Oregon’s Architectural Liens on Construction Property Relates-Back to Commencement of Construction, and Lender’s Defense of Equitable Subrogation to Obtain Priority is without Merit if Architectural Firm Notifies Lender of their Design Role

SERA ARCHITECTS, INC. v. KLAHOWYA CONDO, LLC (Ct. of App. Ore., November 7, 2012)

In October 2007, the plaintiff, Sera Architects, sued property owner and developer Klahowya for failure to pay a balance of $375,598 for the design work it provided on Klahowya’s failed construction project. The plaintiff also filed suit against Shorebank to foreclose their trust deed on Klahowya’s property, a construction lien it recorded on November 15, 2006. The plaintiff had recorded a claim of lien on Klahowya’s property on June 29, 2007. Klahowya had been current on debts owed to plaintiff through early 2007, at which point Klahowya stopped making payments and incurred an outstanding balance. Shorebank had supplied two lines of credit to Klahowya secured by the trust deed. One line of credit was used to pay off an earlier mortgage from a prior lender dating from January 2006. In its complaint, plaintiff alleged that Shorebank’s lien on the property was subordinate to its own.

The trial court ruled that Shorebank’s trust deed had priority over the plaintiff’s lien. The plaintiff appealed the judgment of the trial court. The plaintiff asserted its lien encumbered the development property before Shorebank’s trust deed was recorded, while Shorebank argued that plaintiff’s lien did not encumber the property until the claim of lien was recorded on June 29, 2007, which was more than seven months after Shorebank recorded its trust deed. Shorebank also raised the defense of equitable subrogation which permits a subsequent lender whose loan is used to pay off an earlier mortgage to take the priority position of that earlier lender. Equitable subrogation is applicable if the later lender is ignorant of an intervening lien and if their ignorance was excusable.

The general rule regarding lien priority is that an earlier lien is entitled to satisfaction before a subsequent lien. However, ORS 87.010(5) authorizes a lien on a parcel of land and upon the structures necessary for the use of the architectural plans, drawings, or specifications that an architect prepares. The lien must still be perfected, but the date of perfection relates back to the date of commencement of the improvement upon the land. The plaintiff asserted that the applicable relate-back date was when Klahowya’s contractor began construction in July 2006. Commencement and improvement is defined under ORS 87.005(1) as the first actual preparation or construction upon the site of such substantial character as to notify interested persons that preparation or construction upon the site has begun or is about to begin. Preparation is further defined by statute as “excavating, surveying, landscaping, demolishing, or detaching existing structures or leveling, filing in or otherwise making land ready for construction.”

The Oregon Court of Appeals held that plaintiff’s lien was created when it began work on the project. Once the lien was perfected on June 29, 2007 it related back to July 2006 when Klahowya’s contractor commenced their work.

Regarding the equitable subrogation defense, the plaintiff proved that Shorebank had actual knowledge of plaintiff’s involvement in the development project by virtue of their participation in workshops hosted by plaintiff, Shorebank’s loan negotiations with Klahowya wherein plaintiff’s work was discussed, and that fact that actual site preparation was ongoing during Shorebank’s involvement with the project.

Shorebank asserted that equitable subrogation was proper because they were ignorant of the fact that Klahowya was not paying its bills to the plaintiff and had no grounds to believe that plaintiff had a lien on the property for those unpaid bills. The court held that their ignorance of Klahowya’s non-payment was not a result of misrepresentations or the negligence of others, and therefore the defense of equitable subrogation was not available to Shorebank.

Impact: Under Oregon State Law, an architectural firm will have a lien upon the property for which its designs are intended. The relate-back date of that lien will be the date upon which work commences on that property. In order to proactively prepare for a lender’s defense of equitable subrogation, an architectural firm should include lenders in the discussions of timelines and project goals so that ignorance of an firm’s involvement cannot be proven. Once a design firm’s involvement in a construction project is known, lenders are put on notice of a potential inchoate lien held by that architectural firm.