In re Smith
United States Bankruptcy Court for the Western District of New York
288 B.R. 675 (2003)
Scott Smith (debtor) bought a home financed partly through a purchase-money mortgage from sellers Robert and Mary Jane Zak (creditors) and partly through an institutional mortgage from PCFS Mortgage Resources (creditor), with PCFS recording first and the Zaks recording ten days later; the home's tax-assessed value ($65,606) was about $20,000 less than the combined amounts owed on both mortgages ($15,000 to the Zaks, $70,000 to PCFS) when Smith filed bankruptcy. Smith moved to avoid the Zaks' mortgage entirely, arguing PCFS's prior-recorded lien alone exceeded his home equity, making the Zaks' junior mortgage wholly unsecured and avoidable under circuit precedent; the Zaks countered that a seller's purchase-money mortgage always has priority over a third-party lien regardless of recording order.
Whether a debtor may avoid a seller's purchase-money mortgage as wholly unsecured, based on a prior-recorded third-party lender's mortgage alone exceeding the home's value, when state law gives the seller's purchase-money mortgage priority over the third-party mortgage regardless of recording order.