A long, long time ago – in 1876 – the Oregon Supreme Court was faced with a situation where a contractor filed both a construction lien and a mortgage against a single property securing a single debt. This month they released another opinion confirming that decision and expanding its scope.
1876 Oregon Construction Lien Invalidated By Taking A Mortgage
In Trullinger v. Koefed (1876), the contractor was offered a mortgage interest in the property to secure the construction debt as the project proceeded, and thereafter, filed a construction lien claim to secure the debt. The validity of invalidity of the construction lien claim became an important issue in the case because of lien priority, as construction liens are given great priority in Oregon. The contractor, in other words, wanted to foreclose on the construction lien (then called a “mechanics lien”) instead of the mortgage. Could he?
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The Oregon Supreme Court invalidated the mechanics lien in the Trullinger case. It held:
[T]he rule seems to be well settled that where a mechanic takes a mortgage, either on the same property to which the lien attaches or on other property, that he thereby waives his lien, and the reason is, as observed in many of the cases cited, that subsequent lien-holders and purchasers have a right to rely on the record, and should be protected against secret liens. In this case it is true that the lien was filed at the same time that the mortgage was given, but if the general doctrine be established, that the taking of a mortgage on the property is not a waiver of the mechanics’ lien, a mechanic may hold a mortgage on the property and afterwards, at any time allowed by the statute, file his lien. In these cases of waiver, if it only concerned the immediate parties, it would ordinarily be a matter of little consequence how it was determined. ‘But when the acts of individuals become the motive to the conduct of others, it is important that such acts should be made to bear their natural construction, so that deceit and imposition upon third persons may be prevented. And though one of the parties to the transaction is overreached, or was in error as to its consequences, that error cannot be remedied at the expense of third persons.’
2012 Oregon Appeals Court Says Mortgages, Trust Deeds and Any Security on Property Always Waives Lien Rights, Even If Contrary to Parties Agreement
It’s been a long time since 1876. When the Trullinger case was decided, contractors were still called “mechanics” – which, of course, is why we still frequently refer to liens as mechanics liens.
Nevertheless, the underlying principle in Trullinger was reaffirmed by the Oregon Court of Appeals earlier this month in Evergreen Pac., Inc. v. Cedar Brook Way, LLC. In Evergreen Pac, the situation was a bit more unusual, and the facts were really perfect for the Oregon Court of Appeals to flesh out the exact public purpose behind the Trullinger rule.
In the recent case, the plaintiff performed construction services and was owed roughly $196,000. It filed a construction lien, and then settled the lien claim with the property owner. As part of the settlement the claimant released its lien and took a “trust deed” against the property. The construction lien claim they released (and later refiled) had priority over the mortgage, but the trust deed had no such priority.
As part of the settlement the parties agreed the claimant would go back to the property and (i) correct work that was in dispute; and (ii) perform new construction work. The settlement agreement signed by the parties explicitly reserved the right for the claimant to re-file a construction lien against the property.
The work was performed, the property owner didn’t pay and went belly-up and the claimant re-filed its mechanics lien. It got into a priority dispute with the bank and the bank argued the mechanics lien was invalid under Tullinger. The claimant argued that the 1876 didn’t apply because the settlement agreement reserved the right to re-file the lien claim and there was no “deceit,” attempting to distinguish it from Tullinger’s stated purpose to avoid “deceit and imposition upon third parties.”
The claimant argued, for instance, that because defendant (the mortgage company) received a copy of the settlement agreement and thus had notice that plaintiff was not waiving its right to file a lien in the future, there was no “secret lien” or “deceit and imposition” from which defendant needed protection.
The Oregon Appeals Court rejected the distinction.
Trullinger appears to have announced a bright-line rule regarding the effect that taking a mortgage (or trust deed) has on a construction lien…as a matter of law, by taking the trust deed, plaintiff forfeited the right to a construction lien.
What This Means for Oregon Construction Lien Claimants
Well, it must be admitted that this situation is a bit rare. It appears, for instance, that it only comes up once every 135 years or so! In extrapolating meaning or relevance to lien claimants, the situation must be looked upon more generally.
I think the big picture lesson for lien claimants here is to really be careful with your mechanics lien rights, and value those rights over most other remedies. The mechanics lien is an instrument in Oregon and elsewhere that can present a great deal of power in the event of a payment dispute, and may get you paid in the face of a property owner’s bankruptcy.
If you are a lien claimant, you should not compromise your lien rights by accepting a substitute of any kind.