Equitable Liens: How Courts Override Recorded Claims

Equitable Liens are not like traditional liens which arise from contracts. Equitable liens are created by the courts, meaning courts have the ability to grant and impose equitable liens to ensure fairness in a transaction. These liens grant creditors an interest in a debtor’s property that they might otherwise not have had due to legal technicalities or bad faith transactions. 

Courts often impose equitable liens in cases involving:

• Fraud or misrepresentation: Where someone wrongfully acquires a party through deceit or fraudulent misrepresentations. 
• Constructive Trusts: Where a court believes a party is holding property unfairly and it should be returned.

Courts often look to whether:

• There is a clear debt or obligation to be paid by the defendant
• The obligation must be tied to a specific asset as opposed to general debts
• The defendant must have unfairly benefited from the plaintiff’s contribution 

It is important to distinguish that an equitable lien does not create an immediate right to possession of the property but rather, grants the aggrieved party a secured interest instead. Regardless, an equitable lien is an effective tool in protecting a party’s property interests because it serves as an exception to the general “first in time, first in right” rule on real estate liens. The general rule of priority in lien disputes is “first in time, first in right”, meaning the first party to record a lien or mortgage against a property usually has seniority over later claimants. 

However, when a court grants an equitable lien, the newly secured interest “relates back in time” to the moment when the unjust enrichment occurred or when the claim first arose. This relation-back doctrine allows a later-imposed equitable lien to take priority over previously recorded interests, protecting a claimant who had an earlier but unrecorded interest in the property.

It is important to remember that an equitable lien is an equitable remedy, meaning where there exists a more appropriate legal remedy such as damages; a court may not be inclined to grant an equitable lien and may order that damages be paid instead.