#44: Mechanic’s Lien vs. Construction Mortgage
A few months ago I blogged on the priority of mortgages over later-filed mechanic's liens, pointing out that while priority as between a mechanic’s lien and a conventional mortgage is determined by filing order, priority as between a mechanic’s lien and a construction mortgage is determined by RSA 447:12-a. The finer points of that statute are worth examining.
The general rule is that later-filed mechanic's liens jump ahead of construction mortgages in priority. There are two exceptions. A construction mortgagee achieves priority “to the extent that the mortgagee shows that the proceeds of the mortgage loan were disbursed either toward payment of invoices from or claims due subcontractors and suppliers of materials or labor for the work on the mortgaged premises, or upon receipt by the mortgagee from the mortgagor or his agent of an affidavit that the work on the mortgaged premises for which such disbursement is to be made has been completed and that the subcontractors and suppliers of materials or labor have been paid for their share of such work, or will be paid out of such disbursement.“
The language about disbursements “toward payment of invoices from or claims due subcontractors and suppliers of materials or labor” and affidavits “that the subcontractors and suppliers of materials or labor have been paid” immediately raises a question: what about payments to the GC? It is easy to miss the fact that the statute does not include such payments for purposes of achieving mortgage priority. In re Moultonborough Hotel Group, 726 F.3d 1, 6 (1st Cir. 2013), did just that, allowing payments to a GC to establish a construction mortgagee's priority under the statute. Other courts have been more circumspect. For example, Ransco Company, Inc. v. FDIC, No. C-89-562-JD (D.N.H. September 8, 1994), explicitly ruled that “the phrase 'subcontractors and suppliers of labor or material' as used in NH RSA 447:12-a does not include general contractors,” and dismissed the lender's claim of priority based on its payments to the GC.
That payments to general contractors are not included as yielding priority to the mortgagee is no legislative oversight. The GC is the party to whom a lender's disbursements are normally made (whether directly or through the owner/borrower), and it is a simple matter for owner or lender to swap a check for the GC's lien waiver. The lender needs no statutory protection here. Not so with subs and suppliers, who may be unknown to the owner and lender. This is why RSA 447:12-b requires subs and suppliers to identify themselves in writing to the lender, who can then make sure they are getting paid as well. If the subs and suppliers fail to give written notice, they won't lose their liens because of it. But the statute would hardly make sense if they didn't lose their priority because of it. That issue will have to await a test case.
The second exception – allowing the construction mortgagee to achieve priority as long as the owner swears that subs and suppliers “have been paid for their share of such work, or will be paid out of such disbursement“ – is more problematic. While the last sentence of RSA 447:12-a makes a willfully false oath a crime, that doesn't ensure accuracy – particularly when it comes to sworn statements about what will happen as opposed to what has happened. Relieving lenders of the burden of ascertaining the truth here is troublesome because it weakens the first exception, by dispensing with the need to “show” that subs and suppliers have been paid in favor of a reasonable belief that they have been paid. Chalk one up for the bank lobby!
The most cryptic sentence of the statute, however, is this one: “The precedence provided by this section shall not apply to wage claims of employees working for wages under an employer-employee relationship, as defined in RSA 275:42.” It's nice to see confirmation that employees have mechanic's lien rights, but if you asked me what precedence is being declared inapplicable here – the general rule or the two exceptions to it – I'd have to plead ignorance.