In a recent decision, the Utah Supreme Court addressed a matter of first impression in Utah, namely, whether a subordination agreement between two senior lenders, which reversed the priority of their respective liens against certain real property, improved the priority of a junior mechanic's lienholder who was not a party to the subordination agreement. VCS Inc. v Countrywide Home Loans, Inc., (2015 UT 46, 784 Utah Adv. Rep. 33) decided April 14, 2015. In the underlying action, VCS provided labor and materials to improve real property that was subject to deeds of trust in favor of two banks. The lenders entered into several subordination agreements among themselves that altered the priority of their respective trust deeds. VCS was not a party to these subordination agreements. In the subordination agreements, the first lender subordinated its position to the second lender. VCS performed work and filed its mechanic's liens while both senior liens were in effect against the property. Subsequently, the second lender’s lien, which had senior status due to the subordination agreement, was released. Thereafter, the first lender foreclosed. VCS contended that, as a result of the subordination and the release of the second lender’s lien, its mechanic's lien had priority over the first lender.

In resolving the lien priority dispute, the Court acknowledged that other courts had adopted two different approaches to solving “circular lien priority disputes” arising out of subordination agreements between some, but not all, lienholders. The “partial subordination” rule, which the court characterized as the majority position, holds that the nonparty creditor is unaffected by the subordination agreement which “simply swaps the priorities of the parties to the subordination agreement.” On the other hand, the “complete subordination rule,” which was the minority position, moves the junior lienholder into first priority position over the subordinating lender. In adopting the “partial subordination rule,” the Court held that the subordination agreement between the banks did not improve the priority position of the junior lienholder. This decision will resolve uncertainty for lenders in negotiating subordination agreements in Utah where junior liens may be present against the same collateral, or where such junior liens might arise in the future.