In Arizona, the prevailing party in a mechanics lien lawsuit is entitled to have their reasonable attorney’s fees paid by the losing party. But, if multiple liens are filed against a property but only one is determined to have priority, how should that lien claimant’s attorney fees be divided up amongst the losing parties? A recent case heard by an Arizona Court of Appeals provides an answer.

Arizona Attorney Fees Law

Under Arizona mechanics lien law, the prevailing party in a mechanics lien action may recover its cost of reasonable attorney fees from the losing party.

Since the grant of attorneys fees is made at the discretion of the court and not a jury, decisions regarding attorney fees will only be overturned by an appeals court if the lower court’s determination was unreasonable.

Arizona law is silent, however, as to how attorney fees should be divided if multiple liens are filed against a property, and only one is successful in a lawsuit to determine lien priority. Should only the first party who filed the lien be responsible for the attorney fees?  Should courts determine which party or parties “caused” the prevailing party to defend its priority and then only make those parties pay?  Or should attorney fees be divided up proportionately amongst all the losers?

Attorney Fees in Class Action Arizona Mechanics Lien Lawsuits

In Summers Group, Inc. v. Tempe Mechanical, the Court of Appeals of Arizona, Division One finally gave us an answer just a few weeks ago.

In Summers, after a construction project fell apart financially, multiple liens were filed against the property by suppliers, subcontractors, and a construction lender. When one of the suppliers, Rexel, cross-claimed against the other seven plaintiffs and then sued to foreclose on its own lien, the case was removed to bankruptcy court in order to determine which parties, if any, had lien priority over the other lien claimants.

The bankruptcy court determined that one of the claimants, ML (the construction lender), had priority over all the other suppliers and subcontractors. As the prevailing party, ML Manager then moved for attorney fees. Because the trial court determined that “only Rexel caused ML Manager to challenge its lien priority,” the court held that only Rexel, and not any of the other parties, were responsible for paying ML Manager’s attorney fees.

Rexel appealed the ruling that only it and not any of the other losing parties had to pay ML’s attorney fees. Instead, Rexel argued that the court should have divided the fees proportionately amongst all the other non-prevailing parties.

In its holding, the appeals court agreed with Rexel. The court first noted that both prior Arizona cases and Arizona law itself was silent as to how attorney fees should be divided amongst multiple lien claimants. However, the court reasoned that other matters involving multiple parties and mechanics liens could be instructive.

For example, Arizona mechanics lien law dictates that when a property is foreclosed to satisfy a mechanics lien, the proceeds of the sale are “prorated over the respective liens that have equal footing with the foreclosing lien.”  That is, that all properly filed and valid mechanics liens against a property have equal priority in a foreclosure action.

The court applied the same line of logic to Summers: if all mechanics lien claimants share proportionately when they prevail in a foreclosure suit, then they also must share proportionately if they lose. In this case, since there were other mechanics lien claimants besides Rexel who were unsuccessful in the lien priority matter, they were all held to be proportionately responsible for ML’s attorneys fees.

Moving Forward From Summers

Although there is still the possibility of further appellate review, the general takeaway of Summers is that the same general “apportionment” rule applies to all mechanics lien claimants whether they are successful or unsuccessful in a mechanics lien lawsuit; all mechanic’s lien claimants have equal priority. If the property is sold to satisfy multiple mechanics liens, then each party that filed gets a proportionate share of the proceeds. On the other hand, if all the Arizona mechanics lien claimants fail in a suit to foreclose on a lien or if only one party prevails in a lien priority suit, the losing parties share in the expenses proportionately.

Written by Nate Budde See original article at Arizona Mechanics Liens: Appeals Court Rules on Attorney Fees Related to Lien Priority Originally posted on the LIEN

Whenever a property owner goes into financial trouble, mechanics lien claimants naturally wonder if they can still get paid. This often comes down to determining where the mechanics lien ranks on the lien priority ladder.

