A few years back I blogged (#44) on the relative priorities of construction mortgages and mechanic’s liens under RSA 447:12-a. Even as to mortgages recorded first at the registry of deeds, that statute affords priority to mechanic’s liens except in two scenarios. The one which concerns us here gives the mortgagee priority “to the extent that the mortgagee shall show that the proceeds of the mortgage loan were disbursed ... toward payment of invoices from or claims due subcontractors and suppliers of materials or labor for the work on the mortgaged premises.”
The statute does not explicitly state that such disbursements must go directly to subs and suppliers. Is it enough that the payments went to a general contractor who then used the money to pay subs and suppliers?
Lewis v. Shawmut Bank, 139 N.H. 50 (1994), answers in the negative. The Court interpreted the statute to require the mortgagee to “show that the disbursements . . . were made directly to subcontractors as payment . . . While the evidence in this case may well support a finding that more than $565,001 of disbursements is in some sense traceable to the payment of subcontractors, priority is afforded only to those disbursements traceable by either of the two methods described in the statute, i.e., disbursement checks payable to subcontractors, or disbursement checks payable to the mortgagor coupled with prior affidavits of payment. The record in this case contains no evidence that disbursements to G.M. were in response to affidavits attesting to payments made by G.M.; accordingly, the defendant has priority only for those disbursements made directly to subcontractors. The record, however, does not support a finding that any disbursements were made directly to subcontractors. We conclude that the plaintiff’s mechanic’s lien has priority.” Id. at 54 (emphasis in original).
This result was perhaps foreshadowed by L.M. Sullivan Co. v. Essex Broadway Savings Bank, 117 N.H. 985, 990 (1977) (“[B]ecause defendant failed to prove that any other disbursements of its mortgage loan were made to those individuals specified in RSA 447:12-a . . . the remainder of defendant’s mortgage was subordinate to Sullivan’s mechanic’s lien.”) (emphasis added).
Further evidence of legislative intent to require direct payments is suggested by RSA 447:12-b, which obliges construction lenders to post their identity conspicuously at the job site and requires would-be lienors to “provide written notice to the institution providing the construction funds that such person is furnishing services, materials, supplies or other things.” This statute is designed to give lenders a ready means to identify subs and suppliers, so that they can protect their mortgages from lien priority by either gathering lien waivers as a condition of disbursement, or making direct payments (by joint check or otherwise) to those not signing such lien waivers.
In the normal course of progress payments on a construction project, lenders do not pay subs and suppliers directly. For reasons of efficiency – and to avoid injecting themselves into potential disputes between general contractors and subcontractors/suppliers – it is almost always left to the general contractor to make those latter payments. Lewis has done nothing to change this routine practice. Lenders typically take on the more cumbersome procedure of disbursing payments directly to subs and suppliers only when alerted to claims of nonpayment.
Why should it matter whether subs and suppliers were paid by the mortgagee directly rather than through disbursements to the owner or general contractor which then made their way to those subs and suppliers? It is not easy to spot the policy rationale – until we consider that payment to subs and suppliers from any source already protects lenders by reducing their exposure to liens. Subs and suppliers perfect mechanic’s liens only for what remains unpaid. Whether the paid portion of their labor or materials resulted from a GC’s check or an owner’s check is immaterial; the lender benefits either way. But protection against liens for any unpaid portion – the only portion that matters – requires ensuring the subs’ or suppliers’ receipt of funds, and there is no way to ensure this other than by making disbursements directly.
The statute does not explicitly state that such disbursements must go directly to subs and suppliers. Is it enough that the payments went to a general contractor who then used the money to pay subs and suppliers?
Lewis v. Shawmut Bank, 139 N.H. 50 (1994), answers in the negative. The Court interpreted the statute to require the mortgagee to “show that the disbursements . . . were made directly to subcontractors as payment . . . While the evidence in this case may well support a finding that more than $565,001 of disbursements is in some sense traceable to the payment of subcontractors, priority is afforded only to those disbursements traceable by either of the two methods described in the statute, i.e., disbursement checks payable to subcontractors, or disbursement checks payable to the mortgagor coupled with prior affidavits of payment. The record in this case contains no evidence that disbursements to G.M. were in response to affidavits attesting to payments made by G.M.; accordingly, the defendant has priority only for those disbursements made directly to subcontractors. The record, however, does not support a finding that any disbursements were made directly to subcontractors. We conclude that the plaintiff’s mechanic’s lien has priority.” Id. at 54 (emphasis in original).
This result was perhaps foreshadowed by L.M. Sullivan Co. v. Essex Broadway Savings Bank, 117 N.H. 985, 990 (1977) (“[B]ecause defendant failed to prove that any other disbursements of its mortgage loan were made to those individuals specified in RSA 447:12-a . . . the remainder of defendant’s mortgage was subordinate to Sullivan’s mechanic’s lien.”) (emphasis added).
Further evidence of legislative intent to require direct payments is suggested by RSA 447:12-b, which obliges construction lenders to post their identity conspicuously at the job site and requires would-be lienors to “provide written notice to the institution providing the construction funds that such person is furnishing services, materials, supplies or other things.” This statute is designed to give lenders a ready means to identify subs and suppliers, so that they can protect their mortgages from lien priority by either gathering lien waivers as a condition of disbursement, or making direct payments (by joint check or otherwise) to those not signing such lien waivers.
In the normal course of progress payments on a construction project, lenders do not pay subs and suppliers directly. For reasons of efficiency – and to avoid injecting themselves into potential disputes between general contractors and subcontractors/suppliers – it is almost always left to the general contractor to make those latter payments. Lewis has done nothing to change this routine practice. Lenders typically take on the more cumbersome procedure of disbursing payments directly to subs and suppliers only when alerted to claims of nonpayment.
Why should it matter whether subs and suppliers were paid by the mortgagee directly rather than through disbursements to the owner or general contractor which then made their way to those subs and suppliers? It is not easy to spot the policy rationale – until we consider that payment to subs and suppliers from any source already protects lenders by reducing their exposure to liens. Subs and suppliers perfect mechanic’s liens only for what remains unpaid. Whether the paid portion of their labor or materials resulted from a GC’s check or an owner’s check is immaterial; the lender benefits either way. But protection against liens for any unpaid portion – the only portion that matters – requires ensuring the subs’ or suppliers’ receipt of funds, and there is no way to ensure this other than by making disbursements directly.
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