Tuesday, July 23, 2013

FYI: 1st Cir Rejects Builder's Counterclaims Against Loan Assignee in Mechanics Lien Case

Affirming the lower court, the U.S. Court of Appeals for the First Circuit recently ruled that under New Hampshire law a mortgage took priority over a mechanic's lien, where the work for which the mechanic's lien was filed was not initiated until after the mortgage was recorded, and where the mortgagee paid the party asserting the mechanic's lien. 


The Court further affirmed the dismissal of the builder's counterclaims against the assignee of the mortgage for implied contract and promissory estoppel.  In so ruling, the Court reasoned that although any assignment of the mortgage carried with it obligations as lender/mortgagee, there was no specific assignment of an implied contract. 


Lastly, in affirming the lower court, the First Circuit held that where a party fails to allege a benefit, the retention of which would constitute unconscionablity, there can be no finding that such party was unjustly enriched.


A copy of the opinion is available at:  http://media.ca1.uscourts.gov/pdf.opinions/12-2182P-01A.pdf.


A construction company ("Builder") and hotel group ("Hotel Group") entered into a contract for the construction of a hotel in Tilton, New Hampshire.  Builder began construction, but stalled when Hotel Group was unable to pay its bills.  In order to continue the project, Hotel Group entered into a loan with a lender ("Construction Lender"), who agreed to provide $8,700,000 in exchange for a mortgage on the property to continue the project.


Work on the hotel project continued, with loan disbursements paid by Construction Lender to Builder.  Builder executed lien waivers in conjunction with the payments from Construction Lender.  When Builder submitted the waiver, it was unaware that Construction Lender would not issue any more disbursements to Builder because Hotel Group was unable to secure additional financing for the project.


Builder claimed $2,487,411.94 for work under the agreement, which was secured by a mechanic's lien.  After the hotel construction was completed, both Hotel Group and Construction Lender found themselves in financial trouble.  Construction Lender's parent company failed, and the construction mortgage was assigned to FDIC as receiver.  The mortgage was ultimately assigned to another entity ("Assignee").  After the assignment, Hotel Group filed for Chapter 11 bankruptcy.


Assignee initiated an adversary proceeding stemming from the Chapter 11 bankruptcy, seeking a declaration that $6,434,074.40 of the construction mortgage - the amount disbursed by Construction Lender to Builder for work performed on the hotel project - was senior to Builder's lien.  Builder filed a counterclaim for a declaration that Builder's lien was senior to Assignee's mortgage, and ten counterclaims arising in tort, contract and equity.


The bankruptcy court dismissed 10 of the 12 counterclaims, and awarded summary judgment in Assignee's favor.  Builder appealed to the U.S. District Court, which affirmed.  On appeal to the First Circuit, Builder argued that the grant of summary judgment in Assignee's favor was improper, as well as dismissal of three of Builder's counterclaims for breach of implied contract, promissory estoppel and unjust enrichment.  The First Circuit affirmed the lower court's ruling.


On appeal, the First Circuit first analyzed the completing lien claims.  As you may recall, New Hampshire is a "race-notice" jurisdiction with respect to recording.  A purchaser with a senior claim in real estate must record its interest in order to prevail over a bona fide purchaser for value.  N.H. Rev. Stat. Ann. 477:3-a; Mansur v. Muskopf, 977 A.2d 1041, 1046 (N.H. 2009). 


Affirming the district court's ruling, the First Circuit noted that the mortgage was recorded by Construction Lender before the work for which the lien is claimed was performed.  Although the Court also recognized that a mechanic's lien "shall have precedence and priority over any construction mortgage," this is not the case where "the mortgagee shows that the proceeds of the mortgage loan were disbursed... towards payment of invoices from or claims due subcontractors and suppliers of materials or labor for the work on the mortgaged premises." N.H. Rev. Stat. Ann. 447:12-a.


In this instance, Builder did not contest that Construction Lender made $6,434,074.40 in payments to Builder, and therefore, the mechanic's lien was not senior to the mortgage.  Builder presented authority in support of its position that an alternative source of priority for mechanic's liens exists.  The Court was not persuaded by this argument, pointing out that in neither case cited by Builder did the mortgagee pay the mechanic for any work.  Because the mortgage was recorded before the work for which the lien was claimed was performed, and because Construction Lender paid Builder, the First Circuit affirmed the lower court's ruling regarding Assignee's priority of claim.


The First Circuit also affirmed judgment in favor Assignee with respect to Builder's counterclaims for breach of implied contract, promissory estoppel and unjust enrichment.  Builder argued that in realizing the value of a completed hotel, Construction Lender misled Builder in believing that Builder would be paid for completion of the project. 


Taking Builder's claims for breach of implied contract and promissory estoppel together, the Court ruled that there was no basis for holding Assignee liable for the actions of Construction Lender.  As you may recall, an implied contract is an enforceable agreement that arises from the conduct of the parties, apart from oral and written words.  Durgin v. Pillsbury Lake Water Dist., 903 A.2d 1003, 1006 (N.H. 2006).  On the other hand, promissory estoppel is a basis by which recovery may be had where no contract exists.  Great Lakes Aircraft Co. v. City of Claremont, 608 A.2d 840, 853 (N.H. 1992); Panto v. Moore Bus. Forms, Inc., 547 A.2d 260, 266 (N.H. 1988); Restatement (Second) of Contracts, section 90 (1981).


The First Circuit agreed with the bankruptcy court's ruling, holding that because there is no language in the assignment of the mortgage that purports to transfer these liabilities to Assignee, Assignee could not be held liable under these theories.  The Court was not persuaded by Builder's arguments.  Builder relied on section 328 of Restatement (Second) of Contracts, which provides that a general assignment of all rights under a contract as a delegation of unperformed duties under the same contract is enforceable against an assignee by an obligor of the assigned rights.


The First Circuit rejected Builder's assertion because any obligations assumed by Assignee were under the mortgage contract, as lender/mortgagee.  Builder sought to impose liability from an alleged implied contract between Builder and Construction Lender.  However, Assignee did not receive any assignment of rights under this implied contract.


The First Circuit also affirmed the lower court's ruling with respect to the counterclaim for unjust enrichment.  As you may recall, unjust enrichment is an equitable remedy that entitles a party to restitution from one that has received an unconscionable benefit, if the benefit were retained.  Clapp v. Goffstown Sch. Dist., 977 A.2d 1021, 1024-25 (N.H. 2009).  Builder, however, failed to establish any allegation that would support a finding that Assignee received a benefit, the retention of which would constitute unconscionablity.  The Court noted that Assignee simply purchased a mortgage for a completed hotel.  Builder failed to allege any facts indicating that this was not an arm's length transaction.  Accordingly, the First Circuit affirmed dismissal of Builder's counterclaim for unjust enrichment.





Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
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Chicago, Illinois 60602
Direct: (312) 551-9320
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Email: RWutscher@mwbllp.com


Admitted to practice law in Illinois


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