In Massachusetts, for example, mechanic’s liens are governed by General Laws chapter 254. That statute requires a lienholder to record certain notices and statements at the Registry of Deeds and eventually file suit to enforce the lien. These steps must be accomplished within very strict deadlines or the lien will not be enforceable. What if, in the meantime, a general contractor or property owner files for bankruptcy protection before a lienholder can file its complaint to enforce the lien?

The answer involves a complex interaction between state mechanic’s lien law and federal bankruptcy law, particularly the bankruptcy automatic stay, which typically stays most efforts to perfect a lien after a bankruptcy case is filed. There is an exception to this at § 362(b)(3) of the Bankruptcy Code which permits a to complete the lien perfection process if its lien rights arose before the bankruptcy case was filed. This includes mechanic’s liens for work and materials that were provided prior to the bankruptcy filing. Contractors may record the required documents to comply with the perfection process without violating the automatic stay, however, in states that require a contractor to file suit in order to enforce the lien (like Massachusetts), doing so would violate the automatic stay. Instead, the Bankruptcy Code provides a means at §§ 546(b)(2) and 108(c) to preserve the right to enforce the lien by filing a so-called “lien preservation notice” with the Bankruptcy Court within the same time period required under the state mechanic’s lien statute to enforce the lien. Although not required, it is advisable to also record a copy of the notice at the appropriate land records office. If the notice is timely filed, the statute of limitations to file an action to enforce the lien is extended or “tolled” until the automatic stay expires or is terminated, plus 30 days, thus permitting the contractor to enforce the lien in the bankruptcy case, if possible, or after the bankruptcy case has ended.

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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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