Lien Priority & When It Matters

By on November 21, 2011

Most of the time, lien priority doesn’t even matter.  A contractor or supplier files their mechanics lien, and they are paid before legal proceedings and foreclosure are required.  Or, if legal proceedings are necessary, the property has enough equity in it to pay off the lenders and the claimants.

Every now and then, though, lien priority becomes very, very important.  And us construction lawyers and mechanic lien gurus rely on these fairly rare situations to occur so that the courts have the chance to interpret the laws and give us all some guidance on what happens to a mechanic lien claim when its fighting against the lender for money.

So, what exactly is lien priority?  I’ve got a “Lien Priority” Tag here on the Construction Lien Blog, and you can learn a good deal on the topic there.  In short, lien priority refers to the ranking of claims against a property.  If you file a mechanics lien against a property with 4 other liens and a lender’s mortgage, the property is foreclosed upon, and a pile of money (but not enough money to pay all claims) is recovered by the sheriff…who gets paid, and who doesn’t?

In dispersing the funds between mechanic lien claimants, most states employ a “first to file” rule.  Those who file first get paid first.  If you’re not in a first to file state, you may be in a pro-rata state, which separates the money available between all the claimants.

The tougher question arises when there’s claims to the money by mechanic lien claimants and a lender. In some states, the lender’s mortgage is inferior to the mechanic lien claimant, even if it was filed first.  Also, in some states figuring out who “filed first” can be complicated because of the concept that the mechanic lien attaches at the very start of construction, not upon formal filing.

If a mechanics lien doesn’t get you paid immediately, however, and you actually proceed to foreclose upon the project’s property, the obscure concept of lien priority can become critical.  How the project’s state handles priority will dictate if you get full or partial payment, or just go home empty-handed.

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About Scott Wolfe Jr

Scott Wolfe Jr. is the CEO of Zlien, a company that provides software and services to help building material supply and construction companies reduce their credit risk and default receivables through the management of mechanics lien and bond claim compliance. He is also the founding author of the Lien Blog, a leading online publication about liens, security instruments and getting paid on every account. Scott is a licensed attorney in six states with extensive experience in corporate credit management and collections law, with a specific emphasis on utilizing mechanic liens, UCC filings and other security instruments to protect and manage receivables. You can connect with him via Twitter, LinkedIn and Google+.Read Scott's Biography Post Here
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  • http://www.levycraig.com Rob Pitkin

    Interestingly, Missouri and Kansas – where I practice – handle lien priority completely different.

    Missouri is pretty “contractor friendly.” It has what is called the “First Spade” rule, which means that ALL mechanic’s lien have the same priority based on the first day of work on the project by anyone. The Missouri court have also created an “implied waiver” doctrine whereby mechanic’s liens automatically have priority over a deed of trust based on a construction loan.

    Kansas, in contrast, is pretty “lender friendly.” Mechanic’s liens only have priority over a lender if one of the lien claimants performed work before the mortgage was recorded. Thus, if the mortgage was recorded before ANY construction work, the lender prevails. Moreoever, if there was construction work before the mortgage was recorded but the early-performing contractors were all paid, then the lender would prevail.

  • http://www.levycraig.com Rob Pitkin

    I have had many more lien priority issues in the past couple years than ever before. I think this is primarily due to projects that never got completed, so fighting over priority is paramount.

    • http://www.zlien.com Scott Wolfe Jr

      You make a very good point here, Rob. I didn’t think about how the current economy has an impact on the number of lien priority claims that are coming up. While I haven’t dealt with very many of them recently, I think you’re right that projects now more than ever are not being completed, and that a shorter your money is making a lot of people fight over smaller pot. And when that happens, of course, lien priority becomes a very big deal.

      But, like you also said, if the script was flipped in most states allow claimants to always trump construction lenders, construction lenders will be much more apprehensive about lending. Especially in an economy like we have today.

      Thanks for stopping in. Great comments.

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