Recently, the Hamilton County Court of Appeals found that mechanics’ liens filed by the prime contractor and subcontractor on a project took priority over a mortgage in Bank of America v. Omega Design/Build Group, LLC, et al. (Apr. 6, 2011), 2011-Ohio-1650, 2011 WL 1261301. In Bank of America, the owner contracted with a prime contractor and the subcontractors on a project for a multistory condominium complex. Bank of America was the lender for the project. Bank of America sought to foreclose upon the condominium complex and for priority over mechanics’ liens filed by the prime contractor and subcontractors.
On September 1, 2005, the project began with the filing of a Notice of Commencement. Bank of America closed its loan to the owner for the project and filed its mortgage on September 15, 2006 at 2:42 p.m. Only three minutes later, an “Affidavit to Terminate the Notice of Commencement” was filed stating that “all improvements on and to the property which related to work covered by the [original] notice of commencement are completed…” Within the affidavit, the affiant stated that
“at all time of filing of this Affidavit all improvements on and to the property which relate to work
covered by the aforesaid Notice of Commencement are complete and all monies due to the general
contractor and any subcontractors, material men and laborers for the completion of said improvements
have been paid and the Notice of Commencement is terminated as to this Property.”
Then one minute later a new Notice of Commencement was filed identifying the exact same improvements on the property as was identified in the original notice of commencement. The prime contractor and subcontractors then entered into contracts for materials and services for the project and began work. Subsequently, Bank of America declared the owner in default and refused to provide any further funds. The owner stopped paying its prime contractor and subcontractors, who, as a result, filed affidavits for mechanic’s liens.
In its foreclosure action, Bank of America claimed that its mortgage took priority over the mechanic’s liens. The trial court rejected that claim and held that the mechanic’s liens have priority over Bank of America’s mortgage. In doing so, the trial court found that based upon the plain language of R.C. 1311.04(A)(2), the effective date of the notice of commencement for the project was September 1, 2005, the date the notice of commencement was originally filed. The trial court further held that the affidavit terminating that notice of commencement was a legal nullity since it violated the statute and as such, the second notice of commencement only served to amend the original notice of commencement.
The Court of Appeals affirmed the trial court’s decision. It found that this priority dispute concerned R.C. 1311.04. This statute requires an owner of property file a notice of commencement prior to the performance of any work or furnishing of materials. The purpose of the notice of commencement is to establish the priority dates of liens for any subcontractor or materialman on the identified project. Bank of America argued that the Affidavit of Termination terminated the original notice of commencement. The Bank of America court found otherwise, finding that “the real violation of the statute was the Bank’s attempt to restart the lien clock by terminating the original notice, filing its mortgage, and then refilling the notice of commencement as an express means of gaining lien priority for the mortgagee.” The Bank of America court recognized that the use of an affidavit of termination is only appropriate when the project had actually been terminated, which was not the case. To accept Bank of America’s argument would contradict the specific steps the legislature took to prohibit owners from nullifying the lien rights of contractors retroactively.
In its holding, the Bank of America court relied upon R.C. 1311.04(A) which provides that “Only one notice of commencement is required to be filed for a single improvement and if more than one notice of commencement is filed after the original notice shall be deemed to be amendments to the original notice…The date of the filing of the amended notice is the date of filing of the original notice of commencement.” Based upon this language, the Bank of America court held that the second notice of commencement constituted an amendment to the original notice of commencement and thus, related back to the date the original notice of commencement was filed. Further, given the language of R.C. 1311.04(A)(2), the Affidavit of Termination was meaningless. Thus, the Bank of America court held that the only possible effective date of the notice of commencement, and therefore, the effective date of the mechanic’s liens, was when the original notice of commencement was filed – September 1, 2005.