Unfortunately, the answer is far from simple.  One may think that whatever assets the property owner still has could be divided evenly and proportionally to whoever was still owed money, but the law dictates that some parties have priority over others.  In the legal world, priority means that one party is entitled to have all of its debts paid off before anyone else has a shot at the money.  Where mechanics liens rank on the relative priority ladder is addressed in each state’s FAQ section, here.  In Louisiana, one common example is that in a foreclosure action, the IRS is entitled to any back property taxes before a bank is entitled to have its loan paid off. In most states, governmental tax liens and first mortgages generally have priority over other liens attached to the property.

Mechanics Lien Priority: Do They Always “Rise to the Top of the Class” in New York?

The Paid Blog has addressed how a mechanics lien is a powerful tool to get subcontractors or suppliers paid many times.  One court has even noted that mechanics liens “rise to the top of the class” above all other unpaid parties, including other lien claimants.

New York law is a bit more convoluted in this situation.  Essentially, if a property owner runs out of money or a property is foreclosed on, the relative priority of mortgage holders and mechanics lien claimants can shift. Generally, the bank who made the loan has first priority, but sometimes, unpaid subcontractors or suppliers have first priority if the mortgage lender failed to comply with the applicable rules.  The issue of who gets first dibs at whatever assets are left comes down to the application of “Rule 22,” or NY LIEN § 22. Generally, the rule outlines what is a fairly standard rule in determining lien priority: first-in-time, first-in-right. That is, a mortgage that was recorded prior to the filing of a mechanics lien will have priority over the subsequent lien.

So long as a lender complies with the statutory requirements applicable to the loan contract – such as meeting the requirements of having the contract in writing and filing it with the clerk in the county where the property is situated – that lender’s mortgage takes priority over any mechanics liens that may subsequently be filed against the property.

New York Lien Law Rule 22 in Action

In a recent case, Adams v. Carriage House Farms, a New York appeals court affirmed the lower court’s finding that since the lender complied with all the requirements of Rule 22, the lender was entitled to be paid first over an unpaid subcontractor who had filed a lien on the property and was suing to foreclose on it.  The court held that the mortgage lien, under the facts described in the case, should be satisfied first over the mechanics lien.

Of course, the unpaid subcontractor probably wasn’t too happy with the appeals court’s decision.  But there are still two take-aways of which New York subcontractors should be aware.

• First, just because a mortgage lien may take priority over a mechanics lien doesn’t mean there’s no point in even filing a lien; whatever funds leftover in the property will go directly to the subcontractor because of the power of a lien.
• Second, Rule 22 is complex and still open to interpretation such that a lender may not comply with its strict requirements every time.

In other words, even when a mortgage company and unpaid subcontractor have competing interests in a property, if the lender misses one tiny part of the law, the subcontractor will be able to prove in court that it is entitled to first dibs in any assets the property owner still holds. And, in any event, the lien priority of the mortgage lien only applies to the balance of the mortgage. While that may be a significant portion of the foreclosure price of the property (especially recently), if the property owner has paid down the mortgage balance over a period of many years, or paid a large down-payment to reduce the necessary mortgage, there are more funds to go around to mechanics lien claimants – at the expense of unsecured creditors.

Written by Elliot Singer See original article at Mechanics Lien Priority in NY: Lien vs Mortgage Originally posted on the LIEN

Illinois Bankers Association – Vote No on House Bill 3636 from SlatersGarage on Vimeo.

In early 2011, the Illinois Supreme Court issued a 5-2 decision in a mechanics lien priority case that prompted one member of the Illinois State Bar to proclaim the decision marked the “death of the mechanics lien.”  Two years later, the case is still making waves.

We originally reported the decision here in “Lien Priority Case Decided By Illinois Supreme Court,” and you can read all of the articles about the controversy in the tag: Lasalle Bank NA v. Cypress Creek I.  Long story short:  The Illinois Supreme Court had to decide what to do with a troubled construction project, and specifically with some money available to disburse between construction lender and mechanics lien claimants. Who had a priority interest in the money?

