Sprankling Coletta 5th Ed. - Chapter 9 – Quiz
Question 1 - Correct
Beth borrowed $300,000 from Lender, evidenced by a promissory note and secured by a firstpriority mortgage on Beth's home. Two years later, Beth was injured in a car accident. Unable to
work, she failed to make the payments due on the note. Lender elected to foreclose pursuant to
the power of sale in the mortgage, gave the notices required by law, and scheduled the sale at the
county courthouse. On the day set for the sale, mudslides caused by heavy rain made travel to the
courthouse very difficult. As a result, only the Lender's agent was present at the sale. The
Lender's agent bid $200,000 for the home. Because this was the only bid, the Lender acquired
title to the home; at the time of the sale, the fair market value of the home without encumbrances
was $400,000. Beth was furious about the result of the sale and is considering filing a lawsuit to
set it aside. Which of the following is a court most likely to do?
A Set aside the sale based on inadequacy of the purchase price.
B Set aside the sale because Lender did not make reasonable efforts to obtain a fair price.
C Set aside the sale because Lender did not postpone the sale to a time when more bidders
could attend.
D Not set aside the sale.
Correct. On these facts, Beth has no basis for setting aside the sale.
Question 2 – Incorrect
Bob borrowed money from four lenders; each loan was evidenced by a promissory note and
secured by a mortgage on Bob’s ranch. Bob first borrowed $50,000 from Lana, who recorded
the mortgage; Bob then borrowed $100,000 from Leonard, who recorded the mortgage; Bob next
borrowed $70,000 from Lisa, who failed to record the mortgage; and Bob finally borrowed
$50,000 from Logan, who failed to record the mortgage. Leonard foreclosed his mortgage when
Bob failed to make loan payments. The highest bidder at the foreclosure sale obtained title to the
property for $200,000. Assume that this is a notice jurisdiction. How should the sales proceeds
be distributed?
A $50,000 to Lana, $100,000 to Leonard, and $50,000 to Lisa.
Incorrect. Lana’s mortgage has first priority and is not affected by the foreclosure of a junior
mortgage; the buyer at the sale takes title with Lana’s mortgage still in place. Accordingly, Lana
receives no proceeds from the sale. In addition, Lisa receives no proceeds from the sale. Logan
had no notice of Lisa’s mortgage and is thus a bona fide encumbrancer, who receives the same
treatment as a bona fide purchaser. This means that Logan’s mortgage has priority over Lisa’s
mortgage, so the debt to Logan will be paid before the debt to Lisa.
B $100,000 to Leonard, $70,000 to Lisa, and $30,000 to Logan.
Incorrect. Because Logan had no notice of Lisa’s mortgage, his mortgage has priority over her
mortgage, which means that his debt will be paid before any sales proceeds are allocated to the
debt to Lisa.
C $100,000 to Leonard, $50,000 to Lisa, and $50,000 to Logan.
Correct. The priority of these three mortgages in sequence is: Leonard (first-in-time), Logan
(has priority over Lisa because he was a bona fide encumbrancer without notice of her
mortgage), and Lisa. Accordingly, the debts owed to Leonard and Logan will be paid first
before any sales proceeds are allocated to the debt owed to Lisa.
D $70,000 to Lisa, $50,000 to Logan, and $80,000 to Bob.
Incorrect. As the foreclosing lender, Leonard is entitled to the full repayment of his debt before
any junior liens are satisfied. The $100,000 left over after Leonard is paid would go first to
Logan ($50,000, paid in full) and then Lisa ($50,000, paid in part). Bob would receive a share of
the sales proceeds only if the debts to Leonard, Logan, and Lisa were fully paid and proceeds
still remained, which is not the case here.
