Court Opinion

ID: 4206013
Source: CourtListenerOpinion
Date Created: 2017-09-25 16:07:59.264998+00
Date Added: 2024-06-11T14:40:40.399925
License: Public Domain

FILED
                                                                               Sep 25 2017, 10:47 am

                                                                                    CLERK
                                                                                Indiana Supreme Court
                                                                                   Court of Appeals
                                                                                     and Tax Court

ATTORNEYS FOR APPELLANT                                    ATTORNEYS FOR APPELLEE
Mark S. Fryman, Jr.                                        Mark R. Wenzel
Scott L. Starr                                             Debra A. Mastrian
Starr Austen & Miller, LLP                                 Martha R. Lehman
Logansport, Indiana                                        SmithAmundsen LLC
                                                           Indianapolis, Indiana

                                            IN THE
    COURT OF APPEALS OF INDIANA

Kellam Excavating, Inc.,                                   September 25, 2017
Appellant-Intervening Defendant,                           Court of Appeals Case No.
                                                           09A02-1704-PL-760
        v.                                                 Appeal from the Cass Circuit
                                                           Court
Community State Bank,                                      The Honorable Leo T. Burns,
Appellee-Intervening Plaintiff                             Judge
                                                           Trial Court Cause No.
                                                           09C01-1504-PL-24

Baker, Judge.

Court of Appeals of Indiana | Opinion 09A02-1704-PL-760 | September 25, 2017                   Page 1 of 11
[1]   Community State Bank (the Bank) provided financing to Sagamore Warehouse,

      LLC (Sagamore), for the construction of a fertilizer plant by Kellam

      Excavating, Inc. (Kellam), on property Sagamore leased from Winamac

      Southern Railway Company (Winamac). Kellam did not receive full payment

      for its work and filed a mechanic’s lien. After Sagamore and Kellam filed

      complaints against each other, the Bank intervened and filed a third-party

      complaint to foreclose on its leasehold mortgage on Sagamore’s property. The

      Bank also filed a motion for summary judgment, arguing that its interest in the

      property should receive priority. The trial court entered summary judgment for

      the Bank, finding that its mortgage takes priority over Kellam’s mechanic’s lien.

      Kellam now appeals, arguing that the trial court erred in prioritizing the Bank’s

      interest. Finding no error, we affirm.

                                                      Facts
[2]   Sagamore operated a fertilizer wholesaler business that sold fertilizer to farmers

      in the Midwest. It required a fertilizer storage, processing, and handling facility

      (the Facility Improvements). On July 25, 2013, Sagamore and Winamac

      entered into a land lease, pursuant to which Winamac leased Sagamore real

      property (the Real Estate) located in Logansport. Sagamore’s right, title, and

      interest in and to the Real Estate under the land lease is, collectively, the

      “Leasehold Estate.”

[3]   On July 30, 2013, Sagamore and Kellam entered into a construction contract

      under which Kellam would build the Facility Improvements on the Real Estate.

      Court of Appeals of Indiana | Opinion 09A02-1704-PL-760 | September 25, 2017   Page 2 of 11
      Kellam began construction on the Facility Improvements on October 25, 2013.

      Meanwhile, Sagamore needed additional capital and sought financing for

      construction of the Facility Improvements from the Bank.

[4]   The Bank and Sagamore executed four instruments for its financing deal. On

      December 31, 2013, the Bank and Sagamore entered into Master Lease 2013-

      25, and on May 16, 2014, the Bank and Sagamore entered into Master Lease

      2014-02, Master Lease 2014-03, and Master Lease 2014-04 (collectively, the

      Master Leases). Under the Master Leases, the Bank financed the provision of

      certain equipment to Sagamore, Sagamore agreed to make quarterly payments

      to the Bank, and Sagamore acknowledged the Bank’s interest in the leased

      equipment. The Bank filed financing statements for its interests described in

      each Master Lease. After the May 2014 closing, the Bank paid Kellam

      $1,620,156 for costs related to the construction of the Facility Improvements.

      Kellam subsequently refunded $1,620,156 to Sagamore for funds Sagamore had

      previously paid Kellam before the Bank financed the project. On June 23,

      2015, each of the Master Leases was modified under a Master Lease

      Modification Agreement. The Master Leases, the modifications, and the

      financing statements are, collectively, the “Equipment Leases.”