The answer was that construction lenders were equal to mechanics lien claimants, so that the lien claimants would not have priority over the lenders.

Earlier this month, the Illinois State Legislature approved HB3636 to amend the mechanics lien act and overturn the Cypress Creek decision. The bill now simply awaits Governor Quinn’s decision and signature before becoming law.

The guts of the new law provides as follows with respect to the priority war between mechanics lien claims and lender rights:

When the proceeds of a sale are insufficient to satisfy the claims of both previous incumbrancers and lien creditors, the proceeds of the sale shall be distributed as follows: (i) any previous incumbrancers shall have a paramount lien in the portion of the proceeds attributable to the value of the land at the time of making of the contract for improvements; and (ii) any lien creditors shall have a paramount lien in the portion of the proceeds attributable to the value of all subsequent improvements made to the property.

To better explain all of this broo-rah-ha, take a look at the video published by the Illinois Bankers Association who lobbied to defeat HB 3636. That video is embedded above.  The lending interests hated HB 3636 because it gives lien claims a significant leg up on the lenders’ claims.

Fortunately for mechanics lien claimants in the state it looks like the lenders are on the losing side of this battle for now, and that the bill will soon become law.  Read The Full Text of HB 3636 Here.

Related articles

• Illinois House Votes to Pass HB3636 To Amend Mechanics Lien Act

Written by Scott Wolfe Jr See original article at Illinois Mechanics Lien Rises From The Dead: HB3636 Approved To Amend Mechanics Lien Act Originally posted on the LIEN

Earlier this year we wrote about a Lien Priority dipute brewing in Nevada with high stakes for the parties.  That post, Nevada Supreme Court Asked To Weigh In On High Stakes Lien Priority Dispute, discussed a battle between lien claimants and lenders about who had a better claim to $100 million dollars in a bankruptcy estate formed in the wreckage of the Las Vegas Strip‘s Fontainebleau Project.

The underlying case’s facts, addressed in that previous post, are as follows:

In Nevada, lenders usually have claim priority over mechanics lien claimants. This is the case even when a lender issues one loan, then mechanics lien claimants make claims, and then the lender refinances and creates a second loan after the liens are filed.

This is sort of what happened in the Fontainebleau situation, except that instead of having the lender convert the original loan and fold it into the second loan, as is typical, the developer actually paid off the loan the day before the refinance. So, the first loan was placed, then construction started (fixing the mechanics lien claimants priority start-date), then the loan was paid off by the developer, and then a completely new loan was placed.

The Nevada Supreme Court weighed in on this issue with an opinion published October 26, 2012: In re Fontainebleau Las Vegas Holdings LLC.  It was good news for mechanics lien claimants and a depressing day for the lenders.

The court held that when the old loan was closed and the new loan was opened it created another unique recording date, and every mechanic’s lien related back to the start of the construction project which predated the second loan.  As a result, the mechanics lien claims have priority over the lender claims and the first crack at splitting up the $100 million.

To give you an idea of how little will be left for the lenders as a result of this opinion just take a look at the case caption which goes on for 14 pages to list all of the parties who filed a mechanic’s lien against this project and is waiting on payment.

This is great news for mechanic’s lien claimants in Nevada, and another example of why it’s so important to preserve and perfect your mechanics lien rights.

Lenders are not going to sit quietly about this decision.  These loan switch situations arise often enough that it is a concerning precedent  and they will need to do something to prevent the loss of priority like this.

There are some suggestions in the opinion itself, but as an article from Snell & Wilmer, LLP suggets (Nevada Supreme Court Clarifies Lender v. Mechanics’ Lien Priority Disputes), the Supreme Court opinion is not clear enough and lenders’ “best chance of regaining broken priority may be to convince the Nevada legislature to amend NRS 108.225 to specifically provide for contractual subordination of priority.”