Question 3 – Correct
Barbara borrowed money from three lenders; each loan was evidenced by a promissory note and
secured by a deed of trust on Barbara’s peach orchard. Barbara first borrowed $200,000 from
Larry, who recorded his deed of trust; Barbara then borrowed $150,000 from Lena, who
recorded her deed of trust; finally, Barbara borrowed $400,000 from Lisa, who recorded her deed
of trust. Barbara failed to make the payments required on the loan from Lena, and Lena decided
to foreclose on her deed of trust. The fair market value of the orchard without encumbrances is
$500,000. Bill plans to bid at the foreclosure sale. What is the maximum amount that he should
bid?
A Zero.
B $150,000.
C $300,000.
Correct. The successful bidder will take title subject only to the deed of trust held by Larry for
$200,000. Because the property is worth $500,000 without encumbrances, the most Bill should
bid is $300,000.
D $500,000.
*Subtracted Larry’s amount because they will be taking the title held by Larry ($500,000 - $200,000
cost of Larry’s title = $300,000 – highest amount)
Question 4 – Incorrect
Bob owned a factory. He borrowed $100,000 from Lana; the loan was secured by a mortgage on
the factory, which Lana immediately recorded. Bob borrowed $500,000 from Larry one year
later, and then $200,000 from Lisa two years after that; both of these loans were secured by
deeds of trust on the factory, which were promptly recorded. A few months later, Bob missed
two monthly payments on the loan from Larry, who accelerated the debt and began foreclosure
proceedings. Bob also missed one payment on the loan from Lisa, who also began foreclosure
proceedings. Bob tried to reinstate the loan from Larry by giving him a check in an amount
sufficient to pay the two missed payments, plus Larry’s foreclosure expenses to date, but Larry
insisted on holding a foreclosure sale. Betty was the high bidder at the sale, paying $400,000,
which was the fair market value of the factory on the sale date. Which of the following is correct
in most jurisdictions?
A The sale is invalid because Larry refused to allow Bob to reinstate the loan.
Incorrect. Some states allow the borrower to reinstate after acceleration occurs, but this is a
minority view.
B Larry can obtain a deficiency judgment against Bob.
Correct. The $400,000 in sales proceeds will first be applied to repay Larry’s loan, leaving a
balance due of $100,000. In most jurisdictions, Larry can now sue Bob and obtain a deficiency
judgment for this sum. The anti-deficiency legislation that exists in some states does not apply
here because (a) the factory sold for its fair market value and (b) Larry’s mortgage was not a
purchase money mortgage. Finally, nothing about the sale was commercially unreasonable
under the Wansley standard. In a few states, Larry could not obtain a deficiency judgment
because he used nonjudicial foreclosure.
C Lana’s loan will be repaid from the sale proceeds.
Incorrect. Lana’s loan is not affected by the foreclosure because it is senior to Larry’s
loan. Betty took title to the factory subject to Lana’s mortgage. Accordingly, Lana does not
receive any of the sale proceeds.
D Lisa is not entitled to any of the sale proceeds if she accepted a deed in lieu of foreclosure
from Bob.
Incorrect. Lisa’s loan was junior to Larry’s loan, so she would normally share in any excess sale
proceeds; but on these facts, there are no sales proceeds left over to share with her. If Lisa had
accepted a deed in lieu of foreclosure from Bob, she would be the factory owner, and would be
entitled to share in any sales proceeds which remained after Larry’s loan was repaid—like any
other owner—but again there were no excess sale proceeds.
Question 5 – Incorrect
Oscar owned a vacant lot. He borrowed $200,000 from Lender to build a home on the lot; the
loan was evidenced by a promissory note and secured by a first-priority mortgage on the
property. After the construction work was finished, Oscar moved into the home and lived there
for a year until he sold it to Brenda for $240,000. The sales contract provided that Brenda would
take title subject to the mortgage held by Lender. Two years later, Brenda discovered that the
home was right on top of a dangerous earthquake fault, which lowered its value to
$80,000. Lender plans to foreclose its mortgage, but anticipates that the property will
bring only $80,000 at the sale, which will leave almost $120,000 of the loan unpaid. Lender
knows that Oscar owns stocks worth over $500,000 and that Brenda owns an art collection worth
over $400,000; it hopes to collect the unpaid balance from these other assets. Who is personally
liable to pay the loan in most jurisdictions?
