Not All Debts Are Created Equal

Construction and Procurement Law News, Q3 2019

Authored Article


Alabama’s materialman’s lien statute (specifically, Ala. Code § 35-11-211) was drafted with the intent of providing construction lenders priority over materialmen as to debts relating to construction projects. This intent was recently confirmed by an Alabama Supreme Court decision.

In GHB Construction and Development Co., Inc. v. West Alabama Bank and Trust, GHB Construction contracted with Guin, the owner of the property, to construct a house. GHB alleged that it completed construction and submitted its final bill for the work, and that Guin failed to pay the amount owed. GHB thus filed a verified statement of lien in December 2016 claiming that it was owed more than $100,000. GHB brought suit against Guin to collect the balance owed. GHB also brought suit against the lender, West Alabama Bank and Trust (“Lender”) seeking a judgment declaring that its materialman’s lien had priority over Lender’s mortgage on the property.

Lender moved to dismiss GHB’s complaint arguing that, under Alabama law, a materialman’s lien cannot take priority over a mortgage if the mortgage was recorded before the materials were furnished or construction began. In response, GHB argued that the priority of Lender’s mortgage, which was a future-advance mortgage, was not established on the date it was recorded because Lender had yet to make any advances on the promissory note, and that Lender was not unequivocally bound to make any future advances under the terms of the promissory note. GHB argued that Lender’s mortgage lien was not secured until Lender made its first advance to Guin, which did not occur until after GHB had started work.

The trial court dismissed GHB’s claim because GHB failed to plead that it delivered materials to the property or began construction work before the date that Lender’s mortgage was recorded. GHB appealed.

Alabama’s materialman’s lien statute, Ala. Code § 35-11-211(a), states that a materialman’s lien “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, all liens, mortgages, and encumbrances (in this section, ‘mortgages and other liens’) created prior to the commencement of such work shall have priority over all liens for such work.”

The central issue, therefore, was whether GHB could show that it had commenced work – or provided any materials – before Lender’s mortgage was created (i.e., when it was recorded). The mortgage was executed and recorded in April 2015, but the first advance to Guin under the promissory note occurred in October 2015. Although GHB failed to establish when it first commenced work or provided materials, it is clear that it did so after April 2015 but before October 2015. Importantly, GHB did not dispute that Lender’s mortgage was recorded before GHB commenced construction or provided materials to the property. GHB’s argument, however, was that it began work and began delivering materials prior to the date that Lender made its first loan payment to Guin, and that the mortgage was not created until a debt it secured was incurred (so, October 2015).

The Court reasoned that future-advance mortgages may remain valid even absent any initial consideration. (Note: if the mortgagee attempted to foreclose on the property without ever advancing any funds, then the mortgagor could bring an action in equity to have the foreclosure enjoined and the mortgage voided.) As such, the Court determined that the mortgage executed in favor of Lender was legally valid and was superior to the materialman’s lien filed by GHB.

Although this case does not set any new precedent, it confirms new application of a principle established by statute (in Alabama and in many other jurisdictions): a contractor’s materialman’s lien shall have priority over a mortgage on the property only if work began prior to the recording of the mortgage. Contractors or subcontractors providing labor and materials to financed projects should take steps prior to commencing work to ensure that they understand the liens or mortgages in line ahead of them. To maximize their priority potential, contractors and subcontractors should also be sure to timely record any liens if payment is not made timely or in accordance with the project requirements.