[5]   On May 16, 2014, Sagamore granted the Bank a Leasehold Mortgage, Security

      Agreement, Assignment of Leases, and Rents and Fixture Filing (collectively,

      the Leasehold Mortgage) to serve as collateral. The Bank perfected its lien on

      June 24, 2014, by recording the Leasehold Mortgage with the Cass County

      Recorder. Pursuant to the Leasehold Mortgage, Sagamore mortgaged to the

      Court of Appeals of Indiana | Opinion 09A02-1704-PL-760 | September 25, 2017   Page 3 of 11
      Bank all of Sagamore’s right, title, and interest in the Leasehold Estate; in all

      fixtures, appliances, and articles of personal property connected with the

      operation of the Real Estate; and in all buildings, structures, and improvements

      connected with the Real Estate.

[6]   On March 6, 2015, Kellam recorded a mechanic’s lien for work performed on

      the Facility Improvements. On April 27, 2015, Sagamore filed a complaint

      against Kellam alleging breach of contract, among other claims. On August 6,

      2015, Kellam filed a counterclaim against Sagamore, alleging that it had not

      been paid for work completed and seeking foreclosure on its mechanic’s lien.

      On April 18, 2016, the Bank intervened to file a third-party complaint alleging

      that Sagamore was in default under the Equipment Leases and the Leasehold

      Mortgage and seeking foreclosure on its Leasehold Mortgage.

[7]   On May 31, 2016, the Bank filed a motion for summary judgment, arguing that

      the trial court should enter judgment in favor of the Bank with regard to the

      Equipment Leases and the Leasehold Mortgage, and enter an order finding that

      the lien created by the Leasehold Mortgage is superior to any other interest and

      foreclosing on it in favor of the Bank. On September 6, 2016, Kellam filed a

      response in opposition to the Bank’s motion for summary judgment and a

      motion for partial summary judgment, arguing that because the Bank is an

      owner and not a lender, Kellam’s mechanic’s lien is superior to the Bank’s

      interest.

      Court of Appeals of Indiana | Opinion 09A02-1704-PL-760 | September 25, 2017   Page 4 of 11
[8]    A hearing took place on December 16, 2016, regarding the parties’ motions.

       On March 14, 2017, the trial court granted the Bank’s motion for summary

       judgment and denied Kellam’s motion for partial summary judgment, finding

       that the Bank’s Master Leases constitute financing arrangements that take

       priority over Kellam’s mechanic’s lien. Kellam now appeals.

                                     Discussion and Decision
[9]    Kellam appeals the trial court’s entry of summary judgment in favor of the

       Bank, arguing that the trial court erred in prioritizing the parties’ liens.

[10]   Our standard of review on summary judgment is well established:

               We review summary judgment de novo, applying the same
               standard as the trial court: “Drawing all reasonable inferences in
               favor of . . . the non-moving parties, summary judgment is
               appropriate ‘if the designated evidentiary matter shows that there
               is no genuine issue as to any material fact and that the moving
               party is entitled to judgment as a matter of law.’” Williams v.
               Tharp, 914 N.E.2d 756, 761 (Ind. 2009) (quoting T.R. 56(C)). “A
               fact is ‘material’ if its resolution would affect the outcome of the
               case, and an issue is ‘genuine’ if a trier of fact is required to
               resolve the parties' differing accounts of the truth, or if the
               undisputed material facts support conflicting reasonable
               inferences.” Id. (internal citations omitted).

       Hughley v. State, 15 N.E.3d 1000, 1003 (Ind. 2014).

[11]   Three statutes govern priority between a mortgage and a mechanic’s lien:

       Indiana Code sections 32-21-4-1(b), 32-28-3-2, and 32-28-3-5(d). Our goal in

       statutory interpretation is to determine, give effect to, and implement the intent

       Court of Appeals of Indiana | Opinion 09A02-1704-PL-760 | September 25, 2017   Page 5 of 11
       of the legislature as expressed in the plain language of its statutes. Clark Cty.

       Drainage Bd. v. Isgrigg, 966 N.E.2d 678, 680 (Ind. Ct. App. 2012).