A Both Oscar and Brenda.
Incorrect. Oscar is personally liable in almost all jurisdictions simply because he signed the
promissory note. But Brenda is not personally liable because she took title “subject to” the loan;
she did not agree to “assume” the loan
B Only Oscar.
Correct. Oscar is personally liable in almost all jurisdictions simply because he signed the
promissory note. But Brenda is not personally liable because she took title “subject to” the loan;
she did not agree to “assume” the loan.
C Only Brenda
Incorrect. Brenda is not personally liable because she took title “subject to” the loan; she did not
agree to “assume” the loan
D Neither Oscar nor Brenda.
Incorrect. Oscar is personally liable in almost all jurisdictions simply because he signed the
promissory note. But Brenda is not personally liable because she took title “subject to” the loan;
she did not agree to “assume” the loan
Question 6 – Correct
Bill owned a house worth $120,000, which was not encumbered by a mortgage or other security
instrument. He borrowed $80,000 from his friend Fiona and signed a promissory note to evidence the
loan, but never agreed to provide security for the loan. Bill then ran up a credit card debt of
$60,000. Because Fiona and the credit card company were pressing for payment, Bill then borrowed
$100,000 from Lender, evidenced by a promissory note and secured by a mortgage on the
house. He immediately lost all the money he had borrowed from Lender in a poker game. Bill then filed
for bankruptcy; his only asset was his house. How much will Lender be able to collect on its loan?
A Nothing, because the debts owed to Fiona and the credit card company were first in time.
B Nothing, because Lender failed to foreclose on the loan before Bill filed for bankruptcy.
C $50,000, because the debts that Bill owes ($240,000) will be paid pro rata from his assets
($120,000), so each creditor will receive 50% of the amount due.
D $100,000, because the debt is secured by a mortgage.
Correct. In bankruptcy, secured creditors (like Lender) are paid in full before any unsecured
creditors (like Fiona and the credit card company) receive any payment. This is one of the main
reasons that lenders require security for larger loans. ask about promissory notes / legal bond
Question 7 – Correct
Beth inherited a home worth $300,000 when her mother died; the home was not encumbered by a
mortgage or other security instrument. Beth wanted to open a new business, so she borrowed $250,000
from Lender, evidenced by a promissory note and secured by a deed of trust on the home. Beth’s
business was initially successful, but failed when a nation-wide recession occurred. The value of Beth’s
home fell to $200,000 due to the recession, and she stopped making payments. At the ensuing
foreclosure sale, Jill bought the home for $180,000, below fair market value. Assume that the jurisdiction
would allow Lender to obtain a deficiency judgment in this situation, but that it has adopted fair value
legislation. What is the amount of the deficiency judgment that Lender can obtain?
A $20,000.
B $50,000.
Correct. Fair value legislation usually limits a deficiency judgment to the amount by which the
loan balance exceeds the fair market value of the property at time of foreclosure. Accordingly,
Lender can obtain a deficiency judgment for $50,000 ($250,000 minus $200,000 equals
$50,000).
C $70,000.
D $250,000.
