Opinion ID: 2618359
Heading Depth: 1
Heading Rank: 2

Heading: priority of the lienholders

Text: The final question focuses on the priority of the Banks' claims. Since we have determined that Seller had a mortgagable interest in the property, we must now decide whether the Banks' garnishments have priority over Attorney's mortgage. The trial court ordered Buyer to pay the proceeds of the contract into the court so that a determination as to distribution could be made. The court ordered that the proceeds be evenly divided between the two banks. Attorney urges this was error because his mortgage was filed before the Banks caused the prejudgment garnishment summonses to issue. The Banks assert three separate reasons that garnishment liens have priority over the mortgage. First, they assert that the garnishments were prior in time to the mortgage. It is undisputed that the hearing on the prejudgment garnishment was held after the mortgage was executed but before it was filed. Immediately after the hearing, Attorney filed the mortgage. The following day, the Banks issued the garnishment summonses. The Banks urge that the relevant date is that of the hearing. Attorney urges that the critical date is the date of the issuance of the summonses. To determine the date on which the garnishment lien attaches, we turn to 12 O.S. 1981 § 1185, which states that  [f]rom the time of the service of the summons upon the garnishee he shall stand liable to the plaintiff to the amount of the property ... in his possession... . The garnishee does not become liable for the funds held until the summons is served. Clearly, the statute contemplates the critical date to be the date of service of the garnishment summons. Consistent with this interpretation is First Nat'l Bank v. City Guaranty Bank, 174 Okl. 545, 51 P.2d 573, 577 (1935), wherein this Court stated that under Section 628, now Section 1185, the garnishment lien attaches at the time the summons is served. See also Butler v. Breckinridge, 442 P.2d 313, 317 (Okla. 1967); Okla. Oxygen Co. v. Citizens State Bank & Trust Co., 274 P.2d 372, 373 (Okla. 1954). The Banks rely on Selby v. Kelly Rae Apts. Inc., 634 P.2d 1303, 1306 (Okla. 1981) for the proposition that the relevant date is the date upon which the proceedings are instituted. However, Kelly dealt with the question of priority between two garnishing creditors. The date of the institution of proceedings is relevant, if at all, when the dispute arises between garnishing creditors. See Okla. Tool & Supply Co. v. Drumright, 97 Okl. 165, 222 P. 975 (1924). In this case, the garnishment summons was served the day after Attorney filed his mortgage. The garnishment lien attached the day that the summonses were served. A prior recorded mortgage has priority over liens subsequently filed. See 42 O.S. 1981 § 15; Liberty Nat'l Bank & Trust Co. v. Kaibab Ind. Inc., 591 P.2d 692, 694 (Okla. 1978). The right of garnishment is subject to preexisting rights of third persons and cannot displace prior valid rights against the debt or property involved. See El Reno Foundry & Machine Co. v. Western Ice Co., 54 Okl. 116, 153 P. 1107, 1109 (1915); see generally 38 C.J.S. Garnishment § 183. Hence, Attorney's mortgage was prior in time to the garnishment lien and has a higher priority with regard to the contract proceeds. The Banks' second argument is that even if the mortgage was filed before the garnishment liens attached, Attorney has unclean hands because of his knowledge of the Banks' motion for prejudgment garnishment. It is undisputed that Attorney had knowledge of the pending prejudgment garnishment hearing and the land sale contract, and in filing his mortgage, was attempting to establish a priority higher than the Banks'. Attorney answers this argument by pointing out that he did no more than perfect his security interest and that his knowledge of the prejudgment garnishment proceedings is inconsequential. As authority for their assertion, the Banks cite McAtee v. Garred, 185 Okl. 314, 91 P.2d 1095 (1939) and Okla. State Bank v. Crumley, 146 Okl. 12, 293 P. 218 (1930). McAtee dealt with a situation in which plaintiffs were fraudulently induced to grant a mortgage to defendant company. Defendant company urged that it had no notice of its agent's fraudulent actions and that the mortgages should be upheld. This Court cancelled the mortgage because the fraudulent acts of the agent were known by the defendant. McAtee does not support the Banks' position; the holding there hinged on the fraud of the mortgagee. The Banks do not allege fraud in Attorney's procurement of the mortgage. Crumley involved a contract for mineral royalties which was improperly acknowledged. The trial court found that the subsequent mortgagee had notice of the contract, although it was improperly acknowledged. On appeal, this Court held that the mortgagee had knowledge of outstanding rights adverse to the mortgagor. Thus, the mortgagee took his interest subject to the outstanding claim. Crumley, 293 P. at 220. This case is distinguishable from the one at bar in that it involved a clear undisputed property right which was adverse to the mortgagor. In the present case, Attorney took the mortgage from Seller before the Banks secured a prejudgment garnishment. There were no outstanding adverse rights other than the rights of Buyer. The prejudgment garnishment was not granted until the day of the hearing and did not attach as a lien against Seller's interest until the following day. Here, Attorney properly recorded his mortgage under 16 O.S. 1981 § 15 and this recordation operated as notice to all subsequent creditors. See 46 O.S. 1981 § 7. Although the prejudgment garnishment hearing was pending at the time Attorney took the mortgage, the Banks had not yet secured any type of interest in the proceeds. The subsequent garnishments of the Banks do not take priority over the mortgage. Any other resolution would in essence invalidate our recording statutes as well as the rule that a garnishment does not attach until the summons is served. If we were to hold as the Banks urge, then a prejudgment garnishment could become a lien at the time it was first sought, or when the hearing was scheduled. Thus there would be no need for a hearing because the lien would have already come into existence. We do not believe that this falls in line with the garnishment statutes, the recording statutes or the purposes behind those statutes. See 12 O.S. 1981 § 1185; 16 O.S. 1981 §§ 15, 16; Vann v. Whitlock, 692 P.2d 68, 70 (Okla. App. 1984). As their last argument, the Banks urge that Attorney's security interest was improperly perfected. Attorney recorded his mortgage in accordance