[12]   Our Court has previously discussed the interplay between the three relevant

       statutes and the question of mortgage lien priority versus a later-recorded

       mechanic’s lien as to improvements provided on commercial property as

       follows:

               The first statute relevant to this dispute is Indiana Code section
               32-21-4-1(b), which provides, in pertinent part, that “[a]
               conveyance, mortgage, or lease takes priority according to the
               time of its filing.” Relying on this statute, we have said that a
               mortgage lien 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 Southside Asphalt, Inc.,
               804 N.E.2d 161, 163 (Ind. Ct. App. 2004), aff’d on reh’g, 806
N.E.2d 802 (Ind. Ct. App. 2004), trans. denied.

               However, we also have Indiana Code section 32-28-3-2, which
               provides:

                        (a) The entire land upon which the building, erection, or
                        other improvement is situated, including the part of the
                        land not occupied by the building, erection, or
                        improvement, is subject to a lien to the extent of the right,
                        title, and interest of the owner for whose immediate use or
                        benefit the labor was done or material furnished.

                        (b) If:

                                  (1) the owner has only a leasehold interest; or

       Court of Appeals of Indiana | Opinion 09A02-1704-PL-760 | September 25, 2017   Page 6 of 11
                          (2) the land is encumbered by mortgage;

                 the lien, so far as concerns the buildings erected by the
                 lienholder, is not impaired by forfeiture of the lease for
                 rent or foreclosure of mortgage. The buildings may be
                 sold to satisfy the lien and may be removed not later than
                 ninety (90) days after the sale by the purchaser.

        We have said that “[t]he plain language of this statute protects
        the mechanic lien holder inasmuch as it protects his priority as to
        the improvement for which he provided the labor and materials.”
        Provident Bank, 804 N.E.2d at 164. “The statute contemplates
        that the holder of a mechanic lien may sell the improvements to
        satisfy the lien and remove them within ninety days of the sale
        date.” Id. This statute, as written and as applied by this court,
        seems to favor the mechanic’s lienholder with regard to new
        improvements even if the mortgage is recorded before the
        mechanic’s lien is recorded and before the mechanic’s lienholder
        begins its work or furnishes any materials.

        Finally, we have Indiana Code section 32-28-3-5(d), which
        provides that, as to commercial property (including commercial
        residential property, e.g., apartment complexes), “[t]he mortgage
        of a lender has priority over all liens created under this chapter
        that are 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.” The first clause of
        subsection (d)—“The mortgage of a lender has priority over all
        liens created under this chapter that are recorded after the date
        the mortgage was recorded”—appears to give priority to the
        mortgage of a lender as long as it is recorded first, in contrast to
        Indiana Code section 32-28-3-2, which, as noted above, seems to
        favor the mechanic’s lienholder with regard to new
        improvements even if the mortgage is recorded before the
        effective date of the mechanic's lien. . . .

Court of Appeals of Indiana | Opinion 09A02-1704-PL-760 | September 25, 2017   Page 7 of 11
               [U]nder subsection (d), the mortgage of a lender has priority only
               “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). . . .

               With regard to priority over improvements, Indiana Code section
               32-28-3-2 provides the general rule. As stated in Provident Bank,
804 N.E.2d at 164, the plain language of that statute “protects the
               mechanic lien holder inasmuch as it protects his priority as to the
               improvement for which he provided the labor and materials.”
               On the other hand, Indiana Code section 32-28-3-5(d) provides
               the more specific rule with regard to priority over improvements
               on commercial property where the funds from the loan secured
               by the mortgage are intended to finance those improvements and
               where the mortgage is recorded before the mechanic’s liens. . . .
               [W]e explicitly hold today what has previously been stated only
               in dicta in a dissenting opinion: 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.

       Harold McComb & Son, Inc. v. JP Morgan Chase Bank, NA, 892 N.E.2d 1255, 1259-

       62 (Ind. Ct. App. 2008) (emphasis added). This holding is commonly referred

       to as the Lender Exception.

[13]   Kellam makes several arguments on appeal as to why the trial court erred. Of

       significance is Kellam’s argument that the Lender Exception does not apply to

       this case because the Bank does not have a mortgage, the Bank is not a lender,

       and the Bank’s interest does not relate to the Facility Improvements. At the

       same time, Kellam acknowledges that the Bank “could have loaned the funds to

       build the [Facility Improvements], took [sic] a mortgage and the Lender

       Court of Appeals of Indiana | Opinion 09A02-1704-PL-760 | September 25, 2017       Page 8 of 11
       Exception would have prioritized [the Bank’s] mortgage over Kellam’s

       mechanic’s lien.” Appellant’s Br. p. 15. We find this “hypothetical” situation

       to be exactly what happened in this case.

