Alabama mechanics liens are granted priority over all other encumbrances on the property that pop up after the commencement of work. However, this isn’t always that clear-cut. The Alabama Supreme Court recently issued a judgment dealing with the priority of mechanics liens against future advance mortgages.
What’s a future advance mortgage?
A future advance mortgage is a line of credit secured by a piece of property. It’s typically used for home construction or renovation, where the owner may need to draw from the line of credit in the future. It may also known as a home equity line of credit, or HELOC.
Mechanics lien priority in Alabama
As we’ve written many times before, mechanics liens are the most powerful tool to protect contractors and suppliers against nonpayment. The problem is, if the dispute ends up as a foreclosure action, there may not be enough funds to go around. This is where lien priority comes into play; it’s used when multiple parties have a right to payment. Lien priority essentially determines who gets paid first after foreclosure. If you’re at the end of the line, you might be out of luck.
Alabama mechanics lien priority is regulated by Ala. Code §35-11-211. The pertinent part of this statute is as follows:
(a) Such lien as to the land and buildings for the improvements thereon, shall have priority over all other liens, mortgages or encumbrances created subsequent to the commencement of work on the building or improvement. Except to the extent provided in subsection (b) below, all liens, mortgages, and encumbrances, created prior to the commencement of such work shall have priority over all liens for such work.
At first glance, this seems pretty straightforward. Basically, this provision says “whoever is there first gets paid first.” If a lender creates a mortgage after construction begins, the construction company’s lien rights take priority over the mortgage, and vice versa. This is what’s known as “first in time, first in right” rule.
But what about a future advance mortgage? The money – all or part of the loan proceeds – isn’t paid until a future date; if at all! Does the mortgage start when it was created, or when the money is first paid? And how does this affect a contractor’s lien priority? That is precisely the issue that the Alabama Supreme Court recently dealt with.
Lien claimant challenges mortgage priority
The case in question is GHB Construction Co., Inc. v. West Alabama Bank and Trust.
- Owner: Penny Guin
- Prime Contractor: GHB Construction Co., Inc. (GHB)
- Lender: West Alabama Bank and Trust (WABT)
On April 8th, 2015, Penny Guin purchased an unimproved lot. On that same day, Guin secured a future advance mortgage from WABT for a little over $400K. However, as is typical with a future advance mortgage, WABT didn’t disburse or advance money right away. (They hold the funds until the owner requests them.) And were under no obligation to actually disburse said funds.
The very next day, Guin hired GHB for the construction of a new home.
Mortgage recorded and work commenced
One day later, on April 10th, WABT recorded the mortgage in probate court – still, no funds were released.
Sometime later, GHB delivered materials to the property and began work on the house. Under Alabama law, “commencement of work” occurs when the first materials or labor are provided.
WABT released the first funds to Guin in October 2015 – 6 months after they recorded the mortgage.
Upon completion of the project in August 2016, GHB submitted an invoice for final payment. Guin never paid it. So in December of the same year, GHB filed a mechanics lien claim in the amount of $106,556.16. They initiated an enforcement action the following month.
Trial court declared the mortgage had priority over the lien
The claims that GHB asserted against Guin were for the unpaid balance plus interest. In addition to the lien claim, GHB also sought a judgment declaring that their lien had priority over the WABT mortgage.
In response to this, WABT filed a motion to dismiss, based on the fact that the complaint failed to provide any evidence that they commenced work prior to the recording of the lien.
GHB responded that WABT’s mortgage wasn’t secured until the first advance was made. Additionally, that WABT wasn’t necessarily bound to make any future advancements.
The Alabama trial court agreed with WABT, and granted their motion to dismiss GHB’s claim. GHB appealed.
Alabama Supreme Court: The future advance mortgage had priority even though no payments had been made
The Alabama Supreme Court considered whether a future advance mortgage would retain its priority, even if disbursements had yet to be made.
There was no dispute that the mortgage was recorded prior to the commencement of the work (even though GHB had some difficulties proving the exact date of commencement of work). GHB argued instead that “recording” a future advance mortgage shouldn’t count as “creating” one, since they didn’t make an advance yet.
The court stated that it’s been long recognized by Alabama courts that future advance mortgages remain valid, even if there is no initial consideration (i.e. no release of funds). Yet, the mortgage can be voided if the lender attempts to foreclose without ever advancing any funds.
However, WABT did eventually make advances to Guin that were secured by the mortgage. Even so, failure to support the mortgage by consideration doesn’t make the mortgage invalid or ineffective.
Given all of this, the Alabama Supreme Court agreed with the trial court. They ruled that WABT’s future advance mortgage does indeed have priority over GHB’s mechanics lien.
Priority issues with liens and mortgages can get complicated
This was an unfortunate result for GHB Construction Co. There are a number of factors that one needs to consider when evaluating their claims priority compared to mortgages. Your place in priority can mean the difference between being paid or not. So it’s important to understand where your claim falls in line.
The general “first in time first in right,” isn’t as clear cut as it seems. The issue of future advance mortgages, as in this case, only highlights the complications associated with establishing your place in line.
Contractors and suppliers should never assume that their claim will take priority over a mortgage – even a future advance mortgage that has yet to payout. Which is a jarring decision for contractors, to say the least.
The other takeaway here is the importance of the date of commencement. This date is absolutely critical for determining your priority against other lenders, lienors, or other creditors. At the start of every job, you should document this date and keep it for your records. That way you can get a better sense of where your claim will rank if the property ends of in foreclosure.