The Alabama Supreme Court heard oral arguments earlier this month in a lien law case that pits not only the lumber dealer-installer against lenders but sister against brother.
The case, Theresa Lawson v. Brian Homes Inc., revolves around whether mechanics' liens or home purchase loans get priority when the lien is filed after the construction loan is closed and the mortgage loans were recorded. Attorneys for Lawson, who installed carpet, tile and marble flooring in the homes and then didn't get paid for her work out of the original construction loan, argue that she had priority. The other side--mainly the homes' lenders and purchasers--asserted that their interests had priority under the principle of "equitable subrogation," in which the purchase and then mortgage loans in effect take the place (and the priority) of 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, a regional LBM group--appealed to the Supreme Court. The writ of appeal was filed in November 2006. Attorneys for the plaintiffs say the fact that the case is still under review, and that the court asked for oral arguments, indicates both that the court has struggled with the issue and that it may be nearing a decision.
"Protection of the lien law is one of the highest priorities for CSA," association president Jim Moody said. "... We felt that if the appeals court ruling were allowed to stand, dealers would never have an opportunity to move into first position and collect money owed to them. Banks and home builders would take advantage of the system to develop loans that never put them in jeopardy, even if they stole materials from our dealers.
"Our Board deliberated for about a minute before deciding to fund this case all the way to the Supreme Court," Moody added. "Some things are just worth fighting for, and this is clearly one of them."
Greg Reeves, an attorney in Decatur, Ala., first took up the case for Theresa Lawson, who filed the liens even though Brian Homes' main stockholder, Mike Lawson, was her brother. 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.
"As it stands now, the court of civil appeals decision would be the end of Alabama lien law as it has existed for over 85 years," Reeves said. "All things considered, IF the Alabama Supreme Court reverses Lawson v. Brian Homes, then there should be many, many material suppliers who will be positively benefited. And, this decision could also have a positive impact in other states."
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.