New Hampshire BK Court Upholds Race-Notice Rule to Decide Priority of Lien
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January 06, 2023, US Bankruptcy Court for New Hampshire – The New Hampshire Bankruptcy Court decided a priority dispute between a contractor’s mechanic’s lien and a lender’s mortgage in the bankruptcy case of Prospect-Woodward Home (“Debtor”). The Court ruled that the race-notice rule gave an edge to the contractor’s lien over the bond trustee’s recorded mortgage because the bond trustee had notice of the contractor’s lien at the time of recording its mortgage.
The MacMillin Company, LLC (“Contractor”) had executed a contract with the Debtor to serve as the Debtor’s construction manager for the construction of the Debtor’s facility. The Contractor and some of its sub-contractors commenced preliminary work at the site on or before May 15, 2022, and made numerous construction plans and drawings before June 19, 2017. The construction work was financed through a loan given by the U.S. Bank National Association. U.S. Bank, N.A. recorded its mortgage against the construction facility on June 19, 2017. UMB Bank, N.A. succeeded U.S. Bank, N.A. as the “Bond Trustee”.
From 2017 and continuing into 2019, the Contractor provided labor and materials under the contract, both directly and through its subcontractors, and proceeds of the bonds were used to pay the Contractor. But as the project neared completion in 2019, the Debtor stopped paying the Contractor and the subcontractors, alleging defects in their construction work.
The Contractor and the subcontractors filed a suit for breach of contract, and the state court approved their lien requests. The Contractor subsequently recorded the writ of attachment in October 2019.
The sale proceeds of the construction facility garnered $33 million, but the Court had to decide the priority dispute between the Contractor and the Bond Trustee before making any distribution.
The Contractor and the subcontractors argued that they were race-notice winners since they began work on the construction site before the original lender (U.S. Bank, N.A.) recorded its mortgage on June 19, 2017. The race-notice rule provides that a creditor has a senior claim only if he or she records without notice of a prior unrecorded interest.
The Bond Trustee argued that the New Hampshire Revised Statutes Annotated 447:12-a deprived the Contractors and the subcontractors of the race notice priority to the extent that the proceeds of the mortgage loan were used to pay their invoices and for labor or work on the mortgaged premises. However, the Court held that this statutory exception to the race-notice rule could only be exercised where the mortgage lender had recorded its mortgage before the contractor began work on the premises.
The Court found that the mortgage lender had notice of the Contractors’ mechanic’s lien at the time of recording of the construction mortgage. The Court allowed the Contractors’ and subcontractors’ lien to have priority over Bond Trustee’s mortgage and dismissed all the objections raised by the Bond Trustee.
In re Prospect-Woodward Home, 2023 Bankr. LEXIS 34, 2023 WL 124859