17 PRIORITY - The concept of priority: State Law Flashcards
Who can bring about a foreclosure against the debtor, and when can they do this?
Foreclosures can be brought by any LIENHOLDER when the debtor DEFAULTS.
Describe what happens when a foreclosure is brought by a junior lienholder?
Foreclosure by Non-Senior lienholder:
• Foreclosures pull in all lienholders junior to the foreclosing lienholder
• A foreclosure sale wipes out all liens of those junior lienholders
• A buyer purchases property subject to all of the liens senior to that of the foreclosing lienholder
o Doesn’t become personally responsible for the debt, but becomes owner of property which can be used to satisfy the debts
Describe what happens when a foreclosure is brought by the senior lienholder?
Foreclosure by Most Senior lienholder
• Since all other lienholder are junior, foreclosure by the most senior lienholder eliminates all liens of the property
How can a senior lien holder prevent a junior lien holder from selling the collateral in a foreclosure sale?
Preventing Foreclosure: Senior lienholders have a superior right to possession over the collateral which can allow them to prevent foreclosure by junior lienholders (two standards)
• Grocer Supply standard: A senior lienholder can take possession of collateral from a foreclosing junior lienholder to prevent a foreclosure, and can give collateral back to the debtor if they so choose.
• Frierson standard: A senior lienholder can take possession of collateral from a foreclosing junior lienholder to prevent them from foreclosing, HOWEVER, if a foreclosure sale would provide the junior lienholder with any value, the senior lienholder cannot deprive them of that and therefore must either foreclose on the property themselves OR give up possession.
What is the Grocers Supply Standard?
A senior lienholder can take possession of collateral from a foreclosing junior lienholder to prevent a foreclosure, and can give collateral back to the debtor if they so choose.
What is the Frierson standard?
•Frierson standard: A senior lienholder can take possession of collateral from a foreclosing junior lienholder to prevent them from foreclosing, HOWEVER, if a foreclosure sale would provide the junior lienholder with any value, the senior lienholder cannot deprive them of that and therefore must either foreclose on the property themselves OR give up possession.
When should the judge not allow a foreclosure sale?
Why?
Where a junior lienholder has no equity (cannot get anything from foreclosure) then a judge should not allow a foreclosure.
Here’s why:
• Hypothetically a no equity lienholder shouldn’t be able to find a buyer, because the buyer would have no equity then either, HOWEVER a buyer could pay a small amount and gain use of the collateral for as long as they can avoid foreclosure
o This is bad because it lends itself to “chop shop” purchases which rob senior lienholders of their collateral
