February 24, 2008
Nelson on Fairness and Priority in Foreclosure Purchases
Grant Nelson (Pepperdine) has posted The Foreclosure Purchase by the Equity of Redemption Holder or Other Junior Interests: When Should Principles of Fairness and Morality Trump Normal Priority Rules? on SSRN. Here's the abstract:
This article explores an issue that is uniquely suited to Dale Whitman's powerful analytical mind and his intuitive moral and ethical sensibilities - when should the core maxim of mortgage law, namely that a properly conducted foreclosure of a senior lien terminates junior interests - yield to higher principles of fairness and morality? When the holder of the equity of redemption directly or indirectly purchases at either a mortgage sale or tax sale, survival or revival of junior liens and other junior interests is the norm. This is the case even though time-honored foreclosure principles dictate that a valid foreclosure produces a title free and clear of junior interests. In this situation, compelling concepts of morality, fairness and the prevention of unjust enrichment overcome a strong presumption that normal lien priority rules should govern. Overall, courts and the Restatement reach the correct result in this context. On the other hand, when the purchaser at a tax sale is a mortgagee or other junior interest, courts improperly invoke morality and fairness concepts to justify survival and revival. Here the purchaser does not act unethically and there are no valid moral or fairness arguments for departing from normal priority rules, so modern courts should follow the Restatement approach.
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