Related articles

• Nevada Lenders Beware! Mechanic’s Liens Not Easily Avoided
• Pennsylvania Mechanic Liens Made Stronger By Recent Lien Priority Case – JD Supra (press release)

Written by Scott Wolfe Jr See original article at Nevada Supreme Court Lien Priority Decision Costs Lenders $100 Million Originally posted on the LIEN

It isn’t often that mechanic’s lien claims get mentioned in the regular press. Nevertheless, Los Angeles Times reporter Lew Sichelman had to do his mechanic’s lien research for an article earlier last month in “Lenders, title insurers find new ways to delay or kill mortgages.”

The article reports that title companies and lenders are becoming more cautious about issuing construction loans because of potential mechanic’s lien disputes.  Since “contractors, subcontractors and suppliers can file liens retroactively to the day they started” furnishing labor or materials and that date may be before the loan is closed, Mr. Sichelman writes, the lien gets position over the loan.

I mention a “Tipping Point” in this blog post. I’d like to recommend a great book on this topic by Malcolm Gladwell: The Tipping Point. It makes you think about how movements (in law, policy, business, etc.) start to finally take hold.

This, of course, is a standard Lien Priority issue.

As mentioned in the article, California allows mechanic’s lien claimants to get lien protection retroactively to the date that construction work started on a project.  That is a popular rule across the country although some states fall stricter or broader on the lien priority spectrum.

What does this mean for construction lending across the country?  What does it mean for the fate of mechanic’s lien laws across the country?  Are we seeing a tipping point here, or just a flash in the pan.

I can tell you that there is certainly a lot of back and forth in legislatures and courts about lien priority right now, and in some communities, both sides are making their cases.

This article by the Los Angeles Times, for example, is a bug in the ear of sympathetic legislators about possibly changing the California laws.  After all, if homeowners can’t get loans, what is that going to do for the California economy?  Elsewhere, we’ve seen recent Supreme Court rulings on this topic in Pennsylvania, Missouri and Nevada.

Obviously, the lending industry would love to think that this is a tipping point. However, it seems that the lenders are losing a lot of these battles, and the industries representing claimants are steadfast to protect their ground where they have it.

Further, it’s not a critical situation for the nation. This argument is as old as the mechanics lien laws themselves, which date back to Thomas Jefferson’s first proposal of them in Maryland. There is a constant friction between the arguments for and against mechanic’s lien priority, and these arguments will go on.

There may be a few changes here in there, but the split between the country should remain constant into the foreseeable future.  Put me down, therefore, on the side that this recent focus by industry groups and news organizations is just a blip.

Related articles

• A Couple of Interesting Construction Law Cases
• Nevada Lenders Beware! Mechanic’s Liens Not Easily Avoided
• Avoiding The Money Pit: Advice For Buying New Construction

Written by Scott Wolfe Jr See original article at Will Mechanic’s Lien Claims Kill Construction Loans? Originally posted on the LIEN

A recently published Pennsylvania Superior Court case significantly changed how mechanics lien priority is determined between lien claimants and banks with an open-ended mortgage. The decision – Commerce Bank Harrisburg NA v. Kessler - is decidedly pro-contractor or pro-supplier, and has already made an impact in determining lien priority on other cases throughout the state.

Defining Open-Ended Mortgages in Pennsylvania Mechanics Lien Law

The Kessler decision affects what is called “open-end mortgages.”  A general definition of this type of investment instrument is as follows (courtesy Investopedia):

A type of mortgage that allows the borrower to increase the amount of the mortgage at a later time. Open-end mortgages permit the borrower to go back to the lender and borrow more money if certain conditions have been met. There is usually a set dollar limit on the additional amount that can be borrowed.

