What happens when your working on a construction project that goes completely belly up? When the project itself is over-mortgaged, and the folks up the contracting chain have taken all the money, spent it, and declared bankruptcy?
This situation happens all across the country, but happened recently in massive style with “Prium,” a construction outfit in Tacoma, Washington.
The News Tribune just published an article about the situation written by Kathleen Cooper, titled: Prium’s Pierce County Founders Borrowed Big, Lived Well and Left Tenants, Contractors In Lurch. I was contacted by the Tribune as a legal expert to help explain what happens in these messy payment situations. Unfortunately for contractors, suppliers and builders, the answer is usually nothing. When a project is completely belly up and there’s no money to be found, those at the top file bankruptcy and those below get stuck.
The News Tribune article does mention the mechanic’s lien remedy, and I also discussed this with the journalist.
Usually, when money gets misappropriated and low tier subs or suppliers get stiffed, the mechanic’s lien works terrifically by letting these unpaid parties jump over who hired them and request payment directly from the prime or property owner. When things get too bad, however, and the property owner is bankrupt and the property is over-mortgaged, there’s just nothing left to collect.
This is why Lien Priority is so important. I’ve written about it often on this blog. In some states, a lien will take priority over a construction loan or mortgage (in which case, the laborers and materialmen are nearly always protected). In other states like Washington, however, there is no such priority. The bank gets paid first, and that leaves everyone else with just a sour story.
Great article in the News Tribune that really illustrates a worst case scenario. Your best protection against these situations is to protect your lien rights, enforce your lien rights, and get on these rights and your collection efforts as soon as you can.