Source: http://www.woodmclaw.com/blog/by_category?category=Mechanic's+Liens
Timestamp: 2013-05-24 10:55:26
Document Index: 529018985

Matched Legal Cases: ['§ 32', '§ 32', '§ 32', '§ 32', '§ 32', '§ 5', '§ 5', '§ 5', '§ 32', '§ 32', '§ 32', '§ 32']

Posts in Mechanic's Liens
The usual suspects. The facts in City Savings were undisputed and not terribly unique. The case involved a real estate owner/borrower, a lender/mortgagee and a subcontractor/mechanic’s lien holder. In 2005 and again in 2007, the lender made two construction loans to the owner and contemporaneously filed two mortgages. The funds from the lender’s mortgage loans were for the specific commercial project that gave rise to the subcontractor’s mechanic’s lien. In 2008, after failing to get paid, the subcontractor recorded a mechanic’s lien. The litigation context. At the trial court level of the City Savings foreclosure case, both the subcontractor and lender claimed their respective lien had priority over the other. Despite the McComb precedent in favor of the lender, the trial court gave the mechanic’s lien priority based upon laws of equity. (Black’s Law Dictionary defines “equity” as “justice administered according to fairness as contrasted with the strictly formulated rules of common law.”) On appeal, after citing to McComb and the three operative statutes (Ind. Code §§ 32-21-4-1(b), 32-28-3-2 and, most importantly, 32-28-3-5(d)), the Court reversed the trial court in favor of the lender.
[Lender] supplied the [owner] with proceeds from a third promissory note to pay a subcontractor, Vendramini, for its improvements to the Real Estate knowing full well that Eby remained unpaid by the [owner] for Eby’s improvements. The payments to Vendramini occurred after Eby had already recorded its mechanic’s lien and after Eby had filed its complaint to foreclose to which [lender] was made a party. The trial court frowned upon the fact that [lender] “essentially authorized the payment of a third contractor before the second contractor.” As [lender] was on notice of Eby’s mechanic’s lien before it disbursed those funds on behalf of the [owner], the trial court concluded that [lender] was in the best position to avoid a loss in this case. Equity vs. law. The Court did not condone the owner’s decision to pay Vendramini when it had not yet paid Eby. But the Court did not view such a decision as unclean hands on the part of the lender, which was under no obligation to control its borrower’s decisions. Moreover, the Court did not believe that the owner’s decision to put the lender in a better position than Eby should negate the lender’s statutory priority status. In a pro-lender, pro-legislature statement, the Court said:
A separate equitable doctrine in Indiana provides that “equity follows the law.” In City Savings, principles of equity could not overcome the clear application of the statutory law in favor of the lender. There was no evidence that substantial justice could not be accomplished by following the law. Since Indiana’s priority statutes governed the parties’ actions, “equity must follow the law.” Email this
Posted at 05:00 PM in Mechanic's Liens
The interests. Nichols Group owned real estate that it intended to develop into a residential subdivision. Lincoln Bank gave a mortgage loan to Nichols Group to fund the development, and the bank recorded its mortgage in 2006. General contractor, Conwell Construction, contracted with Nichols Group to develop the site (earth work, sewer, water, curbs and paving). Conwell Construction, in turn, contracted with subcontractors Hedger (for curbs), Mitchell (for drains) and Grady (for paving). The contractors only performed site development work. They did not construct any houses, nor did they improve any specific lots. Indeed no houses were ever built on the property. Since the contractors didn’t get paid, they filed mechanic’s liens in 2007. The controversy. The Court addressed the question of whether Lincoln Bank’s mortgage should have priority, as opposed to the bank and the four contractors sharing pro rata in any foreclosure proceeds.
a. I.C. § 32-28-3-1 – Contractors may file mechanic’s liens for, among other things, the labor and materials at issue.
b. I.C. § 32-28-3-5(c) – Mechanic’s liens are equal in priority to other mechanic’s liens.
c. I.C. § 32-28-3-5(d) – Priority of construction mortgages (see also July 11, 2007 and September 6, 2008 posts).
d. I.C. § 32-28-3-5(d)(1-3) – Exceptions to general rule of construction mortgage priority for homes, improvements auxiliary to homes and utilities.
