Lien Priority Under Mechanics Lien Law

Posted By Cliff Tuttle | July 20, 2012

No. 888

Under the Mechanics Lien statute before it was amended, construction lenders had to take special measures to prevent contractors from obtaining a lien priority by starting excavation before the mortgage was recorded.  The Mechanics Lien Law of 2006, which became effective on January 1, 2007 changed that — or did it?

In Metro Bank v. Kessler & Ricker, 2012 Pa. Super 100,   the Kesslers hired a builder (Ricker) to construct their dream house with financing from Metro Bank.  The excavation occurred in 2006, prior to the recording of the open end mortgage in 2007.

A mortgage foreclosure was commenced after Kesslers failed to pay Metro Bank, followed by a mechanics lien filing by Ricker.  However, with the sheriff sale yet to occur, both parties recognized that they had a lien priority question on their hands.  So, they agreed to submit the issue to the common pleas court.

The common pleas judge entered a order holding that the mechanics lien had priority over the mortgage since the mechanics lien came into existence before the effective date of the amended statute. The Bank appealed.

A very interesting discussion of whether the appeal was interlocutory  appears in the main opinion and carries over into a spirited dissent by Senior Judge Strassburger.  The majority held that the matter on appeal was in the nature of a declaratory judgment action, even though it arose during the course of a mortgage foreclosure.  A declaratory judgment is final and thus appealable.  In a mortgage foreclosure, liens are not fixed until the sheriff’s return is filed after the sheriff sale.  Thus, according to Strassburger (and I’ll wager he’s right) the court’s decision is interlocutory (not final) and can’t be appealed.  Say’s Strassburger: If you call a cat a dog, its still a cat.

Nevertheless, the majority declared the cat a declaratory judgment, accepted the appeal, and we move on.

Although, under the amended law, a mechanics lien still attains lien status when construction begins, usually through excavation, there are exceptions.

“(c) Any lien obtained under this act by a contractor or subcontractor shall be subordinate to the following:

(1) A purchase money mortgage as defined in 42 Pa.C.S. § 8141(1) (relating to time from which liens have priority).

(2) An open-end mortgage as defined in 42 Pa.C.S. § 8143(f) (relating to open-end mortgages), the proceeds of which are used to pay all or part of the cost of completing erection, construction, alteration or repair of the mortgaged premises secured by the open-end mortgage.”

49 Pa.C.S.A. § 1508, amended June 29, 2006, P.L. 210, No. 52, § 3, effective January 1, 2007

In this case, Metro had filed an open-ended mortgage  and the funds were apparently used in part to pay construction costs.The majority of the panel had no problem applying the 2007 amendments, stating:

“Section 1508, as amended, states that, “[a]ny lien obtained under this act by a contractor or subcontractor shall be subordinate to…[a]n openend mortgage…” 49 Pa.C.S.A. § 1508 (emphasis added). The use of the term “any” is unequivocal, meaning that the amendment applies to all liens obtained after the effective date, regardless of whether the work on the contract secured by the lien commenced prior to the effective date of the amendment. While Ricker and the trial court rely upon 1 Pa.C.S.A. § 1926 for the principle that statutes are not to apply retroactively unless clearly intended by the Legislature, we believe that the plain language of the amended Section 1508 makes the Legislature’s intent clear.”

Thus, the open-end mortgage has priority, right?

Not so fast.

Ricker argues that, even if the exception applies generally, the mortgage in this case does not qualify for the exception.

It seems that the proceeds of the open-end mortgage were used for purposes other than construction costs.  After scrutinizing the plain language of the statute, it concluded that the mortgage indeed did not qualify for the exception.  This issue was closely argued on both sides and if you want to get into the subject in depth, read the opinion, linked above.

AS an additional issue, the Mechanics Lien Claim ruled by Ricker was examined and while not in strict compliance, the court held that it was in substantial compliance.  Again, read the opinion for details,

Practical Impact:  Don’t permit the proceeds of a construction loan to be used for closing costs.  That’s how it was done before competition lead to relaxation of the rules.  Now, if a lender wants to assure that its lien position is secure, it had better cleave faithfully to the traditional practice that construction loan proceeds must be used ONLY for construction draws.  

And, incidentally, the draws must also be mandatory.  That means that under the mortgage terms, once the builder completes the specified work, payment is mandatory,  But that’s another story.

CLT

Welcome

CLIFF TUTTLE has been a Pennsylvania lawyer for over 45 years and (inter alia) is a real estate litigator and legal writer. The posts in this blog are intended to provide general information about legal topics of interest to lawyers and consumers with a Pittsburgh and Western Pennsylvania focus. However, this information does not constitute legal advice and there is no lawyer-client relationship created when you read this blog. You are encouraged to leave comments but be aware that posted comments can be read by others. If you wish to contact me in privacy, please use the Contact Form located immediately below this message. I will reply promptly and in strict confidence.

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