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3. Kelly executed a mortgage to Union Bank to secure an initial loan of $25,000. The mortgage contained a clause that provided: "This loan shall be for the purpose of construction of a dwelling house on the above- described property and shall cover and secure additional advances to be made by mortgagee to mortgagors in total amount not to exceed $145,000." Kelly later received other loans from Union totally $145,000. However, before the additional bank advances were made, several contractors furnished Kelly with materials and labor in building his home and complied with the state’s mechanics lien statute even though Kelly had failed to post a proper notice of commencement as required by the statute. Kelly did not pay the contractors and he defaulted on his bank loan. Union Bank foreclosed on its mortgage and argued that its mortgage, recorded before the contractors furnished their materials and labor, gave it priority. The contractors claimed that Union Bank only had a superior lien for $25,000 and that the remainders of its advances were subject to their mechanics’ liens. Who is correct? Why?

Respuesta :

In the scenario provided, the statement that Union Bank can only claim $25,000 and the remainder advances must be paid to the contractors is factually true.

As per the case fought in the court of Lyman Lamb Company vs Union Bank of Benton, the decision was made in the favor of the contractors. It was stated by the court that a valid mortgage may be executed to secure debt which is to be contracted in the future but in doing so, an unequivocal agreement in the instrument itself must be mentioned for the debts incurred in future.

The Union Bank was liable to claim of $25,000 but no such clause/agreement was made that constituted prior or first lien for subsequent advances because was the bank was not in any obligation to do so.

The conclusion made by the court was that the mechanics lien had priority, as they furnished the required materials before Union Bank made the advances.

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