The Bamberger Blog » mortgage

A Financial Face-Off: Bank Loans vs. Mechanic’s Liens

kjewell — Thu, 11 Aug 2011 13:30:04 +0000

A contractor and construction lender were recently pitted against each other in a priority contest, and the lender won. The contractor filed suit in Indiana to collect what it was owed on a construction project from the owner. The owner had borrowed money from a bank to fund the construction project, and the loan was secured by a mortgage on the real estate. The mortgage was recorded before the contractor began work. When the contractor was not paid for its work, the contractor recorded a mechanic’s lien against the property.

Generally, the bank’s mortgage has a higher priority than the later-recorded mechanic’s lien, in such an instance. However, here the contractor argued that the bank had “unclean hands” because funds from the bank’s loan had been used to pay other contractors who performed work after this contractor. In other words, the owner used its shrinking financial resources to pay other contractors first. Because of the bank’s “unclean hands,” the contractor argued that its mechanic’s liens should be given first priority.

The Indiana Court of Appeals disagreed. The Court concluded that the bank did not have “unclean hands” because the bank did not control the disbursement of the loan proceeds. The owner made the decision as to which contractor to pay first, and not the bank.

This case highlights the tension that frequently occurs on construction projects between contractors with mechanic’s lien rights and construction lenders when owners are unable or unwilling to pay what is owed. If you’re wondering about the “unclean hands” doctrine, I’m pretty sure we have our British friends to thank for its name. If you have any questions about this case, please contact a member of the Bamberger Construction Team or Banking Team.

Lender Wins in Lien Priority Dispute with IRS

kjewell — Thu, 19 May 2011 13:30:37 +0000

The Seventh Circuit Court of Appeals recently ruled in favor of a financial institution in a dispute between it and the IRS. The lender had filed a mortgage on its borrower’s real estate and an assignment of rents. Subsequent to the filing of the mortgage, the IRS filed a tax lien against the same real estate. A receiver was appointed and collected rents from the mortgaged real estate.

A lower court determined that the IRS had a right to the rent collected. Fortunately for the lender, the Seventh Circuit saw things differently and reversed the lower court, giving the lender priority over the IRS in the rents. The Appeals Court did not rely on the lender’s separate lien on the rents, but on characterizing the monthly rental as the value of the real property for that particular month, as a new asset that came into existence subsequent to the mortgage.

If you have questions about tax liens or real estate financing, please contact a Bamberger attorney.

Author: Lori Young (bio)
Phone: 812.452.3560
Email: lyoung@bamberger.com

Advice to Lenders: Mortgage Must Correctly Describe the Debt Secured

kjewell — Tue, 12 Oct 2010 13:30:55 +0000

It is not unusual for a lender to obtain a mortgage on real estate owned by a party which is not liable on the underlying promissory note, as collateral for repayment of the note. In a case entered October 4, 2010 by the Indiana Court of Appeals, the Court was presented with a set of facts in which such a mortgage incorrectly described the identity of the makers of the underlying promissory note. The mortgage stated that the signators of the note secured included a corporation and three (3) individuals. In fact, one of said individuals named was not a maker of the note, but instead signed a guaranty.

Following a default on the note, the guarantor negotiated a release of his guaranty, in consideration of the payment of a sum of money substantially less than the outstanding obligation. The owner of the mortgaged real estate had no prior notice of the release of the individual guarantor.

The Appellate Court determined that the mortgagor relied to her detriment on the mortgage’s inaccurate description of the makers. This inaccurate description was material, because by allowing the individual identified as a maker to instead execute a guaranty, the mortgagor’s risk of loss was increased. The Court also noted that because the released guarantor was not a co-maker, the mortgagor did not have the right to seek reimbursement and subordination against him, under applicable surety law.

The lesson taught by this recent Court decision is that lenders should be careful to correctly identify and describe the note, and the makers thereof, which is secured by a mortgage.

Preparation Clauses in Kentucky Mortgages

kjewell — Wed, 10 Mar 2010 15:30:12 +0000

Kentucky law indicates that a mortgage must contain a preparation clause signed by an attorney. The requirement for an attorney to sign the preparation clause cannot be satisfied by having a bank employee or other loan officer sign the preparation clause.

Aside from constituting the unauthorized practice of law, the bank employee improperly signing the preparation clauses on mortgages could subject the employee to prosecution and the bank could be subject to liability if it was aware of such activity and did not take any action to stop it. An improper signature on a preparation clause does not necessarily invalidate the mortgage if the county clerk’s office accepts the mortgage for recording. The recorded mortgage is still notice of the mortgage even though it fails to meet the technical requirements of the statute.

Author: Laura A. Scott (bio)
Phone: 812.452.3557
email: lscott@bamberger.com