The case is In re The Prospect-Woodward Home, 2023 BNH 001 (Jan. 6, 2023), decided by New Hampshire’s bankruptcy court. A Chapter 11 proceeding was commenced by a continuing care retirement facility in Keene whose real estate was subject to a construction mortgage and several mechanic’s liens. The Debtor’s real estate was ultimately sold, and the respective interests of the construction mortgagee and of the construction manager and its subcontractors holding mechanic’s liens attached to the $33 million sales proceeds. Because the total amount of the parties’ claims exceeded $33 million, the court was called upon to decide which of these interests had priority.
The court began by analyzing New Hampshire’s “race-notice” rule of priority, under which the first to record its interest at the registry of deeds is first in line unless it had notice of another’s unrecorded prior interest. Although the construction mortgage was recorded first, the mortgagee was aware at the time of that recording that MacMillin, the construction manager, had already commenced work, giving it an inchoate lien on the facility from the time its work commenced. Accordingly, MacMillin’s later-recorded lien was held to have priority over the mortgage.
Unlike MacMillin’s work, however, the subcontractors’ work did not commence until after the mortgage was recorded, so they were not race-notice winners. The subs argued that RSA 447:8’s directive that owners “retain a sufficient sum of money to pay” subcontractor claims before paying a general contractor meant that they should share in MacMillin’s victory anyway. The court agreed:
“The Subcontractors argue that because they have given notice of their lien claims to the Debtor
as required by RSA 447:5 (which apparently no one disputes), the Debtor is in essence a trustee
for the benefit of the unpaid subcontractors. The Court agrees that RSA 447:8 will dictate how money the Debtor owes to MacMillin must be handled if MacMillin succeeds on its race-notice
claim. Pursuant to this statute, the Debtor will be required to pay the Subcontractors, from the
net sale proceeds, the amounts owed on account of their own mechanics’ liens, as finally
determined by the Court.”
Given this ruling, the court found it unnecessary to rule on the subcontractors’ alternative argument that RSA 447:12-a nevertheless afforded priority to their later-recorded liens (see Blog #44): “Because the Court has determined that MacMillin’s mechanic’s lien is entitled to priority under the race-notice doctrine, and the Subcontractors will share in MacMillin’s race-notice victory, the Court need not determine whether the Subcontractors’ mechanics’ lien attachments also have priority based on the application of RSA 447:12-a.”
The takeaway here is that RSA 447:8 is a type of “trust fund” statute. Several states have enacted statutes that make the general contractor receiving payment a trustee for the benefit of its subcontractors. (Maryland is an example, Md. Code Ann. Real Property § 9-201(b)(1).) By contrast, RSA 447:8 declares that any money due from owner to contractor is held by the owner for the benefit of subcontractors who have given the owner timely notice of their intent to claim a lien and the amount thereof. Once those notices have been given, protection of the owner from threatened liens and protection of subcontractors from nonpayment by the general contractor trumps any contractual right of the general contractor to be paid those amounts (unless and until it pays the subcontractors what they are owed).
Whether the owner’s trusteeship expires if the subcontractors who gave proper notice don’t timely perfect their liens with court-ordered attachments pursuant to RSA 447:10 is an open question that In re The Prospect-Woodward Home had no need to consider.
The case is presently on appeal.