Pennsylvania’s Mechanics Lien Law gets more specific about what constitutes an “open-end mortgage” in the mechanics lien context, providing in 49 P.S. 1508(c) that a mechanics lien is subordinate to:

(2) An open-end mortgage as defined in 42 Pa.C.S. § 8143(f)…the proceeds of which are used to pay all or part of the case of completing erection, construction, alteration or repair of the mortgaged premises secured by the open-end mortgage.

Mechanics Lien In Kessler Pitted Against Open-End Mortgage Lending Money For More Than Just Improvements

The Kessler case presented a situation that is common in the open-end mortgage world, and exposed a long-running ambiguity in Pennsylvania’s Mechanics Lien Law.  In the Kessler matter, the bank that issued the open-end mortgage funded not only construction improvements, but also closing costs, taxes and other types of related indebtedness.

[pullquote style="left" quote="dark"]The question was whether §1508(c)(2)’s priority for open-end mortgages applied only when the open-end mortgage money was exclusively used for improvements.[/pullquote] What’s the big deal about that?

If you re-read the above-quoted §1508(c)(2) you’ll notice that a mechanics lien is subordinate to an open-ended mortgage “the proceeds of which…” are used to pay all or part of construction improvements. Confusingly, however, the statute also identifies the “open-end mortgage as defined in 42 Pa.C.S. §8143(f),” which includes “indebtedness.”

Generally speaking, therefore, an open-end mortgage need not be restricted to improvements.  Specifically concerning the Mechanics Lien Law, however, whether the open-end mortgage that has priority over a mechanics lien claim is tied to whether the money is used for construction improvements.

The question for the Pennsylvania Superior Court was whether §1508(c)(2)’s priority for open-end mortgages applied only when the proceeds made part of an open-end mortgage was exclusive for improvements.

Pennsylvania Mechanics Lien Has Priority Over Bank With Open-End Mortgage Unless Lended Money Exclusively Used For Construction Improvements

The mechanics lien claimant argued that use of any portion of the proceeds for any expense other than those set forth in §1508 wholly defeats application of the lien priority exception. The bank argued opposite, that such a narrow reading of the law was impractical and contrary to the law.  The Pennsylvania Superior Court, however, sided in favor of the mechanics lien claimant:

[The lender's] arguments ..disregard the clear language of §1508 and strain interpretation…We interpret the use of the term “the proceeds” to mean all of the proceeds. Indeed, we agree…that any other interpretation of the statute would permit lenders and owners to improperly manipulate the system to defeat lien rights. Such a result would be absurd and therefore contrary to legislative intent.

What It All Means:  Mechanics Lien Rights Are Stronger In Pennsylvania

Lien Priority is one of those topics that is only important when it’s important. In nearly 90-99% of mechanic liens filed, the priority of the lien claim is a non-issue because the claim will get paid before foreclosure and before the project runs out of money or the property out of equity. However, when money or equity is tight, lien priority can become a very big deal.

In some states, banks and lenders are always given priority over the mechanics lien claimants. In other states, the opposite occurs, with lien claimants given super priority.

In Pennsylvania, the “first” to get a lien right prevails unless an exception applies.  For lien claimants, their lien right actually arises when the first bit of work is performed on the project. Therefore, for a lender to beat them to the punch, they must file before any work whatsoever occurs on the project.  If it is afterwards, they only get priority if the lending is part of a qualifying “open-end mortgage.”

As you can see from this case, what will be a qualifying “open-end mortgage” is strictly construed and must fit within the statute’s requirements.  For now, Pennsylvania mechanics lien claims are that much stronger, but stay tuned to the Lien Blog in the event that this case goes up to the Supreme Court.

