Mortgage Lenders Beware! Alabama Supreme Court Holds That a Future Advance Mortgage May Be Primed By a Mechanic’s Lien
In Alabama, a future advance mortgage may be primed by a mechanic’s lien, despite recording of the mortgage prior to commencement of any work.
by Greer B. Mallette, Partner
The Supreme Court of Alabama just released an opinion to which mortgage lenders in Alabama should pay close attention.
In GHB Construction and Development Co., Inc. v. West Alabama Bank and Trust, the Supreme Court held that a mechanic’s lien could have priority over a recorded future advance mortgage, notwithstanding the fact that the recording of the mortgage pre-dated commencement of the contractor’s work.
In GHB, the owner/mortgagor purchased a lot and executed a promissory note and an optional future-advance mortgage[1] secured by the property on April 8, 2015. The following day, the owner entered into a construction contract with the plaintiff, GHB Construction and Development Company, Inc. (“GHB”), for a house on the property. The underlying complaint did not specify precisely when construction then commenced.
West Alabama Bank and Trust (the “Bank”) did not issue the first advance under the note and mortgage until October 15, 2015.
Upon completion of its work, GBH filed a verified statement of lien and sued the owner and the Bank claiming it remained partially unpaid and seeking a declaration that its mechanic’s lien had priority over the Bank’s mortgage lien.
The trial court granted the Bank’s motion to dismiss for failure to state a claim on the basis that the Bank’s mortgage lien was recorded before GHB delivered any materials or commenced any work at the property, despite GHB’s argument that the Bank’s mortgage did not “secure” until the Bank actually advanced money to the owner, which GHB argued did not occur until after GHB had commenced work. GHB appealed.
The question before the Supreme Court was when the Bank’s lien was “created” under Alabama’s lien priority statute (Ala. Code §35-11-211). The Bank argued its lien was created when it recorded its mortgage and therefor primed the commencement of GHB’s work. GHB argued the Bank’s lien was created months later when the Bank made its initial advance, leaving open the question of whether the Bank’s lien was first in priority.
The Supreme Court concluded that a future-advance mortgage does not create a mortgage lien until some indebtedness is incurred by the mortgagor under the future–advance mortgage. Applying this rule, the Court found that the Bank’s mortgage lien was not created when the mortgagor executed the note and mortgage, or when it was recorded. Rather, the Bank’s lien was created months later when the Bank made its initial advance.
The take away from this case is that a mortgage lender in Alabama taking a future advance mortgage as security for loan should, in addition to confirming that no work has commenced on the subject property at the time of closing and recording, immediately advance some nominal loan proceeds at the closing table so as to “secure” its mortgage. In addition, the lender should insist that any contractor performing, work on the property execute a lien subordination agreement as a condition of lender’s making the loan and taking the mortgage.
Likewise, contractors and suppliers should be aware that their lien rights may not necessarily be primed by a mortgage just because the mortgage has been recorded prior to delivery of materials or commencement of work. In light of GHB, investigation into the terms of the mortgage and when loan proceeds were first advance may be warranted.
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[1] A future-advance mortgage is mortgage in which part of the loan proceeds will not be paid until a future date.