Posted by & filed under Legal, Lien Law.

Mar 21, 2019

By: William Fig, Partner, Sussman Shank

Everyone involved in the construction industry should be generally aware of the technical, statutory quagmire that is Oregon construction lien law, ORS Chapter 87.001, et. seq. The most known requirements are the deadlines for lien notices, the recording of a lien, and the foreclosing of a lien that must be followed in order to preserve your right to perfect and enforce a construction lien. However, mired in the bowels of the Oregon lien law statutes are several less obvious traps for the unwary material supplier.

The first such trap may be sprung early on in the life of a project, well before any problems arise or a lien is filed, and it has serious consequences for material suppliers. Generally speaking, a material supplier needs to send a pre-lien notice to any mortgagees and, unless you contract directly with the owner, to the owner of the land upon which the project is being constructed. On new construction, the lien of a material supplier that properly and timely sends a pre-lien notice to the required parties will have priority over the mortgagee’s (e.g. banks/lenders) existing encumbrance (e.g. Deed of Trust) as to the improvement and the land required for the convenient use and occupation of the improvement. This is commonly referred to as “super priority.”

However, the savvy mortgagee who receives a pre-lien notice may send you a demand for a list of materials and supplies under ORS 87.025(4). This statute provides:

A mortgagee who has received notice of delivery of materials or supplies in accordance with the provisions of subsection (3) of this section, may demand a list of those materials or supplies including a statement of the amount due by reason of delivery thereof. The list of materials or supplies shall be delivered to the mortgagee within 15 days, not including Saturdays, Sundays and other holidays as defined in ORS 187.010, of receipt of demand, as evidenced by a receipt or a receipt of delivery of a registered or certified letter containing the demand. Failure to furnish the list or the amount due by the person giving notice of delivery of the materials or supplies shall constitute a waiver of the preference provided in subsections (1) and (2) of this section. Emphasis added.

For a material supplier, the importance of its lien’s priority over existing encumbrances cannot be overstated. A lien that has super priority, i.e. priority over a mortgagee’s Deed of Trust, provides serious leverage to the material supplier, which generally results in the mortgagee paying the supplier. This is because the foreclosure of a super priority lien extinguishes the mortgagee’s secured interest against the property at issue thereby leaving its loan unsecured. In most cases, the mortgagee, after performing some early due diligence, will pay off a supplier’s superior lien to avoid the supplier foreclosing its lien (and being awarded its attorney fees for doing so) and extinguishing the mortgagee’s inferior interest. A mortgagee’s early payment to a material supplier with a superior lien claim is simply good business because it minimizes the mortgagee’s loss and preserves its encumbrance against the property. A material supplier’s failure to comply with ORS 87.025(4) results in a loss of its lien’s super priority and, consequently, the supplier’s lien is inferior to the mortgagee’s pre-existing interest. As a result, the mortgagee’s secured interest in the property is no longer threatened by the lien; the supplier loses most, if not all, of its leverage vis a vis the mortgagee; and the mortgagee generally will not satisfy the lien.

Moreover, if a material supplier proceeds to foreclose an inferior lien, it usually must satisfy the superior (and typically significant) encumbrance of the mortgagee, or the foreclosure of the supplier’s lien, and any ownership interest in the foreclosed property obtained by the successful bidder at the post-foreclosure sheriff’s sale, will be subject to the mortgagee’s encumbrance. This means the mortgagee can subsequently foreclose its superior encumbrance thereby wiping out the successful bidder’s ownership interest in the property. Thus, it is important for parties that supply materials to a construction project to be are aware of, and comply with, ORS 87.025(4).

A second trap for a material supplier lies in the language of ORS 87.057. Subsection (2) of that statute provides:

Where a notice of intent to foreclose a lien has been given as provided by subsection (1) of this section, the sender of the notice upon demand of the owner shall furnish to the owner within five days after the demand a list of the materials and supplies with the charge therefor, or a statement of a contractual basis for the owner’s obligation, for which a claim will be made in the suit to foreclose. Emphasis added.

The kicker is in ORS 87.057(3), which requires a “plaintiff or cross-complainant seeking to foreclose a lien in a suit to foreclose shall plead and prove compliance with subsections (1) and (2) of this section. No costs, disbursements or attorney fees otherwise allowable as provided by ORS 87.060 shall be allowed to any party failing to comply with the provisions of this section.” Emphasis added. While this statute does not affect the priority of a lien, it does affect a very important right of a material supplier – the right to recover attorney fees incurred in foreclosing the lien. After priority, the threat of attorney fees is the material supplier’s second biggest leverage point in getting its lien paid. This is especially true regarding a lien for a smaller amount where the owner/mortgagee knows it is not cost effective for the material supplier to foreclose the lien absent the ability to recovery attorney fees. At the point a notice of intent to foreclose a lien is sent, you may be so frustrated with the project that correspondence from the non-paying parties gets ignored or “round filed”. However, it is important that you to continue to carefully review any project-related correspondence and timely comply with an ORS 87.057 request.

Bill represents mortgage servicers and lenders in prosecuting and defending mortgage foreclosure actions and defending lenders and servicers in “wrongful foreclosure” lawsuits in state and federal courts in both Oregon and Washington. Bill also represents general contractors, subcontractors, and material suppliers in all aspects relating to their businesses. This includes contract review and drafting, preparing construction bond and lien claims, and litigating all types of payment claims in state and federal courts. He also handles administrative claims against contractors’ surety bonds.

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