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When there are multiple liens or other encumbrances on a property, and everyone is trying to get paid, the determination of which liens have priority is paramount. I recently discussed an Arizona court’s decision giving a mechanics lien priority over a construction lender. That case was fairly straightforward, and once the facts came out, appeared very easy to decide. This is not always the case. Determining the priority of liens and other encumbrances seems like an easy mathematical calculation, but often, it becomes convoluted, tricky, and complicated – and even different courts in the same state disagree on the outcome, or the interpretation of that state’s statutory language. To illustrate this point, we can take a look at a recent case in Idaho, Am. Bank v. Wadsworth Golf Constr. Co. of the Southwest, 2013 Ida. LEXIS 254 (Idaho Aug. 16, 2013).
Lien Priority in Wadsworth – Does Bonding Off the Lien Matter?
The Wadsworth case stemmed from the failed development of a golf course and high-end residential development in Coeur d’Alene, Idaho. We don’t need to get into all the facts of the case in this post, but for our purposes, the developer BRN got a loan from American Bank, and contracted with Wadsworth to construct the golf course that was to be the main feature of the development. BRN failed to pay Wadsworth for some of the work completed by Wadsworth on the golf course, and Wadsworth filed a mechanics lien. BRN eventually defaulted on the loan, and the bank foreclosed on the property. In order to proceed with the foreclosure sale, the bank bonded off the mechanics lien. At the foreclosure sale, the bank’s credit bid (the balance BRN owed the bank, costs of sale, sheriff’s fees and receiver’s fees) was sufficient to make the bank the successful bidder, and left no surplus from which any other lien holder could recover.
Since Wadsworth’s mechanics lien was subordinate to the bank’s mortgage (in Idaho the priority of encumbrances on the property follow the “first-in-time” rule), in normal circumstances it would have been clear that Wadsworth was out of luck. The foreclosure sale of the property did not supply enough funds to satisfy any lien claimants other than the mortgage holder. This case, however, was not that simple, and, eventually, provided a case of first impression for the Idaho Supreme Court.
In this case, remember, in order to facilitate the foreclosure sale of the property, the bank bonded off Wadsworth’s mechanics lien. The district court determined that the relative priority of the parties’ claims agains the property (and ability to recover therefrom) was irrelevant once the property was replaced by the lien release bond as security for Wadsworth’s claim. That is, the fact that Wadsworth would have been unable to recover from the property did not matter to Wadsworth’s claim against the lien release bond. All that mattered was that Wadsworth had a valid lien, not that it would allow recovery from the property.
An appeal, the Idaho Supreme Court disagreed.
When a mechanics lien in Idaho is “bonded off” the lien release bond must contain certain statutory language. One of the required clauses is as follows:
from which sum they will pay the claimant such amount as a court of competent jurisdiction may adjudge to have been secured by his lien
The interpretation of this language was crux of the case. While the district court skirted the issue by claiming that since the posting of a lien release bond extinguished the lien against the property (and removed it from the property records), it also extinguishes the issue of lien priority.
The issue taken up by the supreme court was whether the phrase “amount…secured by his lien” meant the amount of the lien claim (as claimed by Wadsworth) or the amount that “could have been recovered against the property in a foreclosure action (as claimed by the bank). The court ultimately agreed with the bank. Citing a California case, the court concluded “that the lien release bond is merely meant to act as substitute security for the real property and does not otherwise affect the rights of interested parties” and that the court was “unable to identify a legitimate policy consideration supporting recovery against the property’s replacement in those cases where the lien claimant would recover nothing by way of lien foreclosure”.
So, the end take-away here, after all this confusion, is relatively simple and straightforward after all: The priority of a mechanics lien is unchanged by the posting of a lien release bond.