UMB Bank, N.A. v. MacMillin Co.

654 B.R. 824

2023 DNH 130

UMB BANK, N.A., Appellant

Civil No. 23-cv-036-LM

United States District Court, D. New Hampshire

Signed October 16, 2023

Daniel S. Bleck, Mintz Levin Cohen Ferris Glovsky & Popeo PC, Boston, MA, Jason A. Manekas, Bernkopf Goodman LLP, Boston, MA, Peter N. Tamposi, The Tamposi Law Group PC, Nashua, NH, for Appellant.

Jeremy R. Fischer, Drummond Woodsum, Manchester, NH, for Appellee The MacMillin Company, LLC.

Frank P. Spinella, Jr., Wadleigh Starr & Peters PLLC, Manchester, NH, for Appellee Denron Plumbing & HVAC, LLC.

Bruce Joseph Marshall, Bruce J. Marshall Law Offices PLLC, Bow, NH, for Appellee Wallace Building Products Corporation.

Alan Braunstein, Riemer & Braunstein LLP, Boston, MA, Peter J. Nicosia, Nicosia & Associates, Tyngsboro, MA, for Appellee J.N.R. Gutters, Inc.

Ann Marie Dirsa, Manchester, NH, for US Trustee.

ORDER

Landya McCafferty, United States District Judge

UMB Bank, N.A., appeals the bankruptcy court's order (doc. no. 588 in the bankruptcy proceeding, Case No. 21-10523) that (1) granted appellee The MacMillin Company's motion seeking a determination that its mechanics' lien has priority over UMB Bank's mortgage and (2) granted the motion filed by appellees Denron Plumbing & HVAC, LLC; Wallace Building Products Corporation; and JNR Gutters, Inc. (collectively the "subcontractors") requesting the same. For the following reasons, the bankruptcy court's order is affirmed in part, and vacated in a limited respect and remanded in part.

STANDARD OF REVIEW

Under 28 U.S.C. § 158(a), this court has jurisdiction to hear appeals from final judgments, orders, and decrees of the bankruptcy court. District courts reviewing an appeal from a bankruptcy court decision generally examine the bankruptcy court's findings of fact for clear error, and its conclusions of law de novo. Stilkey v. Marsters, No. 17-cv-337-LM, 2018 WL 345946, at *2 (D.N.H. Jan. 9, 2018). Discretionary rulings made under the bankruptcy code are reviewed for abuse of discretion. Id. This court may affirm, modify, reverse, or remand the bankruptcy court's judgment with instructions for further proceedings. See GT Advanced Techs. Inc. v. Harrington, No. 15-cv-69-LM, 2015 WL 4459502, at *1 (D.N.H. July 21, 2015).

BACKGROUND

The parties stipulated to the factual record before the bankruptcy court, and the relevant background facts are not disputed.

Debtor Prospect-Woodward was a not-for-profit corporation which owned and operated a retirement facility in Keene, New Hampshire. On April 14, 2017, Prospect-Woodward hired MacMillin to manage the facility's construction. Appellees Denron Plumbing, Wallace Building Products, and J.N.R. Gutters were some of MacMillin's subcontractors.

About a month later, on May 15, MacMillin began preliminary work on the facility. This work included tree clearing pursuant to a wetlands permit that required such work to be performed before June 1, 2017. The subcontractors involved in this appeal did not begin work until later.

Under a loan agreement dated June 1, 2017, a state agency loaned proceeds of a bond sale to Prospect-Woodward to finance the facility's construction. On June 19 appellant UMB Bank's predecessor in interest¹ recorded the mortgage against the facility.

MacMillin worked under the construction contract through 2019. During this time, UMB Bank paid MacMillin at least $55 million for labor and materials from the money loaned to Prospect-Woodward. MacMillin executed partial lien waivers over the course of the project. The partial lien waivers expressly reserved MacMillin's mechanics' lien for unpaid retainage, interest, pending unresolved change order requests, unresolved claims, and amounts not yet billed by MacMillin's subcontractors and suppliers.

By 2019, the facility was almost complete. Prospect-Woodward, however, stopped paying MacMillin because of alleged construction defects. Between July and October 2019, MacMillin and its subcontractors sued Prospect-Woodward for breach of contract and to perfect their then-inchoate mechanics' liens.

On October 25, 2019, a state court found that MacMillin and its subcontractors were likely to prevail on their claims and were entitled to attachments. MacMillin recorded the writ of attachment and the state court's order based on the mechanics' liens on October 31. The total amount of these liens is approximately $5.7 million.

Prospect-Woodward filed a chapter 11 bankruptcy petition in August 2021. In the bankruptcy, UMB Bank's mortgage is an allowed claim² against Prospect-Woodward that is secured by the facility to the extent of the mortgage amount, which is about $65 million. MacMillin and the subcontractors also have allowed claims via their mechanics' liens on the facility totaling approximately $5.7 million. In late 2021, the bankruptcy court approved a sale of the facility for $33 million. As these figures demonstrate, the facility's sale will fail to cover all of UMB Bank's, MacMillin's, and the subcontractors' claims.

