Today, in an homage to federalism, the Update takes a look at a recent decision from the Supreme Court of Alabama that undoubtedly is of interest to the banking and financial services community.
As readers will know, the Supreme Court of Alabama is the highest court in the State and is comprised of nine justices, just like the Supreme Court of the United States. And just like the Supreme Court of the United States, the Supreme Court of Alabama often is fractured, with disagreements among the justices prompting dissents from the Court’s majority decisions. Somewhat unique to a state supreme court setting like Alabama’s, however, is the practice of seeking rehearing — that is, the practice of a losing party asking the justices to reconsider their decision. As you might have guessed, a dissent from a justice or justices on the first go-around may make it more likely for a party to seek and win on rehearing because there already is at least some inclination on the court for a different result.
That brings us to GHB Construction & Development Company, Inc. v. West Alabama Bank & Trust. The banking community has buzzed about this case in the several months since the “first go-around” — for good reason, as we will see. The case involves a piece of property in Jasper, a contractor that builds a house, and a bank that finances the construction. It reaches the Alabama Supreme Court because of a lien priority dispute. The basic chronology is important, as it is with any lien dispute: First, the owner of the property contracts with the builder to build a house. Second, the owner secures financing through a future advance mortgage, and the bank records that mortgage. Third, the builder commences work. And fourth, the bank makes the first advance of cash under the future advance mortgage.
Alleging a failure to pay the final construction bill, the builder then went after the owner and contended that the builder’s materialmen’s lien on the property was superior to the bank’s security interest under the future advance mortgage. The bank, of course, flatly rejected that theory, asserting that the future advance mortgage was valid and superior as of the date it recorded the mortgage, which gave the bank priority over the builder, whose materialmen’s lien was valid only as of the date that it commenced work. The bank’s argument seemed to be correct, but the Supreme Court of Alabama, to the surprise of many, sided with the builder (on the “first go-around,” that is).
On September 21, 2018, the court held that the bank’s security interest was not effective as of the date of recording but instead as of the date on which it made the first advance of cash. Thus, the builder prevailed, because it had commenced work prior to the first advance, and, as a result, the practice of construction lending in Alabama was thrown into a state of some turmoil. Banks no longer could rely on the date of recording as the date on which their mortgages would secure priority, and on the flip side, construction firms were left uncertainty as to where their materialmen’s liens might fall in the priority line.
But Justice Will Sellers dissented from that first decision, and was joined by then-Chief Justice Lyn Stuar and Justice Brad Mendheim. Justice Sellers wrote that he would have held that a future advance mortgage is created and secures priority “on the date the mortgage contract is recorded.”
Sensing a potential willingness on the part of the justices to reverse course, the bank then sought rehearing. The court ultimately issued a new decision and reached a different result on March 29, 2019. The court issued a new majority opinion — authored by Justice Sellers, who had dissented back in September — and explained that the bank’s future advance mortgage had been properly executed and recorded before the date on which the builder commenced work. The court therefore held that the date of the recording was the key date for priority purposes — i.e., after the date of recording, the bank maintained priority over all subsequent liens and security interests.
As a result, boths banks and construction firms — and all other parties touching on the construction industry — can move forward knowing exactly where the bank stands in the priority line. As it is in many areas of the law, certainty is of the highest importance here, as it allows all parties to efficiently and confidently order their affairs to account for future events.
Charles W. Prueter is a trial and appellate lawyer at Waller Lansden Dortch & Davis, LLP, in Birmingham. He can be reached by email at charles.prueter@wallerlaw.com.
