## Facts

- A construction lender and a developer entered a construction loan agreement requiring the lender to make progress payments at specified construction stages.
- The developer executed a construction mortgage securing the loan; the mortgage was recorded before any work began on the property.
- The lender used a field representative to inspect work and authorize progress payments.
- Without the lender’s knowledge, the representative fraudulently approved progress payments for work not actually performed, resulting in some subcontractors being paid while others, including a masonry subcontractor, were not.
- The unpaid subcontractor later filed mechanics’ liens after foreclosure proceedings began.
- The subcontractor claimed its mechanics’ liens had priority over mortgage advances disbursed after it commenced work; the lender claimed priority for all advances under the earlier-recorded construction mortgage.

## Issues

1. Whether a construction mortgage recorded before any work begins has priority over later mechanics’ liens for all advances made under the loan, including advances disbursed after a subcontractor starts work.
2. Whether fraudulent progress-payment authorizations by the mortgagee’s agent defeat the mortgagee’s priority as against later-filed mechanics’ liens.

## Decision

- The court denied the subcontractor’s motion for summary judgment seeking priority for its mechanics’ liens over certain mortgage advances.
- The court held the construction mortgage, recorded before work began, retained priority over the mechanics’ liens for all advances made under the mortgage.
- The court concluded the agent’s fraud did not subordinate the mortgage lien absent collusion or bad faith by the mortgagee directed at defeating intervening lienors.

## Legal Principles

- A construction mortgage executed and recorded before commencement of work is prior to later-arising mechanics’ liens as to advances made under the mortgage in accordance with the loan agreement.
- Advances contemplated by and secured under a properly recorded construction mortgage are treated as part of the original secured transaction, not as independent later-priority events.
- Misconduct by a mortgagee’s agent in approving disbursements does not, without mortgagee collusion or bad faith toward lienors, strip the mortgagee of priority over mechanics’ lien claimants whose work began after recording.

## Conclusion

A lender’s construction mortgage recorded before improvements begin has priority over subcontractors’ later-filed mechanics’ liens for all loan advances made pursuant to the construction loan arrangement, and that priority is not lost merely because the lender’s agent fraudulently authorized progress payments without the lender’s collusion or bad-faith intent to prejudice lienors.


J.I. Kislak Mortgage Corp. of Del. v. William Matthews Builder, Inc., 287 A.2d 686 (Del. Super. Ct. 1972)