Recent Court of Appeals Decision Finds in Favor of Contractor With Respect to Mechanic's Lien's Priority Over Lender's Deed of Trust Based on Six-Hour Time Difference and Unsigned 18% Interest Provision—Part I: Lien Priority

Recently, Division II of the Washington Court of Appeals addressed two issues of first impression:  (1) whether a voluntary release of an earlier lien precludes filing of a second lien, and (2) whether an interest provision requires that the contract be signed.  On appeal, the Court held that the contractor’s earlier release did not preclude the contractor from filing a second lien, which still retained priority over the lender’s Deed of Trust based on work completed by the contractor just six hours prior to the lender recording the Deed of Trust.  The Court also held that the contractor was entitled to interest based on course of conduct despite the fact the interest provision was unsigned.  As the Court acknowledged, the case has a long and complicated history.  Thus, Part I of this blog article will address the lien release and priority issues.  Part II will address the interest issue.

  1. 1.                  Background and Trial Court Decision

In this case, Shelcon Construction Group, LLC, filed suit against a real estate developer, Scott Haymond, to foreclose Shelcon’s lien for earthwork, excavation, demolition, clearing, and grading work for a commercial building development project.[i]  Shelcon also named Haymond’s lenders, Anchor Bank and Washington First, seeking a declaration that Shelcon’s lien was superior in priority to both banks’ Deeds of Trust on the property and seeking interest on the amounts due.

When a party files a lien, for purposes of determining priority (i.e., the order in which parties are entitled to payment), the lien relates back to the first day the party started work.  Here, Shelcon arrived at the Project site on July 5, 2006, at 8:35 a.m. to prepare for clearing and grubbing (which would occur a few days later).  Just under six hours later, at 2:14 p.m., the owner (Haymond) granted a Deed of Trust to its lender, Washington First, to secure Hammond’s first construction loan.  This Deed of Trust was also recorded on July 5.

In April 2008 (two years later), Hammond sought another loan from Anchor Bank to pay off Washington First and provide extra funding.  Anchor Bank, however, required that Haymond obtain a lien release from Shelcon.  Hammond was able to get Shelcon to issue a lien release based on promises that it would pay Shelcon from the Anchor West funds.  The lien release was recorded, but did not include any limitations or conditions in any way (i.e., it was not a release conditioned on payment of a certain amount).

Based on this release (and some misrepresentations by Haymond) and without seeking confirmation from Shelcon that the lien had been satisfied, Anchor Bank proceeded with the loan to Haymond, and Washington First released its Deed of Trust.  Shelcon, however, continued to perform work without payment from Haymond, and in May 2009, Shelcon filed a second lien on the project for work included in the first lien, as well as subsequent work, totaling $309,369.  Shelcon then sought to foreclose its lien against Haymond, Washington First, and Anchor Bank’s interests in the property.

The trial court found in favor of Shelcon and entered a Judgment and Decree of Foreclosure against Anchor Bank, based on the following conclusions:  (1) under the doctrine of equitable subrogation, Anchor Bank steps into the shoes of Washington First for lien priority purposes, but (2) Shelcon’s work (and lien priority) related back to 8:35 a.m. on July 5, 2006—six hours prior than Washington First’s Deed of Trust.  Further, the trial court concluded that Shelcon’s lien release did not preclude Shelcon from filing a second lien that included funds from the first, released lien.  Anchor Bank appealed.

  1. 2.                  Shelcon’s Lien Release Did Not Preclude Shelcon from Later Filing a Second Lien That Included Amounts Unpaid from the Released Lien

On appeal, Anchor Bank first challenged that Shelcon was able to record a second lien for work it had previously included in the first lien, which was later released.  As a matter of first impression, the Court denied this argument, finding instead that Washington’s liberal construction of the lien statute did not preclude a later filing of a lien for work that was previously released.  The Court reasoned that because the lien statutes are silent as to the effect of a release that is issued without full payment (as is the case with Shelcon), while Shelcon’s release released the first lien from encumbering the property, it did not extinguish Shelcon’s underlying right to file a lien for any unpaid amounts.  Therefore, so long as Shelcon was within the time frame requirements to file its second lien (i.e., within 90 days from the last day of work), Shelcon could file a second lien for all amounts unpaid despite the earlier release.

  1. 3.                  Shelcon’s Lien Had Priority Over Anchor Bank’s Lien by Six Hours

In addition, Anchor Bank also challenged that Shelcon’s work started on July 5 and, therefore, that Shelcon’s lien had priority over Anchor Bank’s Deed of Trust.  As noted above, a lien takes priority over any lien, mortgage, deed of trust, or other encumbrance, based on date and time of commencement of labor, professional services, or first delivery of materials or equipment by the lien claimant.  RCW 60.04.061.  Lienable work must be done for the improvement of real property, and “professional services” explicitly includes “surveying, establishing or marking the boundaries of, preparing maps, plans, or specifications for, or inspecting, testing, or otherwise performing any other architectural or engineering services for the improvement of real property.”  RCW 60.04.011(13).

Here, although mere preparatory activities alone do not constitute improvement (e.g., digging test holes to measure water level in anticipation of beginning construction someday does not constitute an improvement), Shelcon’s 8:35 a.m. marking and flagging of the property boundaries so that the property could be cleared and grubbed days later constituted “professional services” and had a close temporal connection with the construction work.  The Court held that Shelcon’s 8:35 a.m. work marked Shelcon’s commencement of improvements.  Therefore, Shelcon’s lien had priority over Washington First/Anchor Bank’s Deed of Trust filed just six hours later.

Comment:  This case provides some additional clarification as to a contractor’s ability to file or update its lien should it remain unpaid, and highlights the importance of identifying when the work was commenced.  Shelcon could have saved itself a lot of time and money, however, had it not released the first lien or, even better, recorded a lien release conditioned on payment.  Anytime a party is executing a release or waiver, it should be carefully reviewed to ensure it is limited and/or does not extinguish any rights it may have.  Further, the Court’s reasoning and conclusion highlights the critical nature of including the earliest possible date of work in order to effect lien priority.

[i] Shelcon Const. Grp., LLC v. Haymond, 187 Wn. App. 878, 351 P.3d 895 (2015).

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