In Ferguson Enterprises, Inc. v. Keybuild Solutions, Inc. et al., (Colo. App. Dec. 22, 2011), the Court of Appeals had to address the priorities when mechanics' liens and multiple deed-of-trust foreclosures collide. While reaffirming and compiling several previously-established propositions of law in this area, the Court also addressed some novel issues.
The Owners and Deed-of-Trust Foreclosures
Zion purchased the property in question on August 22, 2002. In 2005, Zion borrowed money from FlatIron Bank, secured by a deed of trust recorded November 22, 2005. Zion then hired PWN Architects to create a master plan. The architect's master plan was recorded October 23, 2007. Zion defaulted on its loan, and FlatIron foreclosed its deed of trust. And in January 2008, FlatIron received and recorded a public trustee's deed to the property.
On May 30, 2008, Water Tower Builders, LLC, purchased the property from FlatIron. Water Tower financed the purchase and development plans through two loans from CCB, secured by a deed of trust recorded on June 5, 2008. Water Tower initiated work on the project on July 1, 2008, and it was undisputed that the project pursued by Water Tower was the same project that Zion had commenced. Water Tower was unable to pay its obligations. And in October of 2009, Ferguson filed a mechanics' lien foreclosure action.
In December 2009, CBC initiated a deed-of-trust foreclosure action, and received and recorded a public trustees deed to the property on May 10, 2010.
Summary Judgment
CCB challenged the mechanics' liens, arguing that its deed of trust had priority over the liens. But the trial court granted summary judgment in Ferguson's favor, ruling that the priority of the mechanics' liens related back to the work performed by Zion's architects. The Court of Appeals remanded the case for a determination as to whether or not Zion's architect had ever recorded a mechanics' lien.
Super Priority
In its decision, the Court of Appeals revisited and restated the law related to super priority as to new improvements under C.R.S. section 38-22-103(2), and the exception to the super priority statute for prior deeds of trust where the purpose of the loan secured by the deed of trust was to build the new improvements. Because CCB's recorded deed of trust clearly indicated that it was to secure an obligation incurred for the construction of an improvement on the property, the lien claimants were charged with notice of the deed of trust, and the super priority statute would not apply to the extent loan proceeds were disbursed for construction purposes.
Relation Back to the Architect's Work
Based on the Court's ruling regarding the super priority rule, the only other way that Ferguson could prevail would be if its lien related back to the work performed by Zion's architect. CCB argued that the relation back doctrine could not be applied, because Ferguson had performed for Water Tower Builders, not for Zion. Basically, CCB argued that the change in ownership precluded operation of the relation back doctrine. The Court did not agree, and held that a change in ownership does not bar application of the relation back doctrine.
The Court noted that the project itself had not changed. Instead, the parties agreed that the project undertaken by Water Tower Builders was the same project commenced by Zion. This is important, since the relation back doctrine applies to when work first commences "on the project." The Court also noted that, if a change in ownership could prevent the application of the relation back doctrine, then owners could avoid its application simply by transferring the property to a related entity during construction.
A more difficult problem arose because of the fact that Zion's lender, FlatIron, had previously foreclosed the property. Because of that foreclosure, FlatIron should have taken title free and clear of all liens and encumbrances junior to its lien. FlatIron's deed of trust was recorded in 2005. And the architects' work was performed in 2007. Thus, FlatIron's deed of trust was superior to the architects' lien rights. However, if there was any new structure or improvements built, then the architect's lien rights would potentially have super priority over FlatIron's deed of trust under C.R.S. section 38-22-103(2).
Furthermore, the Court of Appeals ruled that the architect would have had to have actually recorded a mechanics' lien in order for Ferguson's lien to relate back. According to the Court:
[I]n the event that the architects did not actually file a lien, then lien claimants could not relate back their work thereto, because a bona fide purchaser without notice at the FlatIron foreclosure sale would have no record notice of any lien claim, and the foreclosure would have cut off any inchoate lien.
The Court of Appeals then remanded the case back to the trial court to determine whether the architects asserted a mechanics' lien that was superior to FlatIron's deed of trust as to any improvements.
Issues Not Considered
CCB had argued to the Court of Appeals that Ferguson's lien cannot relate back to the architect's work, because Ferguson's work was not completed under the same contract between the same parties. The Court of Appeals declined to address this issue, stating that CCB had not raised it below.
Finally, one additional unresolved question is how long a project can remain dormant between owners and the relation back doctrine still apply. For example, consider a situation where the first owner runs out of money, and the project sits dormant for more than three months. At that point, the project is considered abandoned, which is the equivalent to a completion of the project. C.R.S. section 38-22-109(7). In another six months, the deadline to bring a mechanics' lien foreclosure lawsuit will expire. C.R.S. section 38-22-110. If a new owner then purchases the property and commences to finish the project, is it indeed the same project? And can the liens recorded by those working under the new owner relate back to the work performed by the first owner's architect?
