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Vendees’ Liens—Construction Lenders Beware!

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By:  David A. Sprentall

A recent Arizona Court of Appeals decision highlights a lien priority risk for secured construction lenders when the financed project fails. The problem—known as a “vendee lien”—is most likely to arise when up-front deposits are paid by buyers of units in condominiums or similar projects.

The case, Rigoli v. 44 Monroe Marketing, LLC, involved a construction loan made by Corus Bank in 2006 for the development of the 44 West Monroe condominium tower in downtown Phoenix. As a condition to the loan, the developer was required to have presales of at least 100 units and earnest money deposits of approximately $4.5 million. Those deposits were held by the bank and used to fund project construction costs before advances of the bank’s loan.

In 2009 the developer defaulted on the construction loan. Although some units in the project had been sold[1], the project otherwise failed.

Shortly after the default, the FDIC became the receiver for Corus Bank. In the course of the receivership the loan was transferred to a new entity, Corus Construction Venture LLC and a trustee’s sale was completed with Corus Construction as the buyer based on a credit bid. No doubt the intention was that the trustee’s sale would wipe out any remaining purchaser rights so that the property would be free and clear and could be remarketed as rental apartments.[2] After foreclosure Corus Construction transferred the property to the defendant.

The plaintiffs were purchasers under the presales. For whatever reason, when the project failed their contracts never closed and they lost their deposits. To recover that money, the plaintiffs asserted equitable vendee liens. The plaintiffs also argued that the liens were senior to the construction loan and thereby survived the trustee’s sale. They sought to “quiet title” and foreclose the liens on the project.

The Arizona Court of Appeals found in favor of the plaintiffs and in doing so made several relevant determinations:

  1. The Court found that the plaintiffs held valid vendee liens for the amounts paid on the unit purchases. The liens arose when the purchase contracts were signed and the down payments were made. The purchasers were not required to record any document to be able to assert the lien.
  2. The unit purchase contracts provided that the sole and exclusive remedy for a seller breach was either termination or specific performance. The Court found that this language was not sufficient to waive the vendee lien. The Court required a clear showing of an actual intent to waive – in other words to waive the vendee lien requires very specific language. Even so, in a footnote the Court cited a Florida Bankruptcy Court decision in which purchasers were allowed to assert vendee liens despite contract language disclaiming lien rights.
  3. Language in the original commitment letter from the bank to the developer provided unit purchaser rights must be subordinate to the bank’s deed of trust. The Court held that the unit purchasers were not parties to that letter and therefore could not be bound by the subordination requirement.
  4. The plaintiffs entered into the contracts to purchase the condominium units between April 2005 and September 2006, which was around the same time that the loan was made. Based on that timing, the Court found that the holders of the vendee liens were protected against the bank’s deed of trust. Since Corus Bank not only knew of the purchase contracts but in fact required the earnest money, it was found to have been on notice of the existence of the contracts and the resulting liens. As a result, the bank’s deed of trust was junior to the purchasers’ vendee liens.

Consequently, the plaintiffs were recognized to hold a senior claim on the property.

Whether or not the case is appealed to the Arizona Supreme Court, the clear lesson of 44 West Monroe is that a construction lender should address the risk of future vendee liens in a condominium project or other development in which substantial purchaser deposits are to be made. Otherwise,  the lender may be left having to repay those deposits from its own pocket.

____________________ Notes

[1] See^1968311. [back]

[2] See [back]