In a case of first impression in Idaho, the Supreme Court in American Bank v. Wadsworth Golf Construction Co. of Southwest, No. 39415 (Idaho Aug. 16, 2013) (slip op.), determined that priority of lien filings on a property remain subject to a lien priority analysis even after a statutory lien release bond is filed to remove the encumbrance on the property itself.
After reviewing the specific statutory language in Idaho’s mechanics lien statute, and various cases around the country cited by the parties, the court ruled that the policy reflected under California law was consistent with Idaho’s intent, and that the lien release bond was “merely meant to act as a substitute security for the real property and does not otherwise affect the rights of the interested parties.” Id. at 9-10.
More interesting to some lending to or working on projects in Idaho is the court’s reference to the contractor’s objection to the lender’s subordination argument under the required bank contractual release upon progress payments. The contractor was cross-appealing on the decision that the subordination language incorporated into the progress payment lien release was not a valid waiver of the 5% retention that was still being withheld by the now defunct owner.
Factually and legally, the Idaho Supreme Court did not have to address that issue, given that there was no dispute that the contractor would have had priority over the lender even for the 5% retention. The court’s finding on the effect of the release bond made all other matters before it moot.
Lenders, title companies and contractors will have to wait until another day for clarity on the remaining issues and move forward on their best evaluation of the validity of subordination agreements between lenders and contractors under the statutory mechanics lien laws.