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The Rhode Island Supreme Court issued a mechanics lien opinion last month that will make it more difficult for lenders to get priority over a mechanics lien claim if they fail to take swift protective action after such claims are filed.  The case, Rhode Island Construction Services, Inc. v. Harris Mill, LLC, was decided on June 18, 2013, and overturned a lower court opinion ruling that the lender did have priority. According to the Supreme Court decision, the lender failed to take necessary actions to protect its rights, and accordingly, the mechanics lien claims out ranked the lenders claims.

Lien Priority Under Rhode Island Law

Lien Priority is an important issue whenever multiple parties are clamoring over the same proceeds or property on a construction project. Each state has an unique philosophy about how to rank lien claims among the parties. In Rhode Island, a mechanics lien claimant must name and serve every other party who has interest in the liened property at the time of filing a lien foreclosure action, and within that action, each party must appear to argue why it should have priority.

In the right circumstances this could be a huge penalty for an untimely answer. [/quote] This process is set forth in Rhode Island Mechanics Lien Law § 34-28-16. Something very interesting about this statute is that it requires every party served to answer the mechanics lien foreclosure action within 20 days of service, and if they do not, penalizes the party by making their claim to the property subordinate to the other claim(s).

In the right circumstances this could be a huge penalty for an untimely answer. As we’ll explore in the next section, that’s exactly the situation faced by Petra Finance (a lender) in the Harris Mill case, and the Rhode Island Supreme Court gave them little sympathy.

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Lenders (And Subsequent Loan Purchasers) Lose Priority If They Don’t Respond To Mechanics Lien Claims Fast Without A Really Good Excuse

In the Harris Mill case, $200,000 was escrowed to pay somebody’s claims…the question was: whose?

Fighting for the money were two primary parties.  First, Thomas Lonardo & Associates, Inc., (TLA) claimed the proceeds to pay off its mechanics lien against the property.  Opposite of them was Petra Finance, LLC, a lender who claimed that the their mortgage pre-dated the mechanics lien and had priority.  The problem for Petra Finance was that it and the company who sold them the loan had failed to respond to the lien foreclosure action as required by R.I. Mechanics Lien Law § 34-28-16, above discussed.

Although the Harris Mill case’s procedural history was what the Supreme Court called  “rather labyrinthine,” the question in the case was quite simple: Could Petra Finance get priority over the mechanics lien even though it failed to timely answer the mechanics lien foreclosure action filed by TLA?

Most lien priority cases come down to some mechanics lien statute or lien priority rule, and the courts must construe the competing purposes of the statute to determine if the law should be strictly or liberally construed. The circumstances in Rhode Island is a little different. Since the factor determining lien priority related to a procedural requirement (i.e. the lenders timely answer), whether a late answer could offset the subordination rule was actually looked at as a procedural question.

Rhode Island’s Superior Court Rules of Civil Procedure Rule 60(b) provides that a court “may relieve a party…from a final judgment, order, or proceeding if that party can demonstrate excusable neglect.”

The lower courts in Rhode Island had found that Petra Finance did demonstrate excusable neglect, but the Supreme Court strongly disagreed, explaining as follows:

In our opinion, the motion justice committed reversible error when he found that the failure to submit a timely statement of claim was the result of Petra’s excusable neglect. This Court has stated that “unexplained neglect, standing alone and without more,” is not enough for a party to be granted relief under Rule 60(b. Rather, a party must demonstrate “excusable neglect,” which is “a failure to take the proper steps at the proper time, not in consequence of the party’s own carelessness, inattention, or willful disregard of the process of the court, but in consequence of some unexpected or unavoidable hindrance or accident * * *.”

…Had Petra carried out even the most cursory due diligence before it purchased the mortgage, it would have discovered that the property was implicated in the mechanics’ lien action.

The failure to file a timely answer and to do due diligent when purchasing the property amounted to the lender making its own bed with respect to its claim against the property. The mechanics lien claimant’s lien prevailed over the lender, demonstrating once again that lien priority is never a black and white affair.