Bill's house is sold for $ 120,000 to satisfy several liens . Priority 1 lienholder , Abe , Is owed $ 60,000 ; Priority 2lienholder , Ben , is owed $ 90,000 , and Priority 3 lienholder , Carla , is owed $ 30,000 . How will the proceeds from the sale be divided ? A. Abe = $ 60,000 : Ben $ 60,000 , Carla = $ 0 B . Abe = $ 60,000 ; Ben = $ 40,000 ; Carla = $ 20,000 C . Abe = $ 40,000 : Ben = $ 60,000 ; Carla = $ 20,000 D . Abe = $ 45,000 : Ben = $ 45,000 ; Carla- $ 30,000

Explanation:

We have all heard the terms “Senior Lien”, “Junior Lien”, “First Mortgage”, “Second Trust Deed” and whatever other variations of those terms are out there. Here we are going to explain exactly what those terms mean and how they relate to a foreclosure action.

A lien is simply a way to secure a debt to a piece of property so that the association has some priority especially over the delinquent owner’s unsecured debts. When someone owes money to another, that debt can be secured by recording a lien. That debt is then attached to the property, and the lien must be paid before the property can be sold. The property becomes collateral for the debt. If the borrower fails to pay the debt when due, the lien holder can force the sale of the property in a foreclosure action in order to get paid.

Of course, there can be several liens on a property at the same time. The question then becomes, if one lien holder forecloses, what happens to the other liens, and who is entitled to the excess money from the sale?

LIEN PRIORITY

Simply put, lien priority in California is based entirely on who records their lien first. The first in time to record their interest gets priority over all subsequently recorded liens. And this is codified at Civil Code Section 1367(d) which states: (d) A lien created pursuant to subdivision (b) shall be prior to all other liens recorded subsequent to the notice of assessment, except that the declaration may provide for the subordination thereof to any other liens and encumbrances.

Here is a simple example of how this works:

An owner purchases a home or condo for $500,000. To accomplish this, he or she takes out a loan for the full $500,000. This loan is secured by the property and is first in time. The lender properly and promptly records their lien, in California usually a “Deed of Trust” commonly referred to as the first trust deed. This is the senior most lien.

The homeowner later takes out a line of credit against his property for $30,000. This line of credit is secured by the property and is recorded after the purchase-money loan first trust deed. This lien is therefore junior to the $500,000 loan.

Finally, the homeowner later falls behind in his condominium or HOA assessments and his association records a lien for $7,000, the amount of the delinquent assessments. This assessment lien is junior to both the $500,000 purchase-money first trust deed and the $30,000 line of credit.

As you can see, the order of priority looks like this:

$500,000 purchase-money first trust deed recorded first.

$30,000 line of credit recorded second.

$7,000 assessment lien recorded third.

The purchase-money mortgage is senior to both of the other liens. The line of credit is junior to the purchase-money mortgage, but it is senior to the Association’s assessment lien. And the assessment lien is junior to both the prior liens. Any later liens to be recorded will take priority according to what order they are recorded in. Whoever records before another would be in “senior” position and the other would be “junior”, hence the terms senior or junior lien holders.

Now that we understand how lien priority is determined, let’s look at what happens when a lien is foreclosed upon.