Bulletin: UT2010001

Dear Associates:

A common fact pattern encountered by title examiners is a Deed of Trust (DT) that's been foreclosed non-judicially resulting in a Trustee's Deed, often back to the foreclosing lender. Lately, especially if the foreclosed loan was for construction, the examiner will also find mechanics' liens recorded subsequent to the DT. Underwriting question: Has the foreclosure terminated the liens because they were junior liens or has the grantee in the Trustee's Deed taken the property subject to the liens because they were senior liens and unaffected by the foreclosure. Commonly, the latter circumstance is referred to as broken priority . Lenders overwhelmingly prefer to foreclose non-judicially because of the short time period due to lack of redemption rights. One deficiency of the non-judicial foreclosure is that it does not answer any questions of priority among lien holders.

The answer to the question of priority involves an analysis of Utah's complex law of mechanics' liens and, much to the frustration of the title examiner, cannot usually be found in the public record. One cannot simply look at the order of recording of documents and say since the DT was recorded first, it must have priority to subsequently recorded mechanics' liens.

Company Policy

In order to insure free and clear of otherwise valid recorded mechanics' liens after a foreclosure of a DT, you must have approval from Stewart underwriting personnel who must be provided with the facts discussed in the following sections.

Visible Commencement Standard

To determine priority of a DT versus mechanics' liens you must know if work had started or materials were delivered to the property before the DT was recorded because if so, any resulting liens will have priority and will not be wiped out by a foreclosure of the DT. Under the "relation back" principle if one subcontractor visibly commences work on the property, even if he gets paid and does not file a lien, all lien claimants' liens relate back to the day work started. U.C.A. § 38-1-5. Priority is a factual issue. How do you find out if the foreclosed DT suffered from broken priority?

• Contact the title company and construction lender that insured and issued the DT about evidence in their file that they inspected the property the day of recording and noted no work or materials were evident. Ask if they have dated inspection notes or photographs of the property. Unfortunately many title companies wrote affirmative mechanics' lien coverage historically with no inspection to see if construction had commenced. Many lenders relied on their policy and also have no information on priority. Nevertheless they are the parties most likely, excepting the lien claimants themselves, to have reliable evidence of priority.
  
  
• Check the State Construction Registry (SCR) at http://scr.utah.gov/. The SCR can provide circumstantial, but not definitive, evidence of when construction started. Typically when a building permit is issued by a municipality, a filing on the SCR is created. That filing will tell you the date the building permit was issued and when subcontractors and material suppliers filed notices of commencement. A tempting inference is that if a DT was recorded days, weeks or months before a building permit was issued, no work or materials pre-dated the DT therefore the DT should have priority. This deduction relies on the presumption that neither work nor materials ever arrive prior to a building permit issuance. The way the construction industry sometimes works rebuts that presumption. A dirt hauler or a lumber provider may be told that the property in question is the next to be built on. While the provider is out near the site making another delivery, he decides to take excess materials and leave them on the "next job." Excavators who level sites or dig foundations may start early for a similar reason. In the fall there is a rush to get foundations in before the ground freezes. The possibilities are endless. The fact is work can start and establish mechanics' lien priority before a building permit is issued.
  
  
• Depending on the quality of evidence of priority and if it's reinforced by the order of filings on the SCR, an examination of the individual lien and lis pendens, if any, may be necessary to underwrite the risk of insuring a new transaction. A mechanics' lien claimant must record a lien within 180 days of final completion of a project, where final completion is the day the certificate of occupancy is issued. U.C.A. § 38-1-7. This period is shortened to 90 days if a notice of completion is filed in the SCR. Id. A lien claimant then has 180 days from the recording of the lien to file an action to enforce the lien and record a lis pendens. U.C.A. § 38-1-11. A tip off that a lien claimant thinks they have priority to the construction lender is if they name the lender in their action. A review of the pleadings or a conversation with plaintiff's counsel may indicate the lien claimant's belief that they have priority to the construction loan. Even if the lender is not named in the initial pleadings, they can be added, in some cases years, later as evidence develops, so we cannot place great reliance on this information.

Priority is a fact based determination that is ultimately controlled by off record events. Even a dated photograph of the property can be rebutted as not showing the entire property or was compromised because parts of the property were obscured. Oftentimes we cannot collect enough evidence to enable us to insure over the liens. You may have to refer the transaction back to the title company that insured the lender or we may seek indemnification from the underwriter that insured the lender.

If you have questions related to this bulletin, please contact your local underwriting personnel or Stewart Legal Services.

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