Mechanic’s Lien Priority: Contractor versus Lender

January 8, 2023

Last week, the New Hampshire Bankruptcy Court issued a ruling concerning mechanic’s liens.

In re Prospect-Woodward Home, 2023 BNH 001 (determining that RSA 447:12-a did not govern a priority dispute between a construction contractor’s mechanic’s lien and a construction lender’s mortgage and finding that the construction contractor’s mechanic’s lien had priority over the construction lender’s mortgage, pursuant to New Hampshire’s general race-notice rule, as the construction lender was at least on inquiry notice regarding the contractor’s unrecorded interest in the property as tree clearing work had commenced on the project before the construction mortgage was recorded).

“New Hampshire is a race-notice jurisdiction regarding priority of interests in real property.” In re McLaughlin, Bk. Nos. 09-11671-JMD, 09-11672-JMD, and 09-11673-JMD, 2011 WL 1706791, at *3 (Bankr. D.N.H. May 4, 2011). New Hampshire’s recording statute
“acknowledges by negative implication the rule that the first party to record without notice of a priority party’s claim has priority.” ROK Builders, LLC v. 2010-1 SFG Venture, LLC v. (In re Moultonborough Hotel Group, LLC), 726 F.3d 1, 5 (1st Cir. 2013) (“Moultonborough III”)(citing RSA 477:3-a).
In a race-notice jurisdiction, a purchaser or creditor has the senior claim if he or she records without notice of a prior unrecorded interest.  The purpose then of the recording statutes … is to provide notice to the public of a conveyance of or encumbrance on real estate.  The statutes serve to protect both those who already have interests in land and those who would like to acquire such interests.
Id.   In re Chase, 388 B.R. 462, 467 (Bankr. D.N.H. 2008) (quoting Amoskeag Bank v. Chagnon, 133 N.H. 11, 14 (1990)).  Notice of a prior unrecorded interest may be (1) actual; (2) record (also referred to as constructive), or (3) inquiry.  Bilden Props., LLC v. Birin, 165 N.H. 253, 258 (2013).  A party is deemed to have notice of an unrecorded interest “upon receipt of enough information … that would cause a reasonably prudent person” to make further inquiry.  CF Invs.,Inc. v. Option One Mortg. Corp., 163 N.H. 313, 316 (2012).  “If a party is obligated to investigate, then the party is chargeable with actual notice of what the investigation will show.”
Amoskeag Bank v. Chagnon, 133 N.H. at 14.

Normally construction projects get financed before a builder breaks ground on a project and construction mortgages get recorded before contractors commence work.  Without statutory intervention, first-recorded construction mortgages would always trump mechanics’ liens that arise under state law.  Typically, construction mortgagees would be race-notice winners as compared to contractors with mechanics’ liens, who would be race-notice losers.

However, New Hampshire has adopted an exception to priority laws with respect to mechanic’s lien attachments. RSA 447:12-a states, in relevant part:

[A]ttachment [of a mechanic’s lien] shall have precedence and priority over any construction mortgage. … However, such attachment shall not be entitled to precedence as provided in this section to the extent that:

(1) the mortgagee shows that the proceeds of the mortgage loan were disbursed either toward payment of invoices from or claims due subcontractors and suppliers of materials or labor for the work on the mortgaged premises;

or (2), upon receipt by the mortgagee from the mortgagor or his agent of an affidavit that the work on the mortgaged premises from which such disbursement is to be made has been completed and that the subcontractors and supplier of materials or labor have been paid for their share of such work or will be paid out of such disbursement.

RSA 447:12-a (emphasis added).  As a result of RSA 447:12-a, construction mortgagees forfeit their usual priority to mechanics’ lienholders, except in the two circumstances described in the statute.

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