Priority of Mortgage Versus Materielman’s Lien – The Alabama Supreme Court Reverses Track!
by Jack J. Kubiszyn Jr., Partner
On Sept. 21, 2018, the Alabama Supreme Court reached a controversial decision in GHB Construction and Development Company, Inc. v. West Alabama Bank and Trust (“GHB“). Its decision at the time held that a materialman’s lien had priority over a previously recorded future advance mortgage because the loan secured by such mortgage was not disbursed until after work began on the property, and therefore, such mortgage was not created until it secured some debt. This decision caused an uproar with the lending and insurance industry and called into question whether in Alabama future advance mortgages could ever provide security in construction matters. The concern was so great that the Alabama Bankers Association, the Alabama Land Title Association, the Mortgage Bankers Association of Alabama, and the Credit Union Coalition of Alabama filed an Amicus Curiae brief with the Alabama Supreme Court requesting that it reconsider and reverse its decision.
On March 29, 2019, the Alabama Supreme Court did just that, withdrawing its prior opinion and issuing a new one. In its new opinion, the Alabama Supreme Court clarified Alabama’s law on future advance mortgages, holding that a future advance mortgage is created, and therefore has priority, the day it is recorded – regardless of when funds are disbursed – because to hold a future advance mortgage void until a debt is incurred would undermine the legal validity of such a transaction, and this is not the law in Alabama.
What follows is a summary of the recent decision on the priority of future advance mortgages in Alabama and the rationale for the Alabama Supreme Court’s reversal.
In GHB, the lender closed on a loan with its borrower, and the loan was secured by a future advance mortgage (the “Mortgage”). No loan proceeds were initially advanced at the closing. The Mortgage was recorded on April 10, 2015. The first advance of loan proceeds did not take place until Oct. 16, 2015, nearly six months following the date the Mortgage was recorded. All parties agreed that no materials were delivered to borrower’s property, and no construction began until AFTER the Mortgage was recorded on April 10, 2015 – but BEFORE the lender made its first advance payment on Oct. 16, 2015. The builder completed the construction of the house a full year after the Mortgage was recorded. When the builder’s final invoice was not paid, the builder filed a materialman’s lien (the “Builder’s Lien”) against the property on Dec. 20, 2016, a full year-and-a-half after the Mortgage was recorded, claiming its Builder’s Lien had priority over the Mortgage.
The lender argued that its lien was created when the Mortgage was recorded, regardless of when loan proceeds were disbursed, since there was an obligation to loan the money at the later date and this money was, in fact, disbursed. The builder countered that the Mortgage did not secure any debt or obligation until funds were disbursed, therefore, its Builder’s Lien had priority since the Mortgage could not be created until it secured some type of indebtedness.
Alabama law recognizes that the priority of liens are determined as follows:
Priority of lien
(a) Such lien as to the land and buildings or improvements thereon, shall have priority over all other liens, mortgages, or encumbrances created subsequent to the commencement of work on the building or improvement. Except to the extent provided in subsection (b) below, all liens, mortgages, and encumbrances (in this section, “mortgages and other liens”) created prior to the commencement of such work shall have priority over all liens for such work.
Section 35-11-211 Ala. Code 1975 (Emphasis Added).
So under Alabama law, the issue becomes when is a lien “created” and, in the GHB case, whether the builder could show that it commenced work on the property before the Lender’s Mortgage was created.
In its 2019 reversal, the Alabama Supreme Court held that the builder could not meet this burden because even though the loan proceeds were not disbursed to the borrower until a later date, Alabama law recognizes that the Mortgage was created when it was recorded. Since the recording preceded the date materials were first delivered to the property, the Mortgage had priority over the Builder’s Lien. The Court based its decision on several factors:
- Future advance mortgages have been recognized as valid in Alabama for more than 140 years;
- A mortgage qualifies as a transfer of a property interest, and under Alabama law, any conveyance transferring an interest in land does NOT require that consideration be exchanged in order to be valid;
- The lender did in fact make loan advances that were secured by the Mortgage; and
- The Mortgage was properly recorded before the date the builder commenced work on the property.
In reaching its decision, the Alabama Supreme Court further noted that the code section setting out the priority of liens was drafted “with the intent of providing construction lenders priority over materialmen.” This background should give preference to lenders, because without their loan proceeds no construction would take place.
The Alabama Supreme Court also addressed, and distinguished, the case Morvay v. Drake, 295 Ala. 174, 325 So.2d 165 (1976) that it relied upon in its prior 2018 decision when it initially ruled the Builder’s Lien had priority. In Morvay, a borrower was forced to file an action stopping a foreclosure action filed by his lender. The borrower argued that because the lender never disbursed loan proceeds to the borrower secured by the mortgage, the mortgage was invalid because it did not secure any indebtedness. In Morvay, the Court held that if a mortgage secures a loan that is never made, the trial judge is authorized to declare the mortgage void.
The Alabama Supreme Court relied on Morvay in its prior opinion for the general proposition that a mortgage is not created until some consideration, such as loan proceeds being disbursed, is given. Upon its reconsideration, the Court held that the precedent set forth in Morvay was limited to situations involving a borrower and its lender and did not apply or control the outcome in GHB for several reasons:
- Morvay did not involve a future advance mortgage;
- Morvay did not involve a transaction where the loan proceeds were, in fact, disbursed to the borrower;
- Morvay involved a situation between a borrower and its lender, not a lender and a third party builder seeking to have its materialman’s lien be given priority over a previously recorded mortgage; and
- Alabama law recognizes that although a mortgage without consideration is valid, a court may deem it void based upon equitable principles due to lack of consideration where a lender is attempting to foreclose on the property of a borrower based upon debt that does not exist which was not the situation in the GHB matter[1].
This revised opinion by the Alabama Supreme Court has provided clarity moving forward on several fronts. Legally, guidance exists as to when a future advance mortgage is created for priority purposes when compared to other liens. More importantly, the lending and the title industry have certainty that the loans being made and title policies being written are valid and enforceable, which is essential for construction matters in the future.
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[1] In fact, the Alabama Supreme Court noted that in the GHB matter, if it was the borrower contesting a foreclosure due to the lender never making the agreed upon loan, then the borrower would have the right to have the mortgage declared void.