Bulletin: AK000003

Dear Associates:

The Alaska Supreme Court has ruled that (1) a contractor is not entitled to priority of its lien over a previously recorded deed of trust, but (2) an unrecorded mechanics' lienholder is entitled to notice of foreclosure.

AS 34.35.060(c) gives super-priority to liens of "individuals" over prior encumbrances. Individual seemed to be clearly defined in AS 34.35.120(10). However, the trial court decided that a contractor fit within the definition. The Supreme Court reversed by clarifying that "individual" means a "natural person who is not acting as a contractor and who is employed by the owner of real property or employed by a contractor". A contractor is not entitled to priority.

The Supreme Court also ruled, however, that this contractor was entitled to notice of foreclosure of the deed of trust. The contractor's claim of lien was not recorded until after the sale. It was evidenced, however, by the recent construction on the property.

The court determined that the "trustee or beneficiary should inspect the property" to "insure that all interested parties, including those without recorded interests, have notice of the foreclosure".

Our Trustee Sale Guarantees are limited to matters of record and we should not have any liability for this problem. Our information for Trustee and Additional Inquiry endorsements are somewhat ambiguous on this point and will be cleaned up.

If you are conducting trustee sales, you should attempt to disclaim liability for parties in possession, or whose interests would be disclosed by inspection, who are entitled to notice. This should be the beneficiary's responsibility.

If you are insuring through a deed of trust sale within 90 days of sale, you should inspect the property for unrecorded interests and new construction. If they exist, verify that notice of foreclosure was given. If more than 90 days has elapsed without recordation of a lien, you may ignore the problem. If a lien was recorded, verify that notice was given.

The real problem in Buckhorn was that property appraised at $115,000 was sold for $22,000. When such a disparity between value and sales price exists, the courts will look for a way to upset that sale. It is very important that you not insure through forced sales when the amount bid was less than 70% of value or the debtor remains in possession.