Exceptions not applicable. Since the underlying site development work in Lincoln Bank related to the ultimate construction of houses, seemingly the door was open for the Court to apply one or more of the three exceptions to § 5(d)’s priority rule. Instead, the Court viewed the work for what it was – construction, for a real estate investor, of a commercial project. The work in question did not directly involve the building of an individual homeowner’s residence. The closest call for the Court was § 5(d)(2), which governs the development or construction of “an improvement on the same real estate auxiliary to a Class 2 structure [house].” Despite concluding that the contractors’ earth moving operations and asset installations were indeed “improvements,” the Court relied heavily on the fact that “no home had yet been constructed on the land” in concluding that § 5(d)(2) “does not apply to preparing land for the subsequent construction of houses.” Result. The Court concluded, with regard to the foreclosure proceeds, that “the first priority is to satisfy Lincoln Bank’s mortgage.” Thereafter, “the four mechanic’s liens are equal in priority.” Lincoln Bank is particularly relevant today given recent failures of many residential subdivision development projects across Indiana. These projects have, in certain instances, stalled before any houses were built or any specific lots were improved. According to Lincoln Bank, where the general contractor or subcontractors have devoted resources only to subdivision site work, lenders holding a timely and perfected construction mortgage will not be forced to share equally with such contractors. Email this
Posted at 04:03 PM in Mechanic's Liens
The statutes. Indiana law is well-settled that Chase had priority over McComb/ARI with regard to the land and the pre-existing buildings. The only issue in McComb & Son was whether McComb/ARI had priority as to the improvements they constructed. The Court outlined the three operative statutes and the corresponding rules/exceptions: 1. Generally, a purchase money mortgage is superior to a mechanic’s lien “if the mortgage was recorded before the mechanic’s work was begun or materials furnished.” Provident Bank v. Tri-County South Side Asphalt, Inc., 804 N.E.2d 161, 163 (Ind. Ct. App. 2004); I.C. § 32-21-4-1(b).
3. On the other hand, as to commercial property (including apartment complexes), the mortgage of a lender has priority over all liens recorded after the date the mortgage was recorded, “to the extent of the funds actually owed to the lender for the specific project to which the lien rights relate.” I.C. § 32-28-3-5(d) . For the first time, McComb & Son conclusively tells us what Section 5(d) means. The Court talked about Ward v. Yarnelle, 91 N.E.7 (Ind. 1910) and its doctrine of parity, as well as the dissenting opinion in the Provident Bank case, both of which I addressed in July of 2007. According to McComb & Son, the Ward doctrine of parity does not apply to commercial construction projects. The critical rule announced in McComb & Son was: With regard to commercial property, where the funds from the loan secured by the mortgage are for the specific project that gave rise to the mechanic’s lien, the mortgage lien has priority over the mechanic’s lien recorded after the mortgage.
There is no dispute that [Chase’s] mortgages were recorded before the Lienholders’ mechanic’s liens or that the property in question is commercial in nature. In addition, the trial court … concluded that the funds from [Chase’s] loan were for the specific project that gave rise to the Lienholders’ mechanic’s liens. Although McComb/ARI may seek transfer of the case to the Indiana Supreme Court, for now a lender’s construction mortgage lien will prime a mechanic’s lien, if the lender records its mortgage before any contractor records its notice of mechanic’s lien and if the construction project was commercial in nature. The survival of the Provident Bank rule (#2 above). McComb/ARI argued for application of the Provident Bank rule, but Provident Bank did not involve a construction loan but rather a purchase money mortgage. As such, I.C. § 32-28-3-5(d) did not apply. Significantly, however, the Court explicitly stated that I.C. § 32-28-3-2 “still provides the general rule” in cases where the funds from the loan secured by the mortgage were not for the construction of the improvement. Email this
Posted at 10:46 PM in Mechanic's Liens