New York is a big state with a lot of property changing hands, a lot of financing moving forward at fast clips, and a lot of paperwork being filed with county clerks. With so much going on, NY predictably created a complex system of laws relating to when, how and where closing papers such as mortgages, deeds, notes, etc. need to be recorded. While normally lenders follow the rules, there are so many statutes spread out through the New York Code relating to the recording of land and mortgage documents that many financiers miss parts of the code. While failing to comply with a single statute may not undo a mortgage, it may result in a reshuffling of priorities when mechanics liens are filed in New York.
It is no secret that the financial crisis of the past few years has left properties throughout the country riddled with mechanics liens. Banks are foreclosing on underwater properties one after another, and courts are attempting to deal with the foreclosure process by moving forward as quickly as possible – which translates to a snails pace in many states.
To avoid the foreclosure process and salvage at least part of the loan, construction lenders are beginning to modify terms of loans. According to an article by Todd E. Soloway and Luisa K. Hagemeier in the November 9, 2011 New York Law Journal entitled Construction Lenders: Keep Your Priorities Straight!, “Changes to the contemplated use of the the project, decreasing the loan amount, increasing borrower’s consideration for the loan, changing the equity or retainage percentages or easing bonding requirements are all examples of ways banks are modifying loan documents and requirements.”
However, modifying a loan document can be perilous for a lender, and a boon to the mechanics lien claimant. In some states, if a modification to a loan is material, the parties have a certain amount of time after the modification is made to record it or risk losing their priority. In other states, material modifications themselves can result in losing priority, as if a new loan is being issued. When the lender loses priority and a mechanics lien or construction lien is on the property, the lien may take precedence when a foreclosure action is commenced.
When a mechanics lien claimant is filing a foreclosure action, if a bank loan is involved careful consideration should be taken: at the very least an investigation should be had to ensure that the bank complied with the State laws regarding the recording of loans and loan modifications. To the extent the loan hast lost its priority due to failure to comply with applicable regulations, what once seemed like a useless mechanics lien on an underwater property may turn into a valuable tool for recovery.
In a general victory for contractors and suppliers owed money on a residential project, the IRS published final regulations (TD 9520) that govern the validity and priority of federal tax liens under IRC § 6323.
Under IRC § 6321, the federal government has an automatic tax lien against any person who does not pay federal tax for which they are liable after the government demands payment. This lien extends to all that person’s property and rights to property. Section 6323 provides that a federal tax lien is only valid against certain persons if a notice of federal tax lien (NFTL) is filed; that section also generally addresses the validity and priority of federal tax liens.
Numerous amendments to section 6323 have been made since 1976 but until now have not been reflected in the regulations. The final regulations published on Monday reflect these changes to the law.
This regulation entitles those who file mechanics liens to higher priority and more of a chance to get the money for which they worked so hard. The draft of the relevant section is cited at length below:
(g) Residential property subject to a mechanic’s lien for certain repairs and improvements—(1) In general. Even though a notice of a lien imposed by section 6321 is filed in accordance with § 301.6323(f)-1, the lien is not valid against a mechanic’s lien or (as defined in § 301.6323(h)-1(b)) who holds a lien for the repair or improvement of a personal residence if—Show citation box
(i) The residence is occupied by the owner and contains no more than four dwelling units; andShow citation box
(ii) The contract price on the prime contract with the owner for the repair or improvement (excluding interest and expenses described in § 301.6323(e)-1) is not more than $6,890, effective for 2010 and adjusted each year based on the rate of inflation.Show citation box
(iii) For purposes of paragraph (g)(1)(ii) of this section, the amounts of subcontracts under the prime contract with the owner are not to be taken into consideration for purposes of computing the $6,890 prime contract price. It is immaterial that the notice of tax lien was filed before the contractor undertakes his work or that he knew of the lien before undertaking his work.