The Alabama Supreme Court overturned on Friday, July 18, two lower court decisions in a lien law case that an LBM group helped bring to the justices. The court in essence decided that an installer's liens had priority over home purchase loans when the lien is filed after the construction loan is closed and the mortgage loans were recorded. The case now was remanded to a lower court.
"The Court recognized that the Alabama Legislature, not the courts, have established priority of a lien claimant as against subsequently recorded mortgages," said Gregory Reeves, the Decatur, Ala., attorney who has argued the case since its start. "This holding is not only good news for the material suppliers, it is a victory for judicial restraint--acknowledging that that the role of the courts is to apply the law, not create it."
The case, Lawson v. Brian Homes Inc., begins with Theresa Lawson, whose Decatur business The Design Company installed carpet, tile and marble flooring during late 2003 in several homes built by Brian Homes--whose main stockholder was Lawson's brother, Mike Lawson. In January 2004, the construction loan was paid in full with the proceeds of loands made on behalf of the homes' buyers. When Theresa Lawson didn't get paid for her work out of the original construction loan, she filed liens.
When the case went to trial, the other side--mainly the homes' lenders and purchasers--asserted that their interests had priority over Theresa Lawson's lien under the principle of "equitable subrogation," in which the purchase and then mortgage loans in effect take the place of, and enjoy priority over, the original construction loan, ahead of any liens.
Both the Madison County Circuit Court in northeastern Alabama and the state's Court of Civil Appeals ruled against Lawson, but that side's attorneys--with support from interests including the Construction Suppliers Association (CSA), a regional LBM group for Georgia and Alabama--appealed to the Supreme Court. The writ of appeal was filed in November 2006.
"With this decision, the Court recognized suppliers' contribution to the building process," CSA president Jim Moody said Monday, July 21. "...If we had not won this case, then dishonest builders could have set up construction to permanent financing for all of their projects and simply ignored any liens from suppliers. We believe, and the court agreed, that banks should not be allowed to help builders steal from their suppliers.
"CSA was the only group standing up for the lien rights of suppliers," Moody added. "If we had not been there, this court challenge would have never taken place, and the lower court's ruling for the banks and title companies would have stood as the precedent. That would have effectively killed the lien law in Alabama."
In its July 18 ruling , associate supreme court justice Michael Bolin noted that Alabama has had a mechnic's lien statute since 1821. A 1933 amendment to that law did reverse the priorities between a lien and prior recorded mortgage, but the Legislature made clear that a lien had "priority over all other liens, mortgages or incumrances created subsequent to the commencement of work on the building or improvement." And while equitable subrogation is a recognized doctrine, the defendants failed to show that it applies in this case, Bolin wrote.
"The Court of Civil Appeals contends that Lawson would be receiving a 'windfall' if the lenders' purchase-money mortgages were not subrogated to the builder's construction loan," Bolin added. "If we held against Lawson, however, the builder would receive the windfall. The builder would have the value of Lawson's work witht having paid anything for it.
"The Legislature created a specific statutory scheme in which a materialman's lien is given priority over a subsequently created mortgage," Bolin's decision continued. "The lenders who loaned the money to the purchasers in the present case are sophisticated mortgage companies that could have easily protected their interests. Based on the statutory preference given to materialmen, it is the commercial lenders who bear the burden of protecting themselves."
Reeves--a third-generation builder as well as an attorney--said Theresa Lawson had installed materials in Brian Homes projects for several years. But this time, Mike Lawson was unable to pay what he owed his sister.
According to Decatur, Ala., attorney Robert Harris, who helped prepare the oral argument to the Supreme Court, "The heart of our problem is that permanent lenders and title insurers are attempting to get the Alabama Supreme Court to overrule the case of Collateral Investment Company v. Pilgrim." That's a case Harris argued. "This case, decided in 1982, holds that the doctrine of 'equitable subrogation' does not apply so as to allow a permanent lender to pay off the construction loan mortgage and thereby acquire the priority position of a construction loan mortgage. This priority position will effectively destroy and render valueless the materialmens' liens which would become subordinate to the permanent lender's mortgage. Without equitable subrogation the permanent lender's mortgage would be subordinate to mechanic's liens."
Several other states already apply a relatively principle of equitable subrogation, Harris said. At issue, he said, is whether Alabama will do the same.