Mechanic's Lien Claimants Prevail Over Lender's Attempt to Circumvent Their Statutory Priority
A recent decision by a Court of Appeals in Ohio stopped an attempted nullification of the priority rights of various lien claimants by a construction lender. In the case of Bank of America NA v. Omega Design/Building Group, LLC, the Court found that Bank of America’s (the “Bank”) termination of the original “notice of commencement” (the document which sets the “priority” date for later filed mechanic’s liens) was contrary to the Ohio mechanics’ lien statute. 2011 WL 1261301 (Ohio App. 1 Dist.) 2011-Ohio-1650.
The project involved the construction a multi-story story luxury condominium tower known as The Overlook at Eden Park (the “Project”). The original notice of commencement for the Project was filed with the local county recorder’s office on September 1, 2005. Pursuant to Ohio Rev. Code 1311.13, any mechanic’s liens filed after that would be effective from the date of the recording of the notice of commencement. The Bank’s predecessor in interest closed on a construction loan approximately one year later and filed its mortgage with the county recorder on September 15, 2006. Then, in an attempt to prevent any mechanic’s liens from taking priority over the loan, approximately three minutes later a document titled “Affidavit to Terminate Notice of Commencement” was filed, asserting that “all improvements on and to the property which relate to the work covered by the [original] Notice of Commencement are completed….” The affidavit sought to terminate the original notice of commencement, and a new notice of commencement was filed about one minute later.
The Bank later declared the owner in default and refused to advance further funds, which in turn stopped further payments for work on the Project and prompted the filing of mechanic’s liens by various contractors and suppliers. The Bank then filed a foreclosure action and claimed priority over all lien claimants, citing the second notice of commencement that it filed in 2006. A number of lien claimants ultimately filed for partial summary judgment on the limited issue of priority between the Bank and the lien claimants.
The trial court determined that based upon the language of Ohio Rev. Code 1311.04(A)(2), the effective date of the notice of commencement for the Project was the date the original notice was filed. According to the trial court, the affidavit attempting to terminate the original notice was a violation of Ohio’s mechanic’s lien statute and the subsequent notice was, in effect, an amendment that related back to the original notice. Thus, any valid liens would relate back to the date the first notice was filed, well before the Bank filed its mortgage.
In affirming the trial court’s decision, the Court of Appeals noted that the statute unequivocally provides for only one notice of commencement for a single improvement, and that all notices filed after that would be deemed to be amendments to the original notice. Although the Court of Appeals agreed with the Bank that the statute did not prohibit the filing of an “Affidavit of Termination of Notice of Commencement,” it further held that such termination would only be valid where a project had actually been terminated. Contrary to this situation, the Project had not terminated prior to the purported termination of the original notice of commencement. Consequently, the Court held that the “Bank’s attempt to restart the lien clock by terminating the original notice, filing its mortgage, and then refiling the notice of commencement as an express means of gaining lien priority for the” Bank constituted an express violation of the statute.
The Bank has asked the Ohio Supreme Court to consider the case on appeal, but for the present it is unclear whether the Supreme Court will accept it. If not, all valid liens filed against the Project will take priority over the Bank’s interests.
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