Title Mark provides title services for Minnesota and Western Wisconsin.
 

Split Priority Mortgage Court Case

Shaw Acquisition Co. vs. Bank of Elk River

A review of this court case,  should give everyone pause on lender liability in construction lending.  The court case is about split priority.  When a split priority mortgage is foreclosed, how is the lender to bid at the sheriff's sale?  The logical way would be to bid only the senior amount of the split priority, then allow the mechanic's lien holder to redeem and finally, the junior portion of the lender's lien.  In fact, that's how the Court ruled.  This is a problem because the result conflicts with the plain reading of a state statute.  The State statute says a lender must bid the full amount of their mortgage or lose the right to the difference.  The Court distinguished the statute from the common law.  Click here for Shaw Acquisition v. The Bank of Elk River Court Case.

The real issue in this case is the creation of the split priority in the first place.  The lender and the mechanic's lien holder stipulated that the advances are not obligatory, and split priority applies to these facts.  You never want to be in this position, even if you win.  It is risky and expensive. 

Lessons: 

1.      Make sure your attorney drafts or checks your construction loan documents.  The lender obligations need to be mandatory if the borrower is performing as agreed (unless you wish to take the risk - not necessarily a bad business decision).

2.      Always use a construction loan agreement.

3.      Always get title coverage for your construction loans.  With this kind of case out there, few mechanic's lien holders will assume the lender is first.  They will make sure they review your documents.  The best way to avoid any question about the insured priority is to submit your documents to your title agent for their underwriter's approval.

4.  Always follow sound procedures for loan proceeds disbursement.  If the loan is in balance, this issue will rarely arise.

If you have any questions regarding a split priority mortgage or any other title issue, please do not hesitate to contact Brad Solheim at 952-442-7766 or bsolheim@titlemark.com.

 

 
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