Contractors with Subordinate Liens in Bank Foreclosure Cases May Not Lose Lien Rights Against Bank, Property

In today’s economy and construction market, distressed properties and projects have become common, causing many banks to foreclose on construction loans and contractors to go unpaid. The contractors who are working on these properties are finding that their liens have been subordinated to a foreclosing mortgagee, and many of them are turning to the construction law attorneys at our firm for help.

Our lawyers are now working closely with many of our construction clients in cases involving foreclosing lenders, and under certain circumstances we are able to help the contractors in these cases to retain and enforce their lien rights against the property, lender or both.

Generally, once a contractor has been named as a subordinate lienor in a bank foreclosure, its ability to foreclose its lien on the property to collect for its work has been lost. In certain situations, the contractors still have options. For example, a contractor may be able to establish that it has an equitable lien on the property, which is superior to the bank’s interest, based upon an affirmative misrepresentation made by the bank. The courts call this a “special equity,” and the most common example in which a special equity arises is when the bank convinces a concerned contractor to continue building by assuring that it will make payment.

In addition, in cases in which the construction has been completed and the bank has not fully disbursed the construction loan, contractors may have a claim against the undisbursed construction loan proceeds.

Contractors embroiled in cases involving foreclosing lenders with superseding lien rights should work closely with lawyers who focus on construction matters to determine if they can establish an equitable lien or a valid claim against construction loan proceeds that have not been disbursed.