with real property recording statutes. The Banks say that it should have been perfected in accordance with the Uniform Commercial Code, 12A O.S. 1981 § 9-402, since Attorney's interest was in the proceeds of the land sale contract, not in the actual realty. Attorney disagrees, arguing that a mortgage of realty was intended, and as such, he was required to file only under the recording statutes dealing with realty. This question, one of first impression in this state, has been presented in several other jurisdictions. See 76 A.L.R. 4th 765 (1990); Security Bank v. Chiapuzio, 747 P.2d 335 (Or. 1987); In re Freeborn, 94 Wash.2d 336, 617 P.2d 424 (1980). The confusion occurs because the seller actually has two separate interests in realty subject to a land sale contract: (1) the interest in land and (2) the interest in the proceeds by virtue of the land sale contract. Chiapuzio, 747 P.2d at 337; Citicorp v. Fremont Nat'l Bank, 738 P.2d 29, 31 (Colo.Ct. App. 1987). In Chiapuzio, the seller contracted to sell land to the buyer. Before this sale was completed, the seller transferred to a bank his right and interest in and to the property as security for a loan. The bank filed notice of this interest as required by the realty recording statutes. Later, the defendant purchased the seller's interest in the sales contract. The bank sued to foreclose its security interest in the contract and the land. The defendant urged that the filing by the bank was not sufficient to perfect its interest because as the bank's interest was, for all practical matters, in the proceeds of the land sale contract, rather than in the realty itself. The Oregon Supreme Court agreed that two different interests were involved. As for the interest in realty, the court concluded that the agreement between the bank and the seller was akin to a mortgage, thus requiring filing under the realty recording statutes. But the court continued by pointing out that the parties' language showed an intent to transfer more than just an interest in realty, and that the bank's interest in the proceeds of the contract was separate and distinct from the realty interests. The fact that the two interests were separate and distinct created the problem of determining how to perfect such interests: Because it is possible to use the vendor's interest in the land sale contract as security without thereby automatically including the vendor's interest in the land, recording any security agreement involving a vendor's interest in a land sale contract may not protect the hold of that interest against all other claimants. When an interest in a land sale contract is assigned without a corresponding assignment of an interest in the land, recording in the real property records may not protect the security interest. Id. at 339. (Emphasis added) The court concluded that compliance with Article 9 of the Uniform Commercial Code was required as to the interest in the proceeds of the contract. The Oregon Court recognized that the bank had not perfected its security interest in the contract as required by Article 9, but determined that the buyer had constructive notice of the security interest. Even though the perfection of the security interest in land required a filing different than that of the security interest in proceeds, the interests are so closely related that legally adequate knowledge of one interest should be deemed to give constructive notice of an interest in the other. Id. at 344. Accordingly, the bank's filing was considered adequate to give it priority over the subsequent buyer. Likewise, in Freeborn, a similar question was presented by two consolidated cases. In the first case, the seller obtained a loan by using his interest in a land sale contract as security. In exchange for the loan, the seller expressly deeded the realty to the banks and assigned the contract. The documentation stated that the transfer of realty was for security purposes only. In the second case, the seller obtained a loan by using as security his interest in the contract. The documentation stated that the security was Seller's Assignment of Contracts and Deed. No deed, however, was delivered. The Washington Supreme Court concluded that only an interest in the contract proceeds was involved. In order to perfect a security interest, filing under Article 9 was required. We hold that where the right to real estate contract payments alone is assigned and the legal title held by the vendor is not simultaneously conveyed by deed ... the assignee must file pursuant to UCC Article 9. Id. 617 P.2d at 428 (Emphasis in original) Because the creditor failed to do this, the creditor's status was that of an unsecured creditor. In the present case, Attorney was clearly granted a mortgage on the property subject to the land sale contract. Under Oklahoma law, a mortgage does not operate as a conveyance vesting in the mortgagee any estate in realty. Coursey v. Fairchild, 436 P.2d 35, 38 (Okla. 1967). Instead, it creates a lien against the realty in order to secure the payment of the debt. Id. At the hearing on the motion to reconsider, Attorney had argued that his interest was essentially an interest in the proceeds of the land sale contract. The Banks, relying on those comments of Attorney, argue that Article 9 is applicable. The determinative question is whether the seller transferred his interest in realty or his interest under the land sale contract. The documentation relied on was a mortgage granted to Attorney to secure the debt previously incurred for attorney's fees. No mention of contract rights appear in the documents. Unlike Chiapuzio, Attorney was not granted all rights and interest in and to the land sale contract, nor was the contract assigned to him. There was only one interest transferred to Attorney  a lien against Seller's interest in Property A. Article 9 of the Uniform Commercial Code is thus not implicated. [3] Hughes v. Russo, 20 U.C.C.Rpt.Serv. 1349, 1354 (S.D.Fla. 1976). Under his mortgage Attorney has the normal rights of a mortgagee. Because his mortgage preceded the garnishment liens, it must be satisfied before other creditors may claim the proceeds of the land sale contract. [4] Accordingly, the Court of Appeals' opinion is vacated. The trial court's judgment is affirmed as to Rudnicki, Scarberry and Geronimo Properties (Buyers) but is reversed as to the Banks' prejudgment garnishment efforts to come before Attorney. The matter is thus remanded to the trial court for proceedings consistent with this opinion. HODGES, V.C.J., and LAVENDER, DOOLIN and ALMA WILSON, JJ., concur. SIMMS, J., concurs in result. HARGRAVE, J., dissents. OPALA, C.J., and KAUGER, J., not participating.