## Facts

- Kentucky Legal Systems Corporation (KLS) obtained a money judgment against N.E. Dunn (and related parties) in 1992.
- In 1998, KLS recorded a judgment lien against real property owned by Dunn, asserting lien rights that would attach to Dunn’s after-acquired real estate interests.
- In 2000, Dunn purchased the real property involved in this dispute.
- Community Trust Bank, N.A. (the Bank) financed Dunn’s purchase and, as part of the same transaction, took a mortgage on the property.
- Dunn later defaulted on the loan.
- The Bank filed a foreclosure action and sought a declaratory judgment that its mortgage was a purchase money mortgage with priority over KLS’s previously recorded judgment lien.
- The Fayette Circuit Court ruled for the Bank, finding the Bank’s mortgage was a purchase money mortgage and senior to KLS’s judgment lien.
- KLS appealed to the Kentucky Court of Appeals.

## Issues

1. Does a purchase money mortgage taken to finance the debtor’s acquisition of real property have priority over a previously recorded judgment lien that would otherwise attach to the debtor’s after-acquired property?
2. Does the purchase money mortgage lose priority if the lender has constructive or actual notice of the earlier recorded judgment lien?
3. Is purchase money mortgage priority limited to seller-financed (vendor) mortgages, or does it also apply to third-party lenders such as banks?

## Decision

- The Kentucky Court of Appeals affirmed.
- The court agreed the Bank’s mortgage was a purchase money mortgage because it secured the funds used to acquire the specific property.
- The court held the purchase money mortgage had priority over KLS’s earlier recorded judgment lien, even though the lien was recorded before Dunn acquired the property.
- The court rejected the argument that notice of KLS’s judgment lien changed the priority result.
- The court declined to restrict purchase money mortgage priority to vendor mortgages and applied the rule to a third-party institutional lender.

## Legal Principles

- A purchase money mortgage executed as part of the transaction by which the mortgagor acquires title is senior to earlier judgment liens against the mortgagor that would otherwise attach to the mortgagor’s after-acquired real estate.
- Purchase money mortgage priority applies even when the mortgagee has actual or constructive notice of the preexisting judgment lien.
- Kentucky follows the Restatement (Third) of Property: Mortgages approach recognizing purchase money mortgage priority over prior judgment liens as a fairness-based exception to ordinary “first in time” priority rules.
- Purchase money mortgage priority is not confined to seller-financed transactions; it extends to third-party lenders whose loan proceeds enable the acquisition.

## Conclusion

The Kentucky Court of Appeals held that Community Trust Bank’s mortgage was a purchase money mortgage and therefore had priority over Kentucky Legal Systems Corporation’s earlier recorded judgment lien as to the property Dunn later acquired with the Bank’s loan, regardless of the Bank’s notice of the judgment lien and regardless of whether the lender was the property’s seller.


Kentucky Legal Systems Corp. v. Dunn, 205 S.W.3d 235 (2006)