Priority is a very important, and sometimes complicated, issue for courts to hash out when deciding which parties ultimately get paid in a case where there is not enough money to go around. Mechanics liens can make the priority battle even more complicated because, in some circumstances, mechanics liens do not strictly follow the traditional priority rule of “first to file.” The first-in-time, first-in-right rule is modified slightly with regard to mechanics liens, because the liens often relate back to the very start of the project as a whole – irrespective of when the lien was actually filed. Mechanics liens tend to put the claimant in especially good position if a priority battle arises. But, that being said, there are some pitfalls along the way that could cause a lien claimant to lose priority. This Washington Court decision is a good example of that.
The Case at Issue
In 2005, Gibson & Olsen, Inc. (G&O) was hired by Winlock Properties, LLC (Winlock) to conduct engineering and surveying services on a 50-acre development. The contract, signed in July of that year, included an amendment provision that stated as follows:
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Following completion of the Final Design Phase Services, and after receipt of written authorization from [Winlock], [G & O] shall prepare an amendment to this Agreement for completion of the construction phase and operational phase services. Upon approval of the amendment, [G & O] shall proceed with the work on this project.
This provision became important.
After the commencement of G&O’s work on the project, Winlock obtain a loan from Venture Bank (later acquired by First Citizens Bank and Trust Co.). There was no subordination agreement signed between Venture and G&O. As time went on, there were multiple amendments to G&O’s contract for additional work on the project and the related payment. Despite payment to G&O stopping in October 2006, G&O continued to furnish services based off these amendments until January 2008. In February of 2008, G&O stopped work due to the non-payment. By that time, Winlock owed G&O $155,755.59, plus interest. Pursuant to the payment dispute, G&O filed a mechanics lien under title 60.04 RCW. An enforcement/foreclosure action was then filed in July. The bank filed to foreclose on its deed of trust, as Winlock had defaulted on the construction loan. A priority battle ensued.
Priority Battle: The Court’s Decision
Priority battles and decisions seem like they would be relatively simple – how hard is it to figure out what came first? The actual determination, however, can be difficult. Determining the point at which an encumbrance attached, or was perfected, which of those count for the purposes of priority, or if the encumbrance relates-back to any prior work or other point in time can be complicated. In Washington, a mechanics lien has priority only over a lien or other encumbrance which attached to the land after, or was unrecorded, at the time labor, services, or materials were first provided by the lien claimant. In this case, G&O started work before the loan even existed – but, while this is true, that’s not necessarily where the case ends.
Citizens argued that the mechanics lien priority date in this case should be the day G&O commenced work for the payment owed. In other words, the amendments made to the original contract constituted new contracts, and therefore a new commencement dates, for priority purposes. Since G&O’s mechanics lien claim was limited to the payment not received from the amendment work, the true priority date is the commencement of that work. Thankfully for G&O, the court did not agree.
In Scott’s Excavating Vancouver, LLC v. Winlock Properties, LLC, the Washington Appellate Court decided that G&O’s contract and amendments to that contract were all a single enforceable contract, and that the work done by G&O was one continuous work of improvement – not several different distinct projects with differing start and end dates. Plenty of evidence, like the contract clause referenced above, and testimony was submitted to prove that the intention of Winslow and G&O was to enter into a single contract with an amendment process to continue the work as one inclusive project. Venture Bank was aware that G&O had commenced work already at the time it issued the loan and did not get a subordination agreement signed. Therefore, G&O’s mechanics lien has priority over Citizens’ deed of trust.
What Does This Mean?
This case provided support for the established rules for determining priority related to Washington mechanics liens. The priority date is determined by the lien claimant’s first furnishing of labor and/or materials to the project, and encumbrances unattached or unrecorded at that time are subsequent. It’s important that, as this case sets forth, when work is done pursuant to a single work of improvement and a single contract, mechanics lien priority still relates back to the claimant’s actual start of work as a whole, without respect to any subsequent date of amendments to the contract. In this case, however, it took a lengthy and expensive court battle to come to that determination.