Mechanics Lien Priority: Contractor vs. Lender - Part 2
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Back in Mechanics Lien Priority: Contractor vs. Lender - Part 1 we talked about the basics of priority and why it’s important. At the end I promised to fill you in on the backstory of the Cypress Creek decision. Here it is.
Backstory of LaSalle Bank, N.A. v. Cypress Creek 1, LP
It started when a developer (we'll refer to them as the "Owner") borrowed money from LaSalle Bank (the "Lender") to design and build a senior housing project outside of Chicago. To secure payment of principal, interest, and fees on the loan, the Owner gave to the lender, and the lender recorded, a mortgage against the project.
Later, the Owner entered into contracts with Eagle Concrete and the Edon Construction Company (together, the "Perfected Contractors"). Under these contracts, Eagle provided concrete and Edon provided carpentry. Each then provided work on the project under their respective contracts.
Meanwhile, the Lender disbursed several million dollars in loan proceeds and other payments to fund design and construction of the project.
Then things started to go badly. The Owner stopped paying. Consultants and contractors (including the Perfected Contractors) recorded mechanics liens against the project to secure payment from the Owner. The Lender also stepped in and spent $30,202 to pay off the mechanics lien claim of a development consultant.
With the project still incomplete, the Owner defaulted under the mortgage, prompting the Lender to sue the Owner, and others (e.g., mechanics lien holders), to foreclose the mortgage. The Perfected Contractors soon joined in and sued to foreclose their mechanics liens too.
The partially completed project was sold at a sheriff's foreclosure sale. But the purchase money paid was far less than the combined amount of the debts secured by (a) the mortgage and (b) the the Perfected Contractors' mechanics liens. Then the Lender and the Perfected Contractors disagreed on how to divide up the purchase money among themselves. Division depended on which had senior priority:
- The Lender's mortgage, or
- The Perfected Contractors’ mechanics liens
Is this starting to sound like there wasn't enough lemonade to go around?
Hearing the case, Judge Bobbi Petrungarno decided:
- Lender's Mortgage Is Senior, Partly: Because the Lender's mortgage was recorded before the Owner entered into either contract with the Perfected Contractors, the Lender's mortgage was senior. Result: the Lender's share of foreclosure sale money grows while the Perfected Contractors' share shrinks
- Mechanics Liens Are Senior, Partly: But, to the extent of the value of the Perfected Contractors' work, their mechanics liens enjoy priority as the Lender's mortgage. Result: the Perfected Contractors' share of foreclosure sale money gets larger and the Lenders' share shrinks
- Lender Gets Subrogation Priority: To the extent the Lender paid other consultants and contractors who provided work on the project, the Lender could stand in the shoes of those the Lender paid and also enjoy priority for the value of work those payees provided. Result: the Lender's share of foreclosure sale money gets larger again and the Perfected Contractors' share shrinks.
Both Perfected Contractors, and the Lender, disagreed with Judge Petrungarno's decisions. They all appealed.
Coming Up Next
In Mechanics Lien Priority: Contractor vs. Lender - Part 3, we'll talk what the appeals court judges decided in Cypress Creek and why they decided the way they did.
Construction Law Today is a legal blog about construction contracts, disputes, finance, and the people whose job it is to deal with them.
Lien priority issues can be tricky. Here in NC, we recently had some decisions on liens filed before but perfected after a bankruptcy filing. The bankruptcy courts have taken a hard line on these liens, but the cases are under appeal.
Will be interested to read your follow up post.