News for Contractors and Construction Lenders in Arizona and Nevada – The Contractors' Lien May Trump the Bank's

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In addition to an arid climate and plenty of sunshine, Arizona and Nevada have something more to offer contractors: a potentially advantageous position over lenders when a project goes bad.

When a project derails and everyone involved is looking to be made whole, banks typically have protected their first-place position even if the contractor commenced with construction prior to the bank making its loan. The bank achieves this by requiring the contractor to have executed a subordination agreement or by claiming its first-place position via the theory of equitable subrogation. Subordination agreements are typically enforceable, and equitable subrogation is the rule of law in much of the country. However in two separate rulings in Arizona (view here and here), the courts held that mechanic's liens have priority of all other claims attaching after the commencement of construction. In Nevada, state law prohibits a bank's jumping to the front of the line, going so far as to state that even if such an agreement to subordinate is made, it is "contrary to public policy and is void and unenforceable."

Determining the order of repayment is an important consideration when entering into any construction deal. After a project derails this issue is complex, and typically involves a significant number of parties with none wanting to concede their position. Furthermore, as demonstrated above, some parts of the country operate under state laws that are counter to what is considered standard business practice elsewhere.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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