Priority in Mechanic's Liens, and the Courts.

Posted on April 27, 2010 by Gavin Craig

Construction Law Today posted a story about a priority case. The facts of the case appear to favor the bank, but as always it is difficult to know exactly what happened. The case is LaSalle Bank v. Cypress Creek 1. Priority cases in mechanic's lien cases are not uncommon, but usually the facts are clear enough to ascertain who has the priority. The interesting cases occur when the bank has not filed it's interest before the contractors file the mechanic's liens. The race to file does not seem to be the issue here.

Construction Law Today has published two posts on the case so far. The first post describes how priority works (until this case that is.) The second post gives some more detail.

However, the courts decision is what makes this remarkable. The court essentially said both the bank and the contractor had priority. If this makes you scratch your head, your not alone. The parties are appealing.

I will be interested to see how this plays out.

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Who Gets the First Dollar? The Fight Between Creditors and Victims!

Posted on January 28, 2009 by Gavin Craig

I’ve written about the Petters matter a couple times before, here and here.The latest report raises an interesting question. An investor group is challenging the appointment of a trustee that they say will favor victims instead of creditors. That's an interesting conflict. Who should have priority? If both parties are innocent, who has a priority. 

So, in the abstract the question is interesting. However, in this case the complaining creditor, The Richie Group, reportedly loaned the Petter’s Group money at interest rates of 80% on one loan and 362.1% on another. We should all have such a deal.

At those rates it would not take long to recover the amount of the principal, even though they probably didn't account for the payments as reducing the principal.

The only rational reason that a company would borrow money at rates that high is because they can’t get access to the normal capital markets. That normally means that the borrower is in financial trouble. That also means the lender knew these were high risk loans. So why would they get a priority? The Richie group had a choice whether or not to loan money to a company with a weak balance sheet.

The victims on the other hand were misled. I think the victims have a much better argument for a priority than the Richie Group, or any similarly situated lender.

Who knows how a Trustee will see it, or allocate what assets can be found.  I would guess that the facts of the Richie Group loan will influence the outcome; or I at least hope so.  Greed should not be rewarded. 

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