Opinion ID: 739299
Heading Depth: 2
Heading Rank: 3

Heading: Connecticut Common Law

Text: 37 If, as Duraflex contends, the subordination agreements are enforceable against the RTC, the priority of the Duraflex mechanic's lien depends upon state law principles concerning the circuity of liens. Duraflex asserts that under the common law of Connecticut when Charter Federal subordinated a (relatively small) part of its mortgage to the FNBS mortgage, the Charter Federal mortgage surrendered priority not only as to the FNBS mortgage, but as to the mechanic's lien as well. We disagree. 38 We are presented with a variant of a classic circular priority dilemma. 6 Charter Federal, as first lienholder, has subordinated a portion of its first lien to FNBS, the lienholder with third priority. The issue is what becomes of the relative priority of the original second lien filed by Duraflex, a lienholder not party to the subordination. 39 We are persuaded that the Supreme Court of Connecticut would resolve this issue through reasoning substantially similar to that employed in RJB Contracting Inc. v. Hi-G Co., Inc., No. CV 950466682S, 1995 WL 791952 (Conn.Super.Ct. Nov.28, 1995), a recent case from the Connecticut Superior Court. The circular priority issue in RJB resembles the one we consider here. General Electric claimed a first mortgage on certain property, upon which mechanic's liens were thereafter filed by (first) RJB and (then) Kennedy Electric. Later still, Congress Financial recorded an additional mortgage on the property and on the same day General Electric partially subordinated $275,000 of its first mortgage to Congress's later mortgage. RJB (the second priority lienholder) claimed that the subordination agreement improved its priority and that RJB's lien now took priority over those of Congress and General Electric. 40 The Superior Court rejected RJB's claim. Relying primarily on In re Cliff's Ridge Skiing Corp., 123 B.R. 753 (Bankr.Ct.W.D.Mich.1991), the court resolved the order of recovery among the lienholders as follows: (1) Congress, which recovers $275,000 under GE's senior lien pursuant to the subordination agreement; (2) General Electric, which recovers the balance of its original lien less the $275,000 subordinated to Congress; (3) RJB and Kennedy; (4) GE, which recovers on the remaining $275,000 of its lien; and (5) other lienholders in turn. RJB Contracting, 1995 WL 791952, at  3. The court noted that under this scheme the intermediate lienholders, who (like Duraflex) were not parties to the subordination are not prejudiced because they were always junior to [the first lienholder's] prior interest, regardless of whom it is paid to. Id. 41 Employing that scheme in the instant case, the priorities are as follows: (1) FNBS, which recovers $850,000 under Charter Federal's senior lien pursuant to the subordination agreements; (2) Charter Federal, which recovers the balance of its original mortgage less the $850,000 subordinated to FNBS; (3) Duraflex; and (4) Charter Federal, which recovers on the remaining $850,000 of its lien. Thus, Duraflex's lien priority is neither impaired nor improved by the $850,000 partial subordination of Charter Federal's lien in favor of FNBS--a subordination to which Duraflex was not a party. 42 In arguing that its lien should now have priority over all encumbrances on the property, Duraflex relies chiefly on Shaddix v. National Sur. Co., 221 Ala. 268, 128 So. 220 (1930), and McConnell v. Mortgage Inv. Co. of El Paso, 292 S.W.2d 636 (Tex.Civ.App.1956). These cases are unpersuasive. Shaddix, an Alabama Supreme Court case from 1930, articulates no rationale. See 128 So. at 224. McConnell is a relatively more recent case, decided by a Texas intermediate court, that does little more than cite Shaddix in reaching its conclusion. See 292 S.W.2d at 638. 43 Although these cases are of little help in resolving this appeal, we note that the RJB scheme employed here is not necessarily inconsistent with them. In Shaddix and McConnell, the lienholder with first priority subordinated all of that lien to the lienholder with third priority. Under the RJB analysis, had Charter Federal subordinated the whole of its $3.95 million mortgage to FNBS, then Charter Federal's lien priority would have been entirely subordinate to the Duraflex mechanic's lien. And, in the absence of any stated rationale in Shaddix and McConnell, we read those cases to say no more than when a first lienholder subordinates its entire lien to the lien of a third lienholder, the original first lien is subordinated to the liens of both the second and third lienholders. See Shaddix, 128 So. at 224; McConnell, 292 S.W.2d at 638. In RJB, Shaddix, and McConnell, the second lienholder was left in a position no worse or better than it would have been in, absent the subordination. 44 As Duraflex points out, (i) RJB relies largely on In re Cliff's Ridge Skiing Corp., 123 B.R. at 767; (ii) Cliff's Ridge in turn adopted the reasoning of the Texas Supreme Court in ITT Diversified Credit Corp. v. First City Capital Corp., 737 S.W.2d 803 (Tex.1987); and (iii) ITT, which decided a lien-priority issue concerning personal property, distinguished McConnell on the ground that McConnell stated the rule governing liens on real property. 737 S.W.2d at 804. Duraflex therefore argues that on this appeal--which involves liens on real property--we should follow the McConnell rule and distinguish ITT and Cliff's Ridge on the ground that they furnish the rule only in cases involving liens on personalty. 45 We see no valid basis for the distinction Duraflex seeks to draw between real property and personalty. The reasoning of RJB and Cliff's Ridge is principled and sound, and does not seem to depend on the character of the property to which the liens attach. We think the reasoning of these cases would be applied by the Supreme Court of Connecticut to the Duraflex lien. 7 46 The result in this case is also supported by the Supreme Court of Connecticut's often repeated observation that mechanic's liens are premised upon equitable interests which turn on the nature of the contract between the lienor and the property holder. See generally Centerbrook, Architects and Planners v. Laurel Nursing Servs., Inc., 224 Conn. 580, 586-92, 620 A.2d 127 (1993) (citing cases). Duraflex was not a party to the subordination agreements, and we therefore see no equitable reason why the priority of the Duraflex mechanic's lien should be improved (or impaired) as a result of agreements to which Duraflex was not a party. 47 The goal of the Connecticut mechanic's lien statute is to provide a remedy in the form of security for a contractor's labor and materials. See Conn. Gen.Stat. § 49-33; Camputaro v. Stuart Hardwood Corp., 180 Conn. 545, 550, 429 A.2d 796 (1980). The RJB scheme, as we apply it in this case, serves that goal because the relative priority of the Duraflex mechanic's lien is unaffected. Duraflex's position, if adopted, would raise barriers to subordination agreements and reduce incentives for entering into them. Yet such agreements accelerate the flow of cash to troubled projects--financial relief that promotes the development of assets that secure payments to all lienholders. 48 In light of all these considerations, we hold that under Connecticut law, the relative priority of the Duraflex mechanic's lien would not be improved by the subordination agreements of Charter Federal and FNBS, assuming without deciding that such agreements are valid and enforceable against the RTC. We therefore need not reach the question of the validity of the agreements under 12 U.S.C. § 1823(e).