Wednesday, March 21, 2012

Montana Priorities Favor Lienors - Montana Mechanics Lien Held Valid

Yesterday we posted a blog about the Nevada Supreme Court's ruling on priority of Nevada Mechanics liens over mortgages in situations where a bank has actual knowledge that a contractor commenced work, but there is no "visible" work being performed on the property.  In that case, the Nevada court ruled that actual knowledge of work being performed is not enough, because the statute contains plain language requiring that the work be visible to someone inspecting the property.


Montana has a similar statute, had a similar case arise, and came to a completely opposite conclusion.  In Gaston Engineering & Surveying, P.C. v. Yellowstone Bank, 249 P.3d 75 (Mont. 2011), the Montana Supreme Court was faced with the issue of whether a Montana mechanics lien has priority over a bank mortgage. The case was brought by a contractor that performed preconstruction services. Montana's lien law states that a lien attaches to the property at the "commencement of work," defined as "the date of the first visible change in the physical condition of the real estate caused by the first person furnishing services or materials pursuant to a particular real estate improvement contract." In that case, a Montana "construction lien arising under this part has priority over any other interest, lien, mortgage, or encumbrance that may attach to the building, structure, or improvement or on the real property on which the building, structure, or improvement is located and that is filed after the construction lien attaches."


After the commencement of the preconstruction services, the owner of the property signed a "buy-sell" agreement with a developer. The buyer's purchase was contingent on results of certain tests that were to be performed by the contractor.  Based on the test results that were procured by the contractor, the property was purchased by the developer. The lender issued the funding for the purchase on that same day. A mortgage was thereafter recorded by the lender.


The funding provided by the bank was also being used for the construction of the project. When the funding came through, the contractor's preconstruction services invoices were provided to the lender in order for the developer to obtain a draw from the bank to pay the contractor. The bank specifically knew that the invoices related to work performed by the contractor prior to the issuance of the mortgage. 


Thereafter, a dispute arose between the developer and the contractor, and the contractor sued for payment. The lawsuit included a lien foreclosure count, and named the bank as an interested party. The bank claimed that its mortgage had priority.


At the trial level, the court ruled that the bank indeed had priority. In ruling on a summary judgment motion, the court found that a lien could not have existed because at the time the work was performed, the developer did not own the property.  The Montana Supreme Court, however, disagreed.  In its ruling, the Montana Supreme Court found that a lien attaches when the work begins. Specifically, construction liens extend to the interest of a "contracting owner in the real estate" and that the buy-sell agreement made the developer a "contracting owner."


Furthermore, the court also held that the Montana construction lien had priority over the lender's mortgage, finding that the lender "knew [that the contractor] began work before it recorded its Mortgage, as evidenced by an email [the lender] itself produced in discovery. Given this factual record, it cannot be disputed that [the contractor] commenced work before [the lender] recorded its mortgage."


The the Montana Court's ruling on the "visible" requirement directly contradicts the ruling in Nevada. Does the Montana Court's decision seem more equitable? Or should the letter of the law be followed in every circumstance. Is actual knowledge more important that, pardon the pun, constructive knowledge?

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