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Property

Exam 4
30 minutes

Fact Pattern

A owns a tract of land known as Whiteacre. A sells Whiteacre to B for $250,000. At the time of the sale, B is subject to a duly recorded judgment lien of $50,000 in favor of B’s creditor C. Under state law, this lien attaches to all of B’s real and personal property, whenever acquired. In order to raise the funds to buy Whiteacre, B borrows $200,000 from D. This loan is secured by a mortgage on Whiteacre in favor of D. D immediately and properly records this mortgage.

One year later, B conveys Whiteacre to E in fee simple for $120,000. E does not assume B’s debt to D, nor does D release his own mortgage on Whiteacre. Whiteacre thus remains subject to D’s mortgage. Moreover, E does not assume B’s debt to C, nor does C release the judgment lien on Whiteacre. Whiteacre therefore also remains subject to C’s judgment lien. E then leases Whiteacre to B for 10 years, at a rate of $1,000 per month. The lease includes an option for B to repurchase Whiteacre for $25,000 at the conclusion of the lease. E promptly and properly records the deed and the lease.

The terms of the lease allow E to evict B, with five days’ notice, if B fails to make three consecutive monthly payments. Assume that this eviction clause conforms to applicable state law concerning leases. Within one year after the lease takes effect, B fails to make payments for three consecutive months. E then invokes the eviction clause by giving notice to B.  

At the same time that E seeks eviction, B defaults on B’s debt to D. State law allows only judicial foreclosure, not power-of-sale foreclosure. Accordingly, D initiates judicial foreclosure proceedings against Whiteacre, joining B, C, and E as parties. The foreclosure progresses to sale, at which a buyer unrelated to the parties purchases Whiteacre for fair market value at $300,000. Assume that there is no issue of redemption.

The court costs, attorney fees, and other expenses of the foreclosure sale total $5,000. At the time of the sale, B owes $50,000 to C under the judgment lien. B also owes $200,000 to D under D’s mortgage. The amounts owed include all accrued interest. The lease payments from B to E totaled $5,000, before B stopped paying. 


Questions

  1. Ignoring the foreclosure action brought by D, could E lawfully evict B, once B failed to pay on the lease for three consecutive months, and E provided the required notice? Explain.

  2. How should the proceeds from the sale of Whiteacre be distributed? Explain, including a summary of the final positions of B, C, D, and E after the foreclosure.

Question 1

Ignoring the foreclosure action brought by D, could E lawfully evict B, once B failed to pay on the lease for three consecutive months, and E provided the required notice? Explain.

Question 2

How should the proceeds from the sale of Whiteacre be distributed? Explain, including a summary of the final positions of B, C, D, and E after the foreclosure.

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