Construction professionals at work

Earlier this year we wrote about a Lien Priority dipute brewing in Nevada with high stakes for the parties.  That post, Nevada Supreme Court Asked To Weigh In On High Stakes Lien Priority Dispute, discussed a battle between lien claimants and lenders about who had a better claim to $100 million dollars in a bankruptcy estate formed in the wreckage of the Las Vegas Strip‘s Fontainebleau Project.

The underlying case’s facts, addressed in that previous post, are as follows:

In Nevada, lenders usually have claim priority over mechanics lien claimants. This is the case even when a lender issues one loan, then mechanics lien claimants make claims, and then the lender refinances and creates a second loan after the liens are filed.

This is sort of what happened in the Fontainebleau situation, except that instead of having the lender convert the original loan and fold it into the second loan, as is typical, the developer actually paid off the loan the day before the refinance. So, the first loan was placed, then construction started (fixing the mechanics lien claimants priority start-date), then the loan was paid off by the developer, and then a completely new loan was placed.

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The Nevada Supreme Court weighed in on this issue with an opinion published October 26, 2012: In re Fontainebleau Las Vegas Holdings LLC.  It was good news for mechanics lien claimants and a depressing day for the lenders.

The court held that when the old loan was closed and the new loan was opened it created another unique recording date, and every mechanic’s lien related back to the start of the construction project which predated the second loan.  As a result, the mechanics lien claims have priority over the lender claims and the first crack at splitting up the $100 million.

To give you an idea of how little will be left for the lenders as a result of this opinion just take a look at the case caption which goes on for 14 pages to list all of the parties who filed a mechanic’s lien against this project and is waiting on payment.

This is great news for mechanic’s lien claimants in Nevada, and another example of why it’s so important to preserve and perfect your mechanics lien rights.

Lenders are not going to sit quietly about this decision.  These loan switch situations arise often enough that it is a concerning precedent  and they will need to do something to prevent the loss of priority like this.

There are some suggestions in the opinion itself, but as an article from Snell & Wilmer, LLP suggets (Nevada Supreme Court Clarifies Lender v. Mechanics’ Lien Priority Disputes), the Supreme Court opinion is not clear enough and lenders’ “best chance of regaining broken priority may be to convince the Nevada legislature to amend NRS 108.225 to specifically provide for contractual subordination of priority.”