To read all five installments of this wage lien series, click here.
Washington’s recently enacted Washington Wage Recovery Act, SB 5355 (the “Act”), creates a new statutory lien for employees’ unpaid wage claims against their employers. The Act has significant implications for employees, employers, and secured lenders. In our final installment, we’ll address how wage liens impact secured creditors’ rights, including the priority of their security interests.
Priority Between Wage Liens and Other Recorded Interests
Priority among wage liens is determined by when they are recorded. The first wage lien to be recorded has the higher priority.
Priority between wage liens and other recorded interests is determined similarly. For real property, if the security interest, lien, mortgage, deed of trust, or other encumbrance (each an “Encumbrance”) is perfected before the wage lien is recorded, then the wage lien will be subject and subordinate to it. But if the Encumbrance attached to the real property after or was unrecorded when the wage lien was recorded, the wage lien has higher priority.
For personal property, a security interest perfected pursuant to Washington’s codification of the Uniform Commercial Code (RCW Title 62A) generally has higher priority than a recorded wage lien if the security interest was perfected or a financing statement covering the property was filed before the wage lien was recorded. However, there must not be a lapse after that in either filing or perfection. Generally, Uniform Commercial Code financing statements in Washington must be renewed every five years.
The Act includes some special priority provisions for titled personal property, like vehicles. If the certificate of title for such property does not contain a statement that the goods are or may be subject to a wage lien, certain buyers may take the property free of the wage lien and certain security interests may have priority over the wage lien.
The Act also specifies some circumstances when wage liens are not effective, including buyers of goods in the ordinary course of business, certain buyers of consumer goods, and certain good faith purchasers for value.
Priority rules and exceptions to those rules are detailed and fact-intensive. If you encounter a priority question involving wage liens, we recommend consulting with an attorney to evaluate how the particular circumstances will affect the priority and effectiveness of the wage lien.
Foreclosure Lawsuits and Other Lienholders
If a lawsuit is filed to foreclose a wage lien, the interests of lienholders who had recorded interests in the property prior to the filing of the lawsuit will only be affected if those lienholders are joined as parties to the lawsuit. However, the Act may still have other impacts on lienholders’ rights.
In particular, the Act impacts how lienholders can enforce their rights. The Act prevents a person from bringing a foreclosure lawsuit against property when a prior lawsuit to foreclose another lien on the same property is already pending. The later foreclosing party, though, may apply to be joined as a party to the first lawsuit and have that later party’s lien foreclosed in the same lawsuit. But the later party would not be able to maintain its own, separate foreclosure action.
Likewise, if a wage lien foreclosure lawsuit is filed when another lawsuit is pending, the court may consolidate the lawsuits. The court may do so either on the motion of a party or on its own initiative.
While these provisions do not prevent a lienholder, like a secured lender, from exercising its rights, they do limit procedurally how those rights may be exercised.
Considerations for Secured Lending
The priority and foreclosure impacts described above introduce additional issues secured lenders should consider when determining how to properly protect their interests in their collateral. Relatedly, employers should review whether the existence of a wage lien or the filing of a related foreclosure lawsuit will cause a default under the employer’s loan documents with its bank. With the Act scheduled to go into effect on January 1, 2022, both secured lenders and employers have significant legal issues to consider in the upcoming months.
