At a closing at 10 a.m. on May 3, 2005, X Corp. delivers $25,000,000 to the seller of a factory using $20,000,000 from Bank One secured by a mortgage on the property, and the attorney for X Corp. records its title to the property at the same time. At 2 p.m. the same day, X Corp. grants a mortgage on the same property to Bank Two to secure another $20,000,000 loan. The attorney for Bank One records the mortgage at 2:30 p.m. The attorney for Bank Two records its mortgage at 2 p.m. X Corp. defaults on its loan payments to both banks.
Who gets what?
To determine who gets what in this scenario, we need to consider the order of recording the mortgages and the priority rules that govern mortgage liens.
In general, the rule of "first in time, first in right" applies to mortgage liens. This means that the mortgage recorded first will have a higher priority over subsequent mortgages recorded on the same property.
In this case, the attorney for Bank One recorded its mortgage at 2:30 p.m., while the attorney for Bank Two recorded its mortgage at 2 p.m. Therefore, Bank Two holds the first mortgage on the property, and Bank One holds the second mortgage.
When X Corp. defaults on its loan payments to both banks, the proceeds from the sale of the property will be distributed in the following order:
1. Bank Two: Since their mortgage was recorded first, they have the higher priority lien. Bank Two will receive the first $20,000,000 from the sale proceeds, as they were secured by the first mortgage.
2. Bank One: After Bank Two is paid, any remaining sale proceeds will go towards satisfying the second mortgage. Bank One will receive the next $20,000,000 from the sale proceeds, as they were secured by the second mortgage.
3. X Corp: If there are any sale proceeds left after both mortgages are satisfied, X Corp. will receive the remaining amount, which in this case would be $5,000,000 ($25,000,000 - $20,000,000 - $20,000,000 = $5,000,000).
It's important to note that the amounts mentioned above are subject to any other outstanding liens or claims on the property. If there are additional creditors or claims, they would need to be considered in the distribution of the sale proceeds as well.