Written by Scott Wolfe Jr See original article at Pennsylvania Mechanic Liens Made Stronger By Recent Lien Priority Case Originally posted on the LIEN

Generally speaking, a mechanic’s lien attaches to the property owner’s entire interest in the property – both the land, and the structure/improvement.  In fact, N.D. Cent. Code, § 35-27-19 defines the land subject to a construction lien as follows:

The entire land upon which any building, structure, or other improvement is situated, or to improve which labor is done or materials furnished, including that portion of the land not covered thereby, is subject to all liens created under this chapter to the extent of all the right, title, and interest of the owner for whose immediate use or benefit the labor was done or materials furnished.

In North Dakota, however, there is another possibility.  In certain circumstances, and under certain conditions, a lien claimant in North Dakota may have an additional lien on solely the structure itself.  N.D. Cent. Code, § 35-27-21 sets forth the limited circumstances in which this additional lien is allowed: 1) the labor and/or material was furnished “in the erection or construction of an original, complete, and independent building, structure, or improvement”; 2) “at the time the material is furnished for such improvement, the seller shall notified the purchaser by delivering to the purchaser a written notice stating that the seller claims the right to foreclose the lien under the laws of the state, and in the event that there is a default in payment for the improvement, to remove the building from the real estate upon which it is placed regardless of whether or not said building is placed upon a foundation”.

So, if a lien claimant provides labor and/or materials for the construction of a brand new structure, and gives the property owner notice at the time of first furnishing the labor and/or materials – he has this additional lien right.

Why would a lien claimant want this particular additional lien right?  Doesn’t a lien on the structure and the land on which it sits provide better protection than a lien on only the building?  Isn’t more better?

The answer has to do with the priority of the lien.  A bigger pie may not make a difference if there are more people who get to take a piece before you.  While it is true that in raw numbers, a lien on the structure and the land liens more value, the value to the lien claimant may actually be less.  That is because the lien on solely the new structure has different priority rules.  The lien described by N.D. Cent. Code, § 35-27-21 “attaches to the building or improvement in preference to any prior title, claim, lien, encumbrance, or mortgage upon the land upon which the building, erection, or improvement is erected.”  This means that no matter what encumbrance may already be clouding the land itself, the lien on only the structure has priority, as regards the structure.  So, upon foreclosure, the structure itself could be removed and sold (whether or not it is on a foundation) to satisfy the lien claimant in preference to liens on the land that were recorded earlier.

This is a neat trick available in North Dakota, and potential lien claimants would be well-served to remember it, and send the proper notice when working on a brand new structure.

Written by Nate Budde See original article at In North Dakota an Additional Lien Only on the Structure May Be Available – And Preferable Originally posted on the LIEN

A mechanics lien claimant filed a lien after a mortgage was placed against the jobsite, but the lien related to work performed prior to the mortgage. These facts were stipulated to in a case rencently before the Minnesota Appeals Court, but they were still required to decide who had priority: the lender or the claimant?

The issue at controversy in Big Lake Lumber Inc. v. Sec. Prop. Invs. Inc. was whether the pre-mortgage work was part of a “continuous” project that involved post-mortgage work.

General Lien Priority Rule in Minnesota

The court starts its legal discussion of the case by laying out the general rule for mechanics lien priority in Minnesota:

A mechanic’s lien claimant that contributes to the improvement of real property by performing labor or furnishing material obtains a lien on the improvement and on the land where the improvement is located, which attaches and becomes effective “from the time the first item of material or labor is furnished upon the premises for the beginning of the improvement.” Minn. Stat. §§ 514.01..But “no lien shall attach” against “a bona fide . . . mortgagee . . . without actual or record notice” prior to “the actual and visible beginning of the improvement on the ground.” Minn. Stat. § 514.05

What does this mean?

First, a claimant’s mechanics lien in Minnesota is effective from the time the claimant begins to furnish any labor or material to the project. This can be days, weeks, months or even years before the mechanics lien is eventually filed. When you record a Minnesota mechanics lien, in other words, it relates back and is effective from the time you first began furnishing to the project.

As a result of this, a mechanics lien will have priority over a mortgage if the work was furnished before the mortgage was filed…generally.  There is a small exception, which is the second point to make about this quote.

