In this case, the contractor recorded his contract prior to the commencement of work. Thereafter a dispute arose between the contractor and the owner and the contractor filed a lien. The parties settled the dispute whereby the owner gave the contractor a promissory note for the amount owed.
Then, the contractor canceled its lien and the owner obtained a loan to fund the remainder of the construction; the loan was secured by a mortgage on the property. The owner defaulted on the note given to the contractor and the contractor filed another lien. A contest followed to determine which was the superior lien, the bank mortgage or the contractor’s lien filed after it.
The Court held that the contractor’s second lien primed the previously recorded bank mortgage because the contractor’s contract had never been cancelled.
If you are a contractor and accept a note from an owner, do not cancel your contract until you are paid in full.
However, if you are the owner or a banker, make sure both the contract and all liens are cancelled.
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