"C, The bank is entitled to $30,000, the financing company is entitled to $20,000, and the driver is entitled to the remaining $40,000." J.H. got the answer right, with the correct explanation.
Like most of you, I also selected "A." In the real world, the plaintiff in the foreclosure would serve everyone with an interest in the property, which would seem to include cyclist. Cyclist is going to file an answer claiming the first and best lien, and cyclist would get paid first. I think that is assuming more facts than they gave us, however.
Like, J.H. said, the problem specifically mentions that bank joined the financing company in the suit, but it did not mention cyclist at all in this regard. Thus, as a non-party to the foreclosure, cyclists lien would be undisturbed and the buyer at the sheriff's sale will take subject to it.
Here is the rule that they want us to learn, and what they are attempting to test with this question:
Foreclosure destroys all interests junior to the mortgage being foreclosed and does not affect any interest senior to the mortgage being foreclosed.
I just don't like this rule... at least the way it is phrased. Rather, I think that it depends more on whether the party was joined in the suit than whether the lien is junior or senior. However, perhaps the correct distinction is that if cyclist were made a party, he would answer and request that his lien be foreclosed on first, then the rule would make sense.
I still don't like the outcome... the cyclist with the first lien here was not served with notice of the suit and he could have been paid in full. Worse, the driver walked away with $40,000. But, cyclist would still be able to try to recover from driver or foreclose on the new owner if he doesn't pay up.
Thanks, everyone, for the great discussion.
Best,
Robert A. Franco
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