Second, the small exception is that regardless of the mechanic lien’s general effective date, it will not be considered to have priority over any mortgage unless there is “actual and visable” evidence that work has begun on the project.

Your Work Must Be Related To A Single Continuous Project To Relate Back

This is where the rule gets tricky and the situation the court confronted in the Big Lake Lumber case. As the court went on to explain in their opinion:

To obtain priority over a bank’s mortgage, a mechanic’s lien claimant can only relate a lien back to the actual and visible beginning of a project of improvement on the ground if the lien claimant satisfies its burden to show that the work underlying the lien “bears directly” on the project of improvement and not merely on “the overall project involved.” … A mechanic’s lien therefore does not bear directly on the project of improvement unless the project to which the lien’s underlying work contributed is “one continuous work constituting one undertaking” with the project of improvement.

In the Big Lake Lumber case, work was performed in 2006 to prepare for a building project.  The building project did not go forward immediately, and more than a year later, went forward in a slightly different form.  Big Lake Lumber wanted its lien claim to relate back all the way back to the original work in 2006, and thus have priority over the mortgage recorded between the initial work and the subsequent work.

Even though they acknowledge that this is a question of fact and district courts should be given some deference in making the determination, the Minnesota Court of Appeals nevertheless reversed the trial courts decision to hold that Big Lake Lumber’s 2006 work was not part of a single continuous project.

In making this decision, the court began by acknowledging that the case law on the subject is lacking in clarity:

We begin our analysis by acknowledging that this court has developed two different but overlapping methods of analysis to determine whether a project of improvement is part of one continuous project to which a lien claimant’s contribution relates or is a separate project.

In this decision, however, they “integrate these analyses into a single framework for application in all disputes over the priority of mechanic’s liens and mortgages under section 514.05,” which involves the consideration of four factors to determine if a project is or is not a single continuous improvement: ”the parties’ intent, the contracts’ scopes, financing, and time lapse.”

The court found against Big Lake in this case, holding that it was not a single continuous improvement based on the new integrated analysis. While the facts here are unique, it will be interesting to see how this new analysis spreads throughout the Minnesota courts as similar situations arise.

Related articles

• Mortgage Takes Priority over Mechanic’s Lien
• Maine Mechanic’s Liens Potentially Have Priority over Mortgage – JD Supra (press release)
• Idaho Liens May Attach Earlier Than You Think for Priority Purposes – JD Supra (press release)

Written by Scott Wolfe Jr See original article at Mechanics Lien Priority Case Inspires Minnesota To Create New Analysis For Determining Whether A Project Is Abandoned Or Not Originally posted on the LIEN

Each state is unique in the priority it affords to mechanics lien claims. In Oregon, mechanics lien claimants can have super-priority even over mortgages on lenders, or not. This depends on whether you notified the mortgagee and/or whether you filed your lien carefully enough.

Notify  The Mortgagee, Get Priority

Oregon mechanics lien claims have priority over any mortgages on the property if the lien claimant has complied with O.R.S. § 87.025, Paragraph (3) of which provides:

No lien for materials or supplies shall have priority over any recorded mortgage or trust deed…unless the person furnishing the material or supplies, not later than eight days…after the date of delivery of material or supplies for which a lien may be claimed delivers to the mortgagee [a preliminary notice].

There are two things that make this very, very difficult to follow.  First, the period of time to deliver the Oregon preliminary notice is just 8 days from first furnishing materials. That is, of course, very, very fast.  Second, the notice must be delivered to the mortgagee, and acquring this information is sometimes difficult.

The fact is that oftentimes, and perhaps maybe most of the time, mechanics lien claimants who do not utilize a great preliminary notice service do not get this notice to the mortgagee on time.  This means their mechanics lien claim will not have priority over the mortgage.

Segregate Labor and Materials On Your Lien, and Get Priority

If you read the statute carefully you’ll notice the rule only applies to a “lien for materials or supplies…”  What about labor?

