Federal District Court Clarifies Prioritization of Mechanics’ Liens and Construction Mortgages Under New Hampshire Law

This article, written by attorneys Chris Candon and Nicole Austin, was originally published by the NH Bar News and can be found here (pg 32).

Where there is construction, there are contractors and there are lenders—both of which generally have attachment interests in the property undergoing construction.  Under New Hampshire law, lenders on construction projects may pursue attachment of the property through recording mortgages, including a “construction mortgage,” meaning “any mortgage loan made for the purpose of financing the construction, repair or alteration of any structure on the mortgaged premises where the lien secured by such attachment arises from the same construction, repair or alteration work.”  NH RSA 447:12-a.  Contractors, on the other hand, have “mechanics’ liens” at their disposal.  A mechanics’ lien is a right of attachment available to anyone performing labor, professional design services, or furnishing materials for more than $15 to erect or repair a building pursuant to a contract with the building’s owner.  NH RSA 447:2(I).  Distinctively, mechanics’ liens arise by operation of law at the time that work under a contract first begins—no recording at the outset is required.  However, once the contractor finishes their work under the contract, they must “perfect” the mechanics’ lien through a recording, otherwise it expires.  See NH RSA 447:9, :10.

Comparing the attachment interests of contractors (and subcontractors) and lenders is how courts determine the order (“priority”) of who should be paid from debtor-owner assets when those assets are insufficient to make creditors whole.  There are several New Hampshire laws that prescribe rules to determine priority of attachment interests.  New Hampshire is a “race-notice” jurisdiction, meaning that a creditor has a senior claim if they record without notice of a prior unrecorded interest.  Amoskeag Bank v. Chagnon, 133 N.H. 11, 14 (1990); see also NH RSA 477:3-a (New Hampshire’s recording statute).  Unlike in “race” jurisdictions, simply recording first is not enough in New Hampshire.  In the case of two interests competing for priority, if a creditor records their interest first but knew or should have known about a prior creditor’s unrecorded interest, the prior creditor’s unrecorded interest would have priority, i.e., the prior creditor would be the “winner” or the “victor” under New Hampshire’s race-notice rules.

New Hampshire also gives mechanics’ liens a qualified automatic priority over construction mortgages under what is known as “Section 12-a.”  NH RSA 447:12-a.  If Section 12-a applies, the race-notice rules are irrelevant, and the mechanics’ lien is the automatic “winner.”  However, a mechanics’ lien does not have automatic priority over a construction mortgage “to the extent that the mortgagee shows that the proceeds of the mortgage loan were disbursed either toward payment of invoices from or claims due subcontractors and suppliers of materials or labor for the work on the mortgaged premises.”  Id.  Other statutes provide that if subcontractors provide notice to the property owner that they intend to claim the same lien as the contractor, either before or after the subcontractors’ work begins, the property owner must retain a sufficient sum of money to pay the subcontractors’ claims.  See NH RSA 447:5, :6, :7, :8.

In October 2023, the District Court for the District of New Hampshire (McCafferty, J.) issued an order in UMB Bank, N.A. v. The MacMillin Company, LLC, 2023 U.S. Dist. LEXIS 185680 (D.N.H. Oct. 16, 2023), answering some nuanced questions under New Hampshire’s statutory scheme.  In that case, the MacMillin Company was hired to manage construction of a retirement facility in Keene.  About a month later, in May 2017, the contractor began work, including tree clearing pursuant to a wetlands permit that required work be commenced by June 1—giving rise to then-inchoate mechanics’ liens on the property.  On July 19, 2017, UMB Bank’s predecessor in interest recorded its $65 million construction mortgage against the property.

Over the next two years, UMB Bank paid the contractor at least $55 million for labor and materials from the money loaned to the property owner.  During that time, subcontractors also started work on the property—giving rise to mechanics’ liens as well.  In 2019, the property owner stopped paying the contractor due to alleged construction defects, and MacMillin recorded an attachment based on its mechanics’ liens on October 31, 2019, for a total amount of approximately $5.7 million.

The property owner declared bankruptcy in 2021.  Later that year, the bankruptcy court approved a sale of the facility for $33 million.  The contractor and the lender each sought to have their interest prioritized because the sale proceeds would not cover the lender’s $65 million mortgage and the contractor’s $5.7 million mechanics’ liens.  The bankruptcy court determined that the contractor was the “winner” under New Hampshire’s race-notice laws, that Section 12-a did not give priority to the construction mortgage, and that the subcontractor’s mechanics’ liens followed the priority of the contractor’s and thus were also senior to the construction mortgage. See In re Prospect-Woodward Home, 2023 Bankr. LEXIS 34 (Bankr. D.N.H. January 6, 2023). UMB Bank appealed.

The district court affirmed the bankruptcy court on all but a small point.  The court clarified that just because a mechanics’ lien is not eligible for automatic priority over a construction mortgage under Section 12-a (because the lien is qualified), that does not mean the construction mortgage has automatic priority over the mechanics’ lien.   A qualified mechanics’ lien may not be able to achieve priority automatically via Section 12-a, but as the court’s order details, the mechanics’ lien could still be the senior claim over a construction mortgage if the lien is found to be the “winner” under New Hampshire’s race-notice rules.

The contractor here did not have automatic priority over the UMB Bank’s construction mortgage because UMB Bank paid MacMillin for some of the work MacMillin performed under the contract, therefore, the applicability of Section 12-a was qualified to the extent of those payments ($55 million).  But as the court explained, that did not foreclose MacMillin’s mechanics’ liens from achieving priority by other means.  The district court determined that the bankruptcy court did not err in concluding that MacMillin was the race-notice “winner” in the case.  Although the construction mortgage was recorded on July 19, 2017, about two and half years before MacMillin’s mechanics’ liens were recorded in October 2019, prior to recording its interest, UMB Bank knew about the MacMillin contract and the wetlands permit which together required certain work to be performed prior to June 1, 2017.  The bankruptcy court found, and the district court agreed, that a reasonable creditor possessing this information would have undertaken a simple observation of the property, which would have revealed the already-commenced tree-clearing work resulting in MacMillin’s mechanics’ lien.  A critical fact supportive this ruling was that MacMillin’s contract giving rise to the mechanics’ liens in question spanned the full period of its work—work which started before the construction mortgage was recorded.  Cf. In re Moultonborough Hotel Grp., LLC, 726 F.3d 1, 3, 5 (1st Cir. 2013) (concluding construction mortgage had priority where the mechanics’ liens at issue were associated with a second construction contract for which work was not performed until after the mortgage was recorded).

The one outstanding issue that was remanded to the bankruptcy court was how subcontractors fit into the mix when a subcontractor provides notice under RSA 447:5, :6, or :7 that they have claimed the “same lien” as the contractor, which requires the owner to set aside sufficient funds to discharge its obligations to the subcontractors.  NH RSA 447:8.  The bankruptcy court determined initially, this would mean that subcontractors also had priority over UMB Bank’s mortgage because their liens “followed” MacMillin’s, and MacMillin was deemed to have priority over UMB Bank.  But the district court did not opine on that issue, ruling instead that the bankruptcy court needed to determine whether the subcontractor’s post-work notice under RSA 447:6 was sufficient to grant priority under RSA 447:8 (the bankruptcy court had relied upon a pre-work notice under RSA 447:5 that the district court held the record did not support)..