Question 8 – Incorrect
Oliver owned a four-unit apartment building that was encumbered by a mortgage securing a $500,000
loan from Lender. Facing financial difficulties, Oliver stopped making payments on the loan, and Lender
began foreclosure proceedings. Oliver contacted many lenders to obtain a new loan to pay off the old
loan; but none of them were willing to lend because of Oliver’s poor credit rating. Lana, an attorney who
owned an adjacent apartment building, then offered to buy the building from Oliver for $700,000, which
would allow him to repay Lender in full and keep $200,000. When Oliver said that he really wanted a
loan and protested that the building was worth $900,000, Lana said: “Take it or leave it! But I’ll give
you an option to repurchase the building for $1,200,000 in one year. And you can live in one of the units
if you agree to maintain the building.” Oliver agreed to this arrangement. Accordingly: (a) Lana paid
Oliver $700,000; (b) Oliver repaid Lender in full; (c) Oliver conveyed title to the building to Lana; and
(d) Lana gave Oliver a written option to repurchase the building for $1,200,000 on the basis described
above. Oliver soon decided that he would never be able to raise the money to exercise the option, so he
decided to sue Lana. What is his best theory?
A The agreement is an equitable mortgage.
Correct. The agreement is probably an equitable mortgage based on these factors: the $200,000
disparity between fair market value and purchase price; the existence of the option to repurchase;
Oliver’s continued possession of a unit; Oliver’s maintenance of the property; the disparity of
bargaining power, since Lana is an attorney; the fact that Oliver had never listed the property for
sale; and Oliver’s financial distress. Under this approach, Oliver can force Lana to foreclose his
interest, which would allow him to recapture most of his $200,000 equity in the property.
B The agreement is a future advance mortgage.
C The agreement is an installment land contract.
D The agreement is an invalid attempt to clog the equity of redemption.
Incorrect. The agreement is not structured as a mortgage, and it does not include a provision by
which Oliver waives the right to be foreclosed upon.
Ask Research answer: * For hundreds of years, mortgage lenders have been looking for ways
to avoid both the procedural delays of the mortgage foreclosure process and the borrower's
equitable right of redemption (ie, the right to redeem property secured by a loan that has been
accelerated prior to foreclosure). In the 1600s, English courts protected a borrower's right of
redemption by creating the doctrine against "clogging the equity of redemption," which had the
effect of invalidating any mortgage term that restricted the borrower's right of redemption.
Through the following centuries and into modern times, courts have shown a strong inclination
to preserve this right.i
In today's mortgage lending world, the most common way that lenders attempt to skirt
foreclosure (and its potential delays) is by taking a pledge of the equity interests in the borrower,
allowing the lender to foreclose on the equity interests through a UCC sale (which is a quick
process that can typically be completed in 90 days) instead of foreclosing on the real estate
collateral (which in some jurisdictions can take longer than a year). This is often referred to as
the "dual collateral" approach or an "accommodation pledge." However, even after hundreds of
years, the parameters of the "clogging" doctrine remain unclear, and the value of an equity
pledge may be outweighed by the potential litigation that could arise in connection with an
attempted enforcement of the pledge.
Question 9 – Correct
When Barry purchased a fee simple absolute in a commercial office building, he agreed to assume the
existing loan for $3,000,000 owed to Lloyd, which was secured by a recorded mortgage on the
property. Two years later, Barry borrowed $1,000,000 from Laura, secured by a mortgage on the
property which Laura quickly recorded. Six months later, all the tenants in the building moved out, and
Barry leased the entire building to Tina for a term of 10 years pursuant to a valid lease. A few weeks
later, Barry stopped making payments on the loan from Laura, and she eventually foreclosed on the
property. Sam purchased the building at the foreclosure sale and now holds a fee simple absolute. Is
Sam’s title subject to any encumbrances?
A No.
B Yes, Lloyd’s mortgage.
Correct. The foreclosure of a mortgage eliminates the mortgage being foreclosed on and all
junior interests, but does not affect senior interests. Here Laura’s mortgage was second in
priority because she was on record notice of Lloyd’s prior mortgage; and Tina’s lease is third in
priority because she was on record notice of both of the prior mortgages. Accordingly, the
foreclosure eliminates Laura’s mortgage and Tina’s lease, but does not affect Lloyd’s mortgage
because it is a senior interest.
C Yes, Laura’s mortgage.
D Yes, Tina’s lease.