Oregon gives super priority to all labor liens. If you have furnished both materials and labor, however, you can only obtain the super priority for your claim if you segregate the claim into a labor and materials portion. This does not require two separate claims, it merely requires you to indicate what portion of your total mechanics lien amount is attributed to labor only.

Consider the Oregon Supreme Court’s comments in the 1971 case, Benj.. Franklin Federal Sav. & Loan Ass’n v. Hallmark, Inc.:

Or. Rev. Stat. § 87.025 does not require that notice of labor performed be given to a mortgagee in order for the lien to have priority, but where the lien does not segregate the charges for labor from the charges for materials, the entire lien becomes subordinate to the mortgage if the notice of the delivery of materials is not given.

Fellow blogger at the Ahead of Schedule Blog offers this tip to preserve your liens (at least partial) priority:

Contractors can maintain priority of their construction liens by…Carefully segregate[ing] material[s] charges from other charges (labor, equipment, etc.) in the claim of construction lien.

Does Lien Priority Even Matter?

Yes.

First, you’ll be astounded at how much more powerful your lien claim is when it undermines a bank’s rights at the property.  If your have priority over a bank, the bank is going to be very, very interested in getting your claim paid.  This amps up the pressure placed on the owner or developer to pay your claim.

Second, it makes your security that much better, as the property is there for you to take to pay your claim, and you need not worry about whether there is more equity in the property than the mortgage so there is enough left-over to pay your claim. Your claim will come first.

For more about Lien Priority, read the tag on this blog here.

Related articles

• Mortgage Takes Priority over Mechanic’s Lien
• Maine Mechanic’s Liens Potentially Have Priority over Mortgage – JD Supra (press release)

Written by Scott Wolfe Jr See original article at Oregon Mechanics Liens: Segregate Labor and Materials In The Claim Originally posted on the LIEN

The Missouri Supreme Court issued an opinion yesterday weighing in on a battle between a builder’s mechanics lien and a lender’s unrecorded deed of trust.

The lender argued that the unrecorded deed of trust would have priority over a mechanics lien claim because the deed of trust need not meet the same recording requirements as a mortgage. The Missouri Supreme Court, however, disagreed, giving the builders a victory over Hawthorn Bank.

In the case Bob DeGeorge Associates, Inc. et al v. Hawthorn Bank, the Missouri Supreme Court explained the rule of mechanics lien priority in the state as follows:

Unlike recording an instrument under the recording statutes, filing a mechanic’s lien is irrelevant for the purpose of determining first-in-time priority between competing encumbrances on real property…So long as a mechanic’s lien arises on the land and is filed properly, it will have priority over any third-party encumbrance attaching after the date work began.

It was clear that the deed of trust wasn’t recorded unti after work commenced.  So, what’s the big deal?  Why did this matter get all the way up to the Supreme Court?

Hawthorn Bank argued that its lien against the land was entitled to priority over the mechanics lien because it had a special “purchase-money deed of trust.”  Citing some case law that I won’t go into it argued that purchase money deeds of trust are always superior to mechanics lien claims, regardless of the deed of trust’s recording date.

The Supreme Court distinguished all of the raised precedent and made the law crystal clear in Missouri: purchase money deeds of trust do not get special treatment. To have priority over a mechanics lien claim it must be recorded before the lien attaches, which is when work first commences at the project.

Related articles

• Court determines the priority of two liens–a mechanic’s lien and a deed of trust
• Nevada Supreme Court Rules on Mechanics Lien Priority
• Mortgage Takes Priority over Mechanic’s Lien
• Court of Appeals defines the scope of the relation-back doctrine in light of intervening conveyances

Written by Scott Wolfe Jr See original article at Mechanics Liens Have Priority Over Unrecorded Deed of Trust According to Missouri Supreme Court Ruling Originally posted on the LIEN