[14]   Kellam argues that the Leasehold Mortgage is not a mortgage because the

       mortgage is described as a leasehold mortgage, Sagamore did not promise to

       repay the Bank for the funds the Bank expended, and Sagamore did not execute

       a promissory note. A mortgage is defined as a “conveyance of title to property

       that is given as security for the payment of a debt or the performance of a duty

       and that will become void upon payment or performance according to the

       stipulated terms” and as a “lien against property that is granted to secure an

       obligation (such as a debt) and that is extinguished upon payment or

       performance according to stipulated terms.” Mortgage, Black’s Law Dictionary

       (10th ed. 2014).

[15]   The Bank’s Leasehold Mortgage fits squarely into this definition. Kellam’s

       emphasis on the word “leasehold” in the instrument’s title places semantics

       over substance. Regardless of what the Bank’s financing document is called, it

       operates like a typical mortgage. The instrument granted the Bank a lien

       against Sagamore’s property rights; the lien secured Sagamore’s obligation to

       repay the Bank for the funds the Bank expended. The Master Leases show that

       Sagamore was obligated to make quarterly payments to the Bank until the funds

       were fully repaid. Appellant’s App. Vol. IV p. 26, 45, 73, 97. As for Kellam’s

       contention that the Leasehold Mortgage is not a mortgage because Sagamore

       did not execute a promissory note, Kellam fails to cite any authority that states

       Court of Appeals of Indiana | Opinion 09A02-1704-PL-760 | September 25, 2017   Page 9 of 11
       that a promissory note is required to execute a valid mortgage, nor do we find

       any. Accordingly, we find that the Bank’s Leasehold Mortgage is a mortgage

       for the purposes of the Lender Exception.

[16]   Kellam next argues that the Bank is not a lender but instead a purchaser and

       owner. A “lender” includes a supervised financial organization or any other

       entity that has the authority to make loans. I.C. § 32-28-3-5(a). A supervised

       financial organization includes a business that is “organized, chartered, or

       holding an authorization certificate under the laws of a state . . . that authorizes

       the [business] to make loans and to receive deposits . . . .” Ind. Code § 26-1-4-

       102.5(a). Because the Bank is an Indiana-chartered banking institution, see

       Appellant’s App. Vol. II p. 93, it is a supervised financial organization under

       the statute. In short, the Bank is a “lender” under the Lender Exception.

[17]   Lastly, Kellam contends that the Lender Exception does not apply because the

       Bank’s lien does not relate to the specific project—the construction of the

       Facility Improvements—but rather to the Leasehold Estate. We disagree.

       Simply put, Sagamore sought additional financing from the Bank for the

       construction of the Facility Improvements, and the Bank’s funds were used for

       such construction. Appellant’s App. Vol IV p. 149; Appellant’s App. Vol. VI p.

       84. Thus, the Bank’s lien relates to the specific project for which Kellam

       contracted with Sagamore.

[18]   The parties do not dispute that the Real Estate and Facility Improvements are

       commercial property or that the Bank recorded its Leasehold Mortgage before

       Court of Appeals of Indiana | Opinion 09A02-1704-PL-760 | September 25, 2017   Page 10 of 11
       Kellam recorded its mechanic’s lien. The funds that the Bank loaned were

       secured by the mortgage for the specific project—the Facility Improvements—

       that gave rise to Kellam’s mechanic’s lien. In short, the Bank’s mortgage

       secured its loan of funds used to construct the Facility Improvements. The

       Lender Exception applies, and as a result, the Bank’s mortgages are superior to

       Kellam’s mechanic’s lien. Because we find that the Lender Exception applies,

       we need not consider Kellam’s remaining arguments. The trial court did not err

       in prioritizing the liens.

[19]   The judgment of the trial court is affirmed.

       Najam, J., and Pyle, J., concur.

       Court of Appeals of Indiana | Opinion 09A02-1704-PL-760 | September 25, 2017   Page 11 of 11