In Alabama, Not All Debts Are Created EqualAlabama’s materialman’s lien statute (specifically, Ala. Code § 35-11-211) was intended to provide construction lenders priority over materialmen as to debts relating to construction projects, and this intent was recently confirmed by the Alabama Supreme Court (GHB Construction and Development Co., Inc. v. West Alabama Bank and Trust, 2019 WL 1416893 (Ala. 2019)).

In a recent decision, a contractor who provided labor and materials for the construction of a house filed a statement of lien after the owner failed to make payment for the amount owed. The property, however, was subject to a future-advance mortgage. The contractor, therefore, filed suit against the owner to collect the balance owed and against the mortgagee seeking a judgment declaring that its materialman’s lien had priority over the mortgage on the property.

The trial court dismissed the contractor’s claim for failure to plead that it commenced work prior to the date the mortgage was recorded. On appeal, the contractor acknowledged that it had not commenced work or provided materials to the project before the date that the mortgage was recorded. Its argument, however, was that it began work prior to the date that the mortgagee made its first loan payment to the owner under the future-advance mortgage and that a mortgage was not created until the debt it secures is incurred. Accordingly, the contractor asserted that the mortgage on the property was not created until the date of the first loan disbursement to the owner, which was after the contractor started work on the project.

Alabama’s Supreme Court disagreed reasoning that future-advance mortgages may remain valid even absent any initial consideration. (Note: If the mortgagee attempted to foreclose on the property without ever advancing any funds, then the mortgagor could bring an action in equity to have the foreclosure enjoined and the mortgage voided.) As such, the Supreme Court determined that the mortgage was legally valid and was superior to the contractor’s materialman’s lien.

This case re-affirms existing precedent related to the priority of debts on construction projects and should remind the construction community that lenders have priority above contractors providing labor and materials. A contractor’s materialman’s lien shall have priority over a mortgage on the properly only if work began prior to the recording of the mortgage. Contractors or subcontractors providing labor and materials to financed projects should take steps prior to commencing work to ensure that they understand the liens or mortgages in line ahead of them. To maximize their priority potential, contractors and subcontractors should also be sure to record timely any liens if payment is not made timely or in accordance with the project requirements.