The Court of Appeals offered us lien lovers a rare treat this week when they chimed in on the Lien Law (specifically Lien Law Section 22). Here is what we learned in Altshuler Shaham Provident Funds v. GML Tower...
As a result of the failed effort to renovate the Hotel Syracuse, a number of lienors and a mortgage holder found themselves disputing the priority of the payment of their liens out of the proceeds of a foreclosure sale. The trial court found that Lien Law Section 22 subordinates a building loan mortgage made pursuant to an unfiled building loan contract to subsequently filed mechanic's liens. The lender, of course, argued that the loan was not a building loan contract. The trial court found that the loan was a building loan contract as it had all of the tell-tale characteristics of a building loan contract. Specifically, the loan agreement was: 1) made between a lender and an owner of real property; 2) there was an express promise to construction improvements to the property; 3) periodic advances were to be made to fund the improvements; 4) the lender was to be informed of construction progress; and 5) the loan was to be secured by a mortgage on the real property. This is no shocking revelation as it is in line with the clear language of the statute and the interpreting case law. The loan agreement itself even identified itself as a "construction loan transaction." The trial court therefore awarded the mechanic's lien holders priority over the mortgage. The trial court also found that one subcontractor's liens was superior to the lien of a contractor that had hired the subcontractor (pursuant to Lien Law Section 56). Finally, the trial court rejected the argument of a lienor that claims its lien was superior to all other lienors pursuant to Section 13 of the lien law because it performed labor.
The Appellate Division affirmed the trial court without significant comment and the Court of Appeals granted leave to appeal.
Lien Law Section 22 requires that a building loan contract "with or without the sale of land and before or simultaneously with the recording of a building loan mortgage made pursuant to it, must be filed in the clerk's office of the county where land subject to the contract is located, along with a borrower's affidavit stating the consideration paid or to be paid for the loan, any expenses incurred or to be incurred in connection with the loan, and the net sum available for the construction project." Subsequent modifications of the loan contract must be filed within 10 days after their execution. Looking at Section 22, and applying the definition of a "building loan contract" found in Section 2 of Section 13 of the Lien Law, the Court of Appeals found that the building loan agreement here was, in fact, a building loan contract. Because the lender never recorded the initial loan agreement, the thereafter filed mortgage lost priority to subsequently filed mechanic's liens.
Of note, the Court of Appeals rejected the lender's argument that a subsequent mortgage was recorded pursuant to an amendment and not pursuant to the original building loan contract. The Court noted that Lien Law Section 22 does not state that modifications to a building loan contract "must be filed only so long as the contract, as modified, remains a building loan contract within the meaning of the Lien Law."
Finally, the Court of Appeals looked at the question of whether the proceeds of an additional loan, used to refinance the existing first mortgage, were entitled to priority. The Court noted in this respect that prior to this case, there was conflicting authority on whether a subordination penalty applied to funds loaned in a building loan contract for financing the purchase of the property on which the improvements are to be made. The Court found that "Section 22 does not state that the entire interest of each party to an unfiled building loan contract is subject to a later-filed notice of lien, and we do not infer such a limitation..." The Court therefore held that Lien Law Section 22 does not require that the subordination penalty apply to the entire mortgage but, rather, covers only the portion relating to the advancement of construction funds.
There is, notably, a detailed and very persuasive dissent from Judge Graffeo wherein it is argued that the entire proceeds of the loan, including funds used to acquire the property, should be subject to the subordination penalty pursuant to Lien Law Section 22. Worth a read for anyone that ever hopes to challenge the holding.
Vincent T. Pallaci is a partner with the New York law firm of Kushnick | Pallaci, PLLC where his practice concentrates on construction law.
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