United States: Mechanic's Liens Held To Have Priority Over Deed Of Trust At The Railway Exchange Building In Downtown St. Louis

In the latest development involving the currently-vacant Railway Exchange Building in downtown St. Louis, the Missouri Court of Appeals, Eastern District held that the deed of trust holder—Gamma Real Estate Capital, LLC ("Gamma")—waived the priority of its $19.7 million deed of trust securing the building and attendant parking garage.The November 28, 2023 decision, captionedCustom Construction Solutions, LLC v. B & P Construction, Inc., No. ED 111253, is a victory for unpaid contractors asserting their mechanic's lien rights.

In January 2017, HH St. Louis Railway, LP ("HH St. Louis") purchased the Railway Exchange Building, along with its parking garage and surface parking lot (collectively, the "Property"), for redevelopment.As part of the purchase, Gamma lent HH St. Louis $19.7 million and, as a security interest in the loan, recorded a deed of trust at the time of purchase.Throughout 2017, HH St. Louis then retained various contractors and project designers to begin work at the Property, including demolition and shoring work, materials supply, and architectural and engineering services.

As invoices accrued and were left unpaid in 2018, however, the contractors filed mechanic's liens against the Property, and initiated litigation. Eventually, the Circuit Court of the City of St. Louis held a 4-day bench trial to adjudicate the contractors' claims for mechanic's lien enforcement, breach of contract, and non-payment.The trial court entered judgment in favor of the contractors, holding they were collectively owed several millions of dollars.Among other things, the trial court found: (1) Gamma waived the priority of its deed of trust; (2) the contractors had enforceable mechanic's liens on the Property, and were otherwise entitled to payment based on other legal theories; and (3) most of the contractors were entitled to their attorneys' fees under Missouri's Prompt Payment Act.

On appeal, Gamma and HH St. Louis challenged nearly all aspects of the trial court's decision, but one point is particularly worthy of discussion.Gamma—the deed of trust holder—principally argued the trial court erred in granting the mechanic's liens priority over its deed of trust, which was recorded before any work began at the Property. In considering this argument, the appellate court recited the law in Missouri: "Generally, the priority of a superior deed of trust over an equitable lien can be waived where there is evidence that the holder of a superior deed of trust is aware that its loan will be used for construction on the property and will be secured by the property where the construction activity will be undertaken."

The appellate court found Gamma was aware that its loan proceeds would be used for construction because Gamma set up a $5 million "predevelopment reserve fund" for HH St. Louis to pay contractors.Gamma retained complete control over the fund and required HH St. Louis to submit detailed "draw requests" (supported by invoices, bills, and receipts proving the work had been performed) before Gamma would release any predevelopment reserve funds to HH St. Louis for contractor payments.The Court found that the draw requests and Gamma's engagement in the reserve fund process amounted to "substantial evidence" that Gamma was aware its loan proceeds would be used for construction purposes. The Court also found Gamma was aware the Property was subject to liens because its contract with HH St. Louis required HH St. Louis to defend, indemnify, and hold Gamma harmless from any such liens. Thus, the court held that Gamma waived the priority of its deed of trust, even though it was first-in-time, because it was aware its loan proceeds would be used for construction and the property could be subject to liens.

This case is an important lesson for contractors, lenders, and property owners, particularly because the use of such lender-controlled reserve funds and "draw request" processes have become commonplace. Typically, the holder of a superior mortgage or deed of trust assumes it cannot lose its priority status. However, the Custom Construction Solutions decision makes clear that is not always the case under Missouri law. Rather, a lender who is "aware" that mechanic's liens can arise from a construction project for which the loan is being made can be found to waive the claim of priority of its deed of trust as to the mechanic's lien, and such lender "awareness" can be established by the lender's participation in the reserve fund and draw request process. It is crucial that lenders and construction contractors, alike, understand this wrinkle of Missouri law, as it may make the difference between payment and non-payment on a project.

After finding Gamma waived the priority of its deed of trust, the Missouri Court of Appeals then continued on to analyze the validity of the various contractors' lien claims, whether the work was completed in a workmanlike manner, the availability of attorneys' fees under the Prompt Payment Act, and other issues.

The full text of the Court's publicly-available decision can be found under "Resources" below.

Resources

• In the Missouri Court of Appeals Eastern District

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