Back in May, I wrote about lien priority in Minnesota and the “relation back” doctrine, which holds that:
All liens, as against the owner of the land, shall attach and take effect from the time the first item of material or labor is furnished upon the premises for the beginning of the improvement, and shall be preferred to any mortgage or other encumbrance not then of record…
This relation back, in the context of what constitutes one continuous project such that prior work lends its start date to later work for mechanics lien priority purposes, was discussed by an interesting case – Big Lake Lumber v. Security Property Investments. At the time of the previous post, the Minnesota Supreme Court had recently heard oral arguments in an appeal of the Big Lake case. That court has now reached a decision, and in doing so has rejected the fairly clear test set forth by the court of appeals, and instead, has chosen to keep the determination of mechanics lien priority in Minnesota a case-by-case, fact-specific, statutory-analysis, confusing mess.
Big Lake Factual Background
In 2005, Mark Hilde hired Wruck Excavating to design a residential septic system for a property on which Hilde planned to build a house. In order to obtain a loan, Hilde then hired the plaintiff, Big Lake Lumber, to draft preliminary plans. At this time, Wruck cleared a path to the property. That was the end of work on the property for approximately 1 year. Hilde’s plans for the property changed dramatically shortly after Wruck cleared the path. Instead of constructing his personal residence, Hilde instead decided to build and sell a “spec home” to Security Property Investments.
In preparation for the work, Hilde and Security hired another company, Bogart, Pederson & Associates to stake out the property. This work was completed 11 months after Wruck cleared the original path, and against the backdrop of Hilde’s own acknowledgement that the staking “wasn’t performed as part of the project that [Hilde] originally intended…but rather was performed for the ultimate project that was built.” Shortly thereafter, a mortgage was granted to 21st Century Bank to secure a construction loan. The mortgage was recorded in October, 2006. Big Lake recorded a mechanics lien in March 2007 for work first started in November 2006.
Upon foreclosure of the mortgage, Big Lake claimed its mechanics lien had priority over the 21st Century’s mortgage because of Minnesota’s “relation-back” provision. Big Lake’s claim was that its mechanics lien attached to the property all the way back when Wruck cleared the first path in 2005. The trial court agreed, but the appeal court reversed.
Court of Appeals Test & Supreme Court Rejection
The Minnesota Supreme Court, however, flatly rejected the integrated approach. The appeals court attempted to synthesize multiple years of court decisions in order to put together a complete and clear test for determining mechanics lien priority. This was purportedly accomplished by combining the two general tests used to determine whether a later work was given the benefit of prior work for the purposes of relating back, 1) the continuity test; and 2) the abandonment test. Each of these tests was comprised of multiple factors.
The Minnesota Supreme Court, however, flatly rejected the integrated approach. Despite the rejection of the test set forth by the court of appeals, the supreme court declined to create any alternate test of its own. The supreme court noted that the determination of mechanics lien priority is a fact-specific and fact-intensive inquiry, and that it must be determined with reference to the underlying statutory language, not through the lens of a certain test. Many of the parts comprising the approach championed by the court of appeals were determined to be relevant to the determination of priority, but the determination must be made more “holistically” by focusing on the statutory language.
By rejecting the integrated approach of the court of appeals, the supreme court accomplished a couple of things: 1) the determination of mechanics lien priority is to be accomplished through the holistic application of the statutory language of the mechanics lien laws [probably a good thing]; and 2) those determinations are going to be messy affairs, and litigants will have a less clear idea of how a specific situation will turn out.