DD 10/15/08 Are mechanic's liens subject to lis pendens notice in foreclosure of senior mortgage where their priority predates date of foreclosure notice, but not the mortgage itself?

Daily Development for Wednesday, October 15, 2008 by: Patrick A. Randolph, Jr. Elmer F. Pierson Professor of Law UMKC School of Law Of Counsel: Husch Blackwell Sanders Kansas City, Missouri dirt@umkc.edu MECHANIC’S LIENS; LIS PENDENS: Materialman's liens in Arkansas are subject to lis pendens, and a party filing such a lien after the filing of the lis pendens in a foreclosure action need not be joined in the foreclosure even though the priority of the materialman’s lien theoretically takes effect prior to the effective date of the lis pendens. National Home Centers, Inc. v. Coleman 373 Ark. 246, ___ S.W.3d ___, 2008 Westlaw 1747108 (Ark. 2008) On August 13, 2004, Coleman granted Regions Bank a note and construction mortgage on property in Little Rock. Within months, Coleman had defaulted on the loan and ceased construction. On January 4, 2005, Regions filed a complaint of foreclosure and a lis pendens in the county recorder's office. Regions then purchased the property at foreclosure in June 2005 and sold to Cain. On January 25, 2005, National Home Centers, Inc. ("National"), a materials supplier for Coleman, filed a materialman's lien on the property. In April 2006, National filed a complaint in foreclosure against the property, listing Coleman, Cain, Regions, and Newoods, Inc. as defendants. Regions and Cain filed a motion for summary judgment, alleging that National's lien was filed after the lis pendens in Regions' action, and therefore the materialman's lien was subject to the outcome of that litigation, and National was consequently barred from bringing its own foreclosure action. The circuit court granted summary judgment in favor of Regions and Cain and denied National's motion, which National appealed. The arguments addressed by the Arkansas Supreme Court were (1) whether the lis pendens statute applies to materialman's liens, and (2) whether National's claims were barred despite the fact it had not been joined as a party to Regions' foreclosure action. The court held that materialman's liens are not exempt from lis pendens, even though the Arkansas lis pendens statute does not explicitly include materialman's liens. The court noted that the general rationale behind a lis pendens motion is that it is "prospective in operation, giving notice to persons who may thereafter acquire an interest in property." The court reasoned that such considerations of public policy and convenience support the application of the lis pendens statute to materialman's liens, since a materialman's lien does not create a property interest until the lien is perfected, which in this case was after the lis pendens motion. In addition, the court noted that a relation-back provision contained in the Arkansas Code does not mean that a materialman's lien will be deemed to predate a lis pendens. Rather, the relation-back merely addresses perfection and priority of materialman's liens. The court held that National did not obtain an interest in the property until it perfected its lien, 21 days after Regions filed the lis pendens, and was therefore subject to Regions' lis pendens. "When a materialman delivers the last supplies to a construction site, he or she accrues an expectant interest in the property, but that interest does not vest and become enforceable until it is perfected. Finally, the court rejected National's argument that Regions should have conducted another title search on the property 120 days after the foreclosure complaint. The court held that such a search to assess any materialman's liens that could have been perfected up to that point was an excessive burden for a creditor foreclosing on its own lien. On the second issue raised at appeal, the Supreme Court applied the established rule that a person who acquires an interest in property subject to lis pendens is treated as a party to the lawsuit and need not be joined in the suit to be affected by its result. Therefore, National's claims on appeal were appropriately barred despite the fact that National was not joined in the action. Comment: Note that the case appears to deal with the question of whether National should have been named as a party in the foreclosure, and not with National’s priority as against Regions. The court indicates that National’s priority dated back to the time the materials in question were supplied to the project. Although the court doesn’t say so expressly, this would appear have been after Regions filed its mortgage. Consequently, even if named, Nationals would have had to deal with a large senior foreclosing mortgagee. National didn’t lost much, most likely, and it is curious that the case went up on appeal. Items reported here and in the ABA publications are for general information purposes only and should not be relied upon in the course of representation or in the forming of decisions in legal matters. The same is true of all commentary provided by contributors to the DIRT list. Accuracy of data and opinions expressed are the sole responsibility of the DIRT editor and are in no sense the publication of the ABA. Parties posting messages to DIRT are posting to a source that is readily accessible by members of the general public, and should take that fact into account in evaluating confidentiality issues. ABOUT DIRT: DIRT is an internet discussion group for serious real estate professionals. Message volume varies, but commonly runs 5 to 15 messages per work day. 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