Mechanic’s liens exception to the exception to the rule in Nevada
American author and humorist James Thurber once said, “There is no exception to the rule that every rule has an exception.”
Think about that for a minute. This truism manifests itself in Nevada, where there is an exception to the exception to the rule that determines a person’s interest in real property.
Title professionals need to understand the rules and the exceptions to avoid exposing underwriters to unintended risks.
In America, we employ a system of recording that determines title, or ownership, to real property. The default “rule” for determining such rights is so old even the Romans had name for it: “Qui prior est tempore potior est jure,” or the person who is prior in time is stronger in right. See Black’s Law Dictionary, 1682 (7th ed. 1999). Therefore, the person who records a real property interest first has the first right.
But there is an exception to this rule. The legal concept of equitable subrogation “permits a person who pays off an encumbrance to assume the same priority position as the holder of the previous encumbrance.” Houston v. Bank of America Federal Savings Bank, 78 P.3d 71, 73 (Nev. 2003) (quoting Mort v. U.S., 86 F.3d 890, 96 (9th Cir. 1996)).
Put simply, if one pays another’s debt one can claim the debtor’s earlier recording date when applying the first-in-time rule. This exception to the rule is especially important in refinancing situations, where subsequent lenders often repay earlier loans with the understanding that a later-recorded trust deed or mortgage will automatically assume the earlier recording date of the paid-off debt.
As the Nevada Supreme Court observed (and the rule is the same everywhere in America), equitable subrogation “enables a later-filed lienholder to leap-frog over an intervening lien [holder].” In re Fontainebleau Las Vegas Holdings, 289 P.3d 1199, 1209 (Nev. 2012). Equitable subrogation has been applied around the country in the context of mechanics’ liens.
One may think of a mechanics’ lien as an involuntary mortgage or trust deed that contractors record against real property for work done. In Nevada, the mechanics’ lien statute expressly provides that every other mortgage, trust deed, or encumbrance imposed on real property after the commencement of construction of a new improvement or a remodeling is subordinate and subject to the mechanics’ liens regardless of the recording dates of the notices of liens. Nev. Rev. Stat. 108.225.
In other words, mechanics’ lien claims will have priority over lenders’ trust deeds so long as construction began before the trust deed was recorded.
Consider an example. Assume Lender One loaned a developer $1 million to buy undeveloped land. Lender One recorded a trust deed on January 15th to secure the loan. Later, the developer hired contractors to construct a building, and the heavy machinery operators began excavating the land for the installment of underground utilities on April 1st. Later still, the developer borrowed $2 million from Lender Two.
Lender Two totally paid off the original, $1 million loan made by Lender One, and Lender Two recorded a new trust deed on June 1st to secure its $2 million loan, all of which caused the developer to cancel or reconvey the original trust deed recorded by Lender One on January 15th.
A title report would show only Lender Two’s June 1st trust deed and the mechanics’ liens recorded after construction began on April 1. The first in time, first in right default rule requires a court to compare dates to determine who would win the race for the earliest date (and therefore the superior right to the property).
In a priority battle between mechanics’ lien claimants (the underground contractor and others who may have worked on the project), typically Lender Two would win. Although Lender Two technically recorded its second trust deed on June 1, equitable subrogation automatically revives the date of the original, reconveyed trust deed recorded on January 15th and allows Lender Two to adopt this earlier date even though the original trust deed is no longer of record.
So comparing dates, Lender Two (January 15) would usually prevail over mechanics’ lien claimants (April 1).
But not so fast. Nevada’s Supreme Court has ruled that the doctrine of equitable subrogation does not apply against mechanics’ liens. In re Fontainebleau Las Vegas Holdings, 289 P.3d at 1212.
As the court explained, the state legislature created a specific statutory scheme whereby a mechanic’s lien is afforded priority over a subsequent lien, mortgage, trust deed, or encumbrance in order to safeguard payment for work and materials provided for construction or improvements on land.
Therefore, in Nevada, the mechanics’ lien claimants would win the priority dispute. In other states, lenders would prevail.
So, there are rules, there are exceptions, and, in Nevada, there are exceptions to exceptions. We recommend that title professionals consult with underwriting counsel when any mechanic’s lien coverage is requested for a construction loan before committing to provide any affirmative coverage over mechanics’ liens.
Tags: mechanic's lien, nevada