Understanding that reality, MacMillin and the subcontractors filed a motion in the bankruptcy court arguing that, by virtue of their mechanics' liens and a victory under New Hampshire's "race-notice" rules, they have priority over - or are "senior" to - UMB Bank's mortgage. UMB Bank objected, contending that its mortgage has priority under a New Hampshire statute, RSA 447-12:a ("Section 12-a"), or, alternatively, that it has priority under the race-notice rules, not MacMillin.

The bankruptcy court agreed with MacMillin, finding that MacMillin's mechanics' lien had priority under the race-notice rules because UMB Bank had actual or inquiry notice of MacMillin's mechanics' lien before it recorded the mortgage. The bankruptcy court rejected UMB Bank's argument that it was entitled to priority under Section 12-a. The bankruptcy court also found that under RSA 447:5 and 447:8, the subcontractors' liens followed MacMillin's priority. UMB Bank filed this appeal and argues that the bankruptcy court erred as to all three points.

DISCUSSION

Generally, in bankruptcy "state law governs the substance of claims." Travelers Cas. & Sur. Co. of Am. v. Pac. Gas & Elec. Co., 549 U.S. 443, 450, 127 S.Ct. 1199, 167 L.Ed.2d 178 (2007). The parties do not dispute that New Hampshire law governs the relative priority of their claims.

New Hampshire is a "race-notice" jurisdiction, meaning that "a purchaser or creditor has the senior claim if he or she records without notice of a prior unrecorded interest." Amoskeag Bank v. Chagnon, 133 N.H. 11, 14, 572 A.2d 1153 (1990); In re McLaughlin, Nos. BK 09-11671-JMD, BK 09-11672-JMD, & BK 09-11673-JMD, 2011 WL 1706791, at *3 (Bankr. D.N.H. May 4, 2011). In other words, when there are two interests competing for priority, the first creditor to have recorded its interest has priority over the second-in-time creditor's interest, unless the first creditor already knew or should have known about the second interest. In re Moultonborough Hotel Grp., LLC, 726 F.3d 1, 5 (1st Cir. 2013) ("The New Hampshire recording statute, [RSA] 477:3-a, acknowledges by negative implication the rule that the first party to record without notice of a prior party's claim has priority."). The creditor who has priority under the race-notice rules is often called the race-notice "winner" or "victor" in relation to the other creditor, who may be called the race-notice "loser."

A court can find that a creditor had prior notice of another's interest in several ways. Of course, a creditor had notice if it in fact knew about the prior interest at the time it recorded its own interest. Amoskeag Bank, 133 N.H. at 14, 572 A.2d 1153. Likewise, a creditor has constructive notice of any interest already recorded. Id. And, finally, an unrecorded interest may have priority over a recorded interest if the recording party possessed facts which would cause a reasonably prudent person to have inquired further into the existence of the unrecorded interest. See C.F. Invs. v. Option One Mortg. Corp., 163 N.H. 313, 316, 42 A.3d 847 (2012); In re McLaughlin, Nos. BK 09-11672-JMD, BK 09-11673-JMD, 2011 WL 1706791, at *3 (Bankr. D.N.H. May 4, 2011) ("A party is deemed to have actual notice if an investigation would show the existence of an interest in property.").

Beyond the race-notice rules, New Hampshire law provides certain interests automatic priority in specified circumstances. Specifically, MacMillin and the subcontractors hold mechanics' liens arising under RSA 447:2(I).³ Under New Hampshire law, mechanics' liens begin as inchoate - meaning incomplete or unperfected - liens at the time work under a contract first begins. See In re McLaughlin, 2011 WL 1706791, at *3 ("The mechanic's lien arises by operation of law when the labor or materials are furnished."); Boulia-Gorrell Lumber Co. v. E. Coast Realty, 84 N.H. 174, 148 A. 28, 30 (1929) (stating that a mechanics' lien is "one indivisible lien for the whole" if it was performed "under one entire contract," so that "as the work was done under an entire contract, the lien had priority over the mortgages for the labor and materials furnished after as well as before the mortgages were recorded"); Pike v. Scott, 60 N.H. 469, 471 (1881) ("If the materials were furnished under one entire contract, one indivisible lien for the whole was created thereby."). After the contractor finishes its work under the contract, it must take steps to perfect (or complete) the lien. See RSA 447:9; RSA 447:10. Otherwise, the lien expires. See RSA 447:9; In re McLaughlin, 2011 WL 1706791, at *3. There is no dispute in this appeal that MacMillin held a mechanics' lien for the total amount due under its contract with Prospect-Woodward at the time UMB Bank recorded the mortgage. There is also no dispute that MacMillin timely perfected its mechanics' lien after completing work under the contract.

UMB Bank's interest, on the other hand, is a construction mortgage, which is "any mortgage loan made for the purpose of financing...