In a depressed economy wrought with defaulting developers, a lender in California facing a lien priority challenge should evaluate whether it would be worthwhile to secure a first priority position for its deed of trust through law and motion practice.
California’s case law provides the legal authority that allows a lender to require a mechanic’s lien claimant to establish the validity of a lien by demonstrating that the lien only includes amounts for labor, services and/or materials that were actually used in the construction of the improvement on the parcel upon which the lien was recorded.
Take, for example, the case where a mechanic’s lien claimant constructs improvements for a large-scale commercial development of 10 buildings on separate parcels. The developer, initially well-funded by its construction lender, paid for the necessary improvements to construct and sell off the first four buildings in the commercial project. Buildings five through eight were in various stages of production when the developer ceased to pay all of the mechanic’s bills. The mechanic, usually on a pay schedule that runs 30 days behind work performed, completed the work necessary to complete buildings five through eight before ceasing operations at the site. At the time the mechanic realizes it won’t be paid, the mechanic is owed $1,000,000. The developer sells buildings five through eight, and the construction lender’s deed of trust is partially reconveyed based on a pay-down, through escrow, of the construction loan. The developer goes belly up and the mechanic records its $1,000,000 lien on each and every lot (i.e., one through ten) underlying the commercial buildings for the full value of all unpaid bills. The construction lender, no longer receiving payments on its loan, forecloses on its remaining security (i.e., the partially constructed buildings numbering nine and ten), and the mechanic’s lien is wiped out as to those two parcels. The mechanic is left with a $1,000,000 lien on the lots underlying buildings one through eight, each of which is owned by a third party, and each of which has a purchase money deed of trust recorded against the parcel.
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