Just Because You’re in Line Doesn’t Mean You’re Gonna Get Your Turn

Standing in lineThis past week two of my colleagues – Bruce Scheidt, our firm’s Managing Shareholder, and Bruce Emard – wrote about a new case involving lien priorities – Decon Group, Inc. v. Prudential Mortgage Capital Co., LLC.

I won’t summarize the case since los dos Bruces did a fine job in their legal update, but suffice to say, it involved a fight between a contractor and a bank over lien priorities.

These things do happen.

Why Your Mechanics Lien Doesn’t Necessarily Guarantee You’ll Get Paid

When contractors and other lien claimants record a mechanics lien they often think they’re going to get paid because they now have a security interest in the real property in which they performed work, furnished materials, or provided labor.

Not necessarily so.

While a mechanics lien is a great way to help you get paid it’s not a guarantee that you will get paid. And the reason is simple, albeit often forgotten:

You may not be the only one standing in line.

Not only might there be other mechanic lien claimants but you might also be competing against banks and others who may have recorded mortgages or deeds of trust on the property. And, in California, there’s no line cutting . . . at least generally.

Note: The term “mortgages” is a bit of a misnomer.  While there are differences between a mortgage and a deed of trust, in California, banks use deeds of trust.

Lien Priorities Among Mechanics Liens, Deeds of Trust and Other Encumbrances

Civil Code section 8450 et seq. governs the priority of mechanics liens.  Because a mechanics lien creates a security interest in real property for work performed, materials furnished, or labor provided, a mechanics lien attaches at the time of commencement of a work of improvement, irrespective of when it’s recorded or when work was performed, materials furnished, or labor provided.

Note: Of course, there are absolute deadlines for recording a mechanics liens. Likewise, there are limitations on when you can record a mechanics lien, namely, after you’ve performed your work, furnished your materials, or provided your labor.

Thus, Civil Code section 8450 provides that a mechanics lien has priority over other liens (except competing mechanics liens – more on that in a bit), mortgages, deeds of trust or other encumbrances on the work of improvement or the real property on which the work of improvement is situated that:

  1. Attach after commencement of the work of improvement; or
  2. Was unrecorded at the time of commencement of the work improvement and in which the mechanics lien claimant had no notice.

Note: Practically speaking, this means that the deed of trust recorded when the property was purchased, as well as the deed of trust (if any) recorded in connection with a construction loan, will typically take priority over a mechanics lien since they are recorded (i.e., attached) before commencement of a work of improvement.

Line Cutting Exceptions

There are, however, exceptions. Line cutting exceptions, if you will.  Under Civil Code section 8452, a deed of trust that is otherwise subordinate to a mechanics lien has priority over a mechanics lien after recordation of a payment bond that:

  1. Refers to the mortgage or deed of trust; and
  2. Is in an amount not less than 75 percent of the principal amount of the mortgage or deed of trust.

Note: The concept here is that because a payment bond is being furnished, mechanics lien claimants have recourse against the payment bond, so it’s not unfair to give holders of a deed of trust priority over mechanic’s lien claimants.

And then there’s the biggest line cutting exception of them all: property tax liens.  Property tax liens take priority over all other liens, mechanics liens, mortgages, deeds of trust, or other encumbrances no matter when they were recorded.

Surprised that the government would let itself cut to the front of the line?  I didn’t think so.

Priority Between Competing Mechanics Liens

So, if mechanics liens relate back to the time of commencement of a work of improvement, irrespective of when a mechanics lien is recorded or when work was performed, materials supplied, or labor provided, what is the priority between competing mechanics liens?

There is no priority.

And, because there is no priority, it often comes down to a race to the courthouse to be the first to obtain a judgment foreclosing on their mechanics lien, because if the competing mechanics liens exceed the value of the property then the mechanics lien claimants share pro rata.

And, let’s face it, no one likes to share.

There are other, rather complicated scenarios affecting lien priority, such as deeds of trust recorded before commencement of construction but later subordinated to a deed of trust recorded after commencement of construction in which volumes have been written, discussed and debated. Which, if you’re interested, I’m sure you can find.

Just not here.

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