On October 25, 2012, the Nevada Supreme Court handed down
its decision in the Fontainebleau Las Vegas Holdings, LLC Case. The
matter was submitted to the Nevada Court via NRAP 5’s provision for receiving
certified questions from other courts-in this case, the Bankruptcy Court for
the Southern District of Florida. The dispute involves competing claims
of priority between Wilmington Trust FSB, as Administrative Agent for the
secured lenders, and the mechanic’s lien creditors who performed construction
on the still uncompleted structure. The work of improvement
commenced prior to the recording of the current deed of trust, but included
take out financing of a deed of trust recorded prior to commencement of
work. Wilmington claimed priority over the mechanic’s lien claimants by
virtue of the doctrine of equitable subordination, arguing that, to the extent
it paid off the original senior secured lien, it should be substituted for that
lien in priority. The Nevada Supreme Court held that equitable
subordination cannot operate to defeat the priority of mechanic’s liens given
NRS 108.225’s directive that mechanic’s liens are preferred to any mortgage of
which the lien claimant had no notice and which was unrecorded at the
commencement of construction, as well as to every mortgage or encumbrance made
after the commencement of construction.
The decision also holds that prospective contractual
subordinations of mechanic’s lien rights are not enforceable, but that pursuant
to NRS 108.2457 a subordination of rights which arose prior to the agreement
may be enforceable if the agreement comes within the statutory exceptions there
specified to the general unenforceability of waivers of mechanic’s lien rights
pursuant to NRS 108.2453.
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