sat idly by while the bank foreclosed. The Supreme Court determined that the equitable doctrine of laches applied even though the statute of limitations had not run.
Laches will apply when a party has failed to exercise diligence and an injury results from the lack of diligence. Because the seller failed to promptly exercise its rights before the bank conducted the foreclosure sale, Farias purchased the property reasonably assuming from the seller's inaction that the seller's Trust Deed was extinguished by the bank's foreclosure.
This should serve as a warning to parties involved in seller financed real estate transactions. Third-party lenders would be wise in all situations where sellers are furnishing part of the financing for the purchase, to insist that the seller furnish a duly acknowledged subordination agreement subordinating the seller's Trust Deed to the third-party's Trust Deed regardless of the sequence of recording. On the other hand, sellers that have not subordinated to third-party financing and enjoy the benefit of the Purchase Money Rule should never sit idly by while the third-party forecloses.
Copyright © Daniel L. Day 2013
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