Which Has Priority?
& Small LLP, where the primary focus of
his practice involves general commercial
real estate matters for local and national
clients, focusing on representing developers,
borrowers and lenders in commercial real
estate loan transactions, landlords and tenants
in leasing matters, parties in acquiring and
disposing of office buildings, retail shopping
centers and multi-family apartments and
advising clients on land use law situations.
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property for development. The lender
provides the loan for the construction
and the builder provides the material
and construction based on such funds.
Alabama law provides a security right to
the lender for the loan and to the builder
for its material and construction so
everyone wins, right?
Not so fast, as the Alabama Supreme
Court recently reached a controversial
decision on whose lien takes priority in
a future advance mortgage setting
materialman lien when a builder is not
paid for its work. In reaching its decision,
the Alabama Supreme Court relied, in
part, on case law from other jurisdictions
so this decision will have ramifications
not only on future lending in Alabama but
potentially in other states as well.
Alabama law recognizes that the
priority of liens are determined as follows:
buildings or improvements thereon,
shall have priority over all other liens,
mortgages, or encumbrances created
subsequent to the commencement of
work on the building or improvement.
Except to the extent provided in
subsection (b) below,
section, "mortgages and other liens")
created prior to the commencement of
such work shall have priority over all
liens for such work. Ala. Code § 35-11-
211 (1975) (Emphasis Added).
So, under Alabama law, the issue
becomes when is a lien "created"?
Alabama has long recognized that a
mortgage under § 35-11-211 is "created"
when it is executed (see Kilgore Hardware
& Bldg. Supply, Inc. v. Mullins, 387 So. 2d
834, 836 (Ala. 1980) or in the alternative,
when the mortgage is recorded (see Metro
Bank v. Henderson's Builders Supply Co.,
613 So. 2d 339, 340 (Ala. 1993).
However, a recent decision from the
Alabama Supreme Court addressing
future advance mortgages has turned this
understanding upside down and left the
lending and title industries in Alabama
scrambling.
Supreme Court released its decision
in GHB Construction and Development
Company, Inc. v. West Alabama Bank
and Trust, which held that neither the
execution date nor the recording date
controls when a future advance mortgage
is created. Rather, the determining factor
is the time when the mortgage secures
some type of indebtedness.
In
secured by a future advance mortgage
(the Mortgage). No loan proceeds were
initially advanced at the closing. The
Mortgage was recorded the very next day,
on April 10, 2015. The first advance of
loan proceeds did not take place until
October 16, 2015, nearly six months
following the date the Mortgage was
recorded. All parties agreed that no
materials were delivered to the borrower's
property and no construction began until
after the Mortgage was recorded on April
10, 2015 but before the lender made
its first advance payment on October
16, 2015. The builder completed the
construction of the house a full year after
the Mortgage was recorded. When the
builder's final invoice was not paid, the
builder filed a materialman's lien (the
"Builder's Lien") against the property on
December 20, 2016, a full year and a half
after the Mortgage was recorded, claiming
its Builder's Lien had priority over the
Mortgage.
In deciding the issue, the Alabama
Supreme Court first recognized that future
advance mortgages are enforceable in
Alabama, but the Court did not find any
Alabama cases involving a future advance
mortgage that did not initially secure