Montana Supreme Court Rules that Mechanic's Liens Take Priority Over Certain Deeds of Trust

The Montana Supreme Court recently released an opinion addressing the priority between a construction loan trust indenture and a mechanic’s lien (March 22, 2010). In Signal Perfection, LTD v. Rocky Mountain Bank-Buildings, 2009 WL 3628027 (Mont. Nov. 3, 2009), a developer had taken out a construction loan to fund the construction of a $55 million casino and restaurant and the bank recorded a trust indenture on the property. During construction, the developer exhausted the entirety of the loan. Approximately five months later, an audio and video systems contractor filed a mechanic’s lien on the property for non-payment. The contractor filed suit to enforce its mechanic’s lien and to seek a judicial determination that its mechanic’s lien took priority over the bank’s trust indenture. After the district court granted summary judgment in favor of the contractor, the bank appealed.

On appeal, the Court considered whether the trust indenture should take priority over the construction lien. The Court began by examining Section 71-3-542, MCA, which provides the default rule “first in time, first in right.” However, the Court noted that Section 71-3-542(4), MCA, states: “A construction lien has priority over an interest, lien, mortgage, or encumbrance that is filed before the construction lien attaches if that interest, lien, mortgage, or encumbrance was taken to secure advances made for the purpose of paying for the particular real estate improvement to which the lien was attached.”

However, the bank argued that that the fact that the loan was completely exhausted before the lien was filed meant that the later mechanic’s lien should fall behind in priority. The bank relied on an earlier decision where the court found that a mechanic’s lien did not take priority over a deed of trust, based upon the principal that the contractor was in a better position to determine when the owner was in financial distress. The bank argued that the bank was likewise helpless to protect itself here, where the lien was already exhausted.

The Court disagreed, noting that the bank could protect itself by providing lien waivers or by not making the loan. Since the statute was controlling, the mechanic’s lien could take priority over the construction loan security.

The Court ruled that the principal distinction was whether the deed of trust was created in order to purchase the property or rather in order to remodel the property.