Priority battles can sometimes turn into a nightmare for mechanics lien holders. In many cases, a mortgage lender may have priority over a mechanics lien. Why? Most jurisdictions will give priority to the lender if the mortgage was recorded before the work was commenced on the improvement. Since most mortgages arise to purchase property, or in order to pay for the contemplated work, it is oftentimes likely that the mortgage will be recorded before work is commenced. Therefore, in the event of a foreclosure proceeding, once the property is sold off, the lender gets first crack at the cash that sale generates, and any mechanics lien holders with secondary priority are left with whatever is left. Thankfully, for mechanics lien claimants, this is not the only outcome, and is much simplified explanation of a very complicated battle. Thanks to a new ruling from an Indiana Court of Appeals, mechanics lienholders’ rights were expanded to increase leverage in priority battles.
The Case At Issue
The facts of this case were not really disputed. Woodmar Hammond LLC (Woodmar) was a titleholder of the Woodmar Shopping Center in Hammond. In August 2007, Wells Fargo loaned Woodmar $6.2 million to refinance the purchase of the property. A mortgage was executed, delivered, and then recorded in January 2008. Woodmar defaulted on this loan on April 30, 2011.
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Despite defaulting, Woodmar later hired Rieth-Riley in November of 2011 to pave a parking lot for the shopping center. Rieth-Riley was never paid for the services provided. It executed and recorded a mechanics lien in February 2012. After going one more year without receiving payment, Rieth-Riley filed a complaint in court against Woodmar. Wells Fargo was also named as a defendant because of its interest in the property. Rieth-Riley claimed priority over Wells Fargo’s mortgage lien.
Here, the law provides that Rieth-Riley . . . shall have priority as to the actual improvements that [it has] made to Lot 1. Further, under Ind. Code § 32-28-3-2, this Court notes that the Mechanic’s Lien holders could have sold and removed their improvements. However, that is not to say that the mechanic’s liens have priority over Wells Fargo’s mortgage lien.
As you can read above, the trial court took a creative route in interpreting the law. The court essentially tried to be a crowd-pleaser. It was not willing to declare that Rieth-Riley’s mechanics lien had priority over the mortgage lien, but did interpret the law as saying that the lien has priority over the improvement. This scenario still secured priority for Wells Fargo, but the amount owed to Rieth-Riley was ordered to be set aside after the foreclosure and sale of the property for further proceedings of the court. If you’re scratching your heading thinking, “that sounds dangerously close to priority for the mechanics lien,” you’re right. That is where the Court of Appeals comes in.
The Appellate Decision
In Wells Fargo Bank, N.A. v. Rieth-Riley Construction Co., 38 N.E.3d 666, the Court of Appeals for the state of Indiana reversed the trial courts decision. The appellate courts reasoning was that the trial court misinterpreted a provision of the Indiana Mechanics Lien Statute. The statutory provision in question reads
(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.
(1) the owner has only a leasehold interest; or
(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.
The appellate court reasoned out that this provision does not allow for money to be set aside from a sales proceeding, effectively messing with the priority of other liens. This provision simply allows mechanics to remove the improvement supplied to the property within the specified amount of time and sell it to satisfy their mechanics lien. This removal is allowed as long as it occurs with no detriment to the underlying real estate. The court also clarified that the world “building” is interpreted as a “structure or improvement.” Therefore, the parking lot would be considered a “building” in the context of this provision.
The ruling handed down from the Court of Appeals for Indiana creates leverage and options for mechanics lien holders in priority battles. As discussed before, it is very common for mortgage liens to have priority over mechanics liens. This case gives mechanics lienholders the right recover from non-payment even if priority is not granted. The case also expands the type of improvements that may be removed by mechanics lienholders. A party with mechanics lien rights now has even more bargaining power when dealing with lenders.