A recent post from the Michigan Construction Law Update blog called our attention to a lien priority case out of that state. In that case, the Michigan Court of Appeals held that a construction lien has priority over a mortgage regardless of whether the general contractor and project owner’s changed during the course of the project.

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Importance of lien priority

When we discuss mechanics liens, it’s not limited to just a document filed. Rather, it is a process. The use of the mechanics lien process is typically enough to get you paid what you’ve earned. However, if payment never comes, it may be time to enforce your claim through a foreclosure action. This is a full lawsuit, and shouldn’t be taken lightly; and there are a lot of factors to consider to determine whether foreclosing your lien claim is worth it.

One main factor to consider is the priority of your claim. If the property is foreclosed, the proceeds will be distributed to creditors according to their priority. Lien priority disputes are always the same: a property is foreclosed, there’s not enough money to go around, and the mortgagor and lien claimant fights about whose claim is superior to the other.

Two Notices of Commencement filed on the same project

The case in question is First Community Bank v. Montainaire, LLC. et al.

Project snapshot

  • Owner(s)
    • Initial owner: Mountainaire, LLC (Mountainaire)
    • Subsequent owner: Cheboygan Yacht Club at Pier 33, LLC (Yacht Club)
  • Mortgagee: First Community Bank (First Community)
  • General contractor: Pioneer General Contractors, Inc. (Pioneer)

The facts of the case are a bit convoluted, but the basic story is this. Mountainaire who at the time owned the property began improvement on their commercial property in early 2004. In July of that year, a Notice of Commencement was filed along with the mortgage issued by First Community. However, in August of 2005, Mountainaire transferred the property to Yacht Club. First Community decided to continue to funding the project. A month later, Pioneer was hired as the GC on the project and recorded a Notice of Commencement on the project.

Priority dispute: lien vs. mortgage

As you can probably guess, a payment dispute arose, and Pioneer ended up filing a Michigan mechanics lien, and successfully foreclosed their claim. The issue was, whether First Community’s mortgage had priority over Pioneer’s lien claim. The general rules regarding lien priority in Michigan is summarized by the court with the following:

Construction liens have priority over interests that are recorded “subsequent to the first actual physical improvement.” MCL 570.1119(3). However, a “mortgage, lien, encumbrance, or other interest recorded before the first actual physical improvement to real property shall have priority over a construction lien arising under this act.” MCL 570.1119(4)

Lien takes priority because improvements began before mortgage was recorded

First Community contended that when Pioneer recorded the Notice of Commencement that was the start of a new project. Therefore, Pioneer’s lien priority traced back to the time of the second notice of commencement’s filing, and not back to when the project originally began. The court held that Pioneer’s claim was superior to the mortgage:

We believe that the statutory language does not support First Community’s argument that a new project (with new priorities) began when Pioneer filed a second notice of commencement in 2005. Rather, under MCL 570.1119(3) and (4), priority depends on when the mortgage was recorded with respect to the “first actual physical improvement.” MCL 570.1103(1) defines an “actual physical improvement” as “the actual physical change in, or alteration of, real property as a result of labor provided, pursuant to a contract, by a contractor, subcontractor, or laborer which is readily visible and of a kind that would alert a person upon reasonable inspection of the existence of an improvement.” (Emphasis added.) A notice of commencement is not mentioned.

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Michigan liens relate back to first physical improvement

Given the evidence that the actual improvements began before First Community recorded their mortgage, Pioneer’s lien claim took priority. Regardless of the second Notice of Commencement or a change in ownership. Under MCL §570-.1108(1), “if all improvements relate to a single project only one notice need be recorded. And the court in this case decided that the change of ownership wouldn’t constitute a “new project” for the purposes of priority. Michigan mechanics liens will always relate back to the “first actual physical improvement.”