If you make commercial loans, commercial mortgage loans, hard money loans, subprime loans, construction loans, or any loan secured by real estate, the following is a must-read.At Associated Mortgage Investors, we are the Hard Money Lender and we recently approved financing for the purchase of a religious facility in the Commitment for Title we noticed several labor liens filed by the Texas Workforce Commission (“TWC”).
The seller of the property foreclosed on the religious facility last month and so we assumed that their foreclosure cut off those labor liens. BTW, the seller was an attorney in his capacity as Trustee for the benefit of bondholders of that certain Trust Indenture known as Trust Indenture No. 800.
The first 25 years of my 50-year career in banking and finance were funding commercial loans, construction loans, residential loans, etc. for a bank, and for the last 25 years, I’ve been funding loans secured by construction loans, residential loans, and commercial loans as a hard money lender.
From the time I made my first commercial loan through last week (50 years later) when we were attempting to close this hard money loan, I have always understood that the only lien that trumps a lender’s first lien is ad-valorem taxes. That, unfortunately, is not so!
TWC liens have “super” priority, and all TWC liens last forever, until paid.
Let me say this again, a labor lien filed by the TWC primes a lender’s first lien. And, there is no statute of limitations.
If a lien is created under Chapter 61 of the Texas Labor Code, Section 61.0825 provides, “A Liens established under this subchapter is superior to any other lien on the same property, with the exception of a lien for ad-valorem taxes.” This means a TWC lien under Chapter 61 of the Texas Labor Code would prime a pre-existing purchase money security interest or similar lien. Liens under Chapter 61 are administrative liens for wages and penalties for failure to pay wages. (In other words, the lien would NOT be cut off by foreclosure of a deed of trust filed prior to the lien being filed.
The only exception is that a labor lien for “unemployment taxes” can be extinguished by the lienholder’s foreclosure provided that the labor lien was recorded subsequent to the lender’s first lien. Unfortunately, if the examiner for the title company is unable to determine if a TWC lien is a lien for wages and penalties under Texas Labor Code Section 61, the examiner should assume they are. In other words, even though a labor lien for “unemployment taxes” does not trump the lender’s first lien, it’s unlikely that a title company will insure title without taking exception to the TWC’s labor lien.
By the way, there were 3 liens filed by the TWC (one of which was filed “after” the lender’s first lien). The total owed was <$3K. Two of the three liens were recorded in 2005 and the third filed in 2011 (after the lender's first lien was recorded). The payoff was $65K and the seller had to pay all three.
And one more word of caution. The Texas Comptroller, on behalf of the TWC, is not required to give notice of a judicial foreclosure to the lender. In other words, the lender’s lien could be voided and the lender would not even be aware of it. That defies logic justice!
Any lender (from a bank to a hard money lender) financing a company that has employees is at risk of having their first lien cut off if the borrower has failed to pay an employee’s wages.
Jim Emerson.
Associated Mortgage Investors
