I hope everyone is having a nice holiday season.  After digging out from a pile of work, and dusting the Christmas cookie crumbs off my keyboard, I was able to catch up on a few recent decisions from the Indiana Court of Appeals.  And wouldn’t you know, the court left two decisions addressing the priority of mechanic’s liens under my tree.  So I wanted to take a moment to update you on these two decisions before returning to the last of my Christmas cookies (if I can find where my wife hid them!).

On December 22, 2010, the court handed down

The facts:  Grand Innovations borrowed money to construct a single family residence pursuant to a mortgage that was properly recorded.  Neises was hired to help construct, and, yadda, yadda, yadda, filed a mechanic’s lien against the real estate and a complaint to foreclose the lien.  The bank then filed to foreclose the mortgage.

Issue 1:  The bank asserted that Neises “left the property in jeopardy of being destroyed or subject to significant damage due to the weather,” including a lack of roof and wrapping the exposed framing.  The bank paid another contractor to install a roof and otherwise protect the structure.  The bank sought priority over the mechanic’s lien for the expenses to protect the partially-constructed house.  Neises opposed, citing the lack of any provision in the statute for such “super prioritization.”

The court noted that an action to foreclose on a mortgage is essentially equitable in nature and that the bank’s actions were for the “benefit of all” the lienholders and not unreasonable or ill-advised.  Thus, because all parties were engaged in a “common enterprise” and each benefited from the measures, the preservation expenses properly received priority over Neises’ mechanic’s lien. 

Issue 2:  Neises also argued that its mechanic’s lien, filed in July, should have a higher priority than the mortgage lien because it began construction in April, which it argued should be the effective date of the lien.  The court rejected because “the plain language of the statute provides that the lien is created when the statement and notice to intention to hold a lien is recorded.”  Further, the “relation back” provisions of the mechanic’s lien statute apply to obtaining compensation for work done since the project began, not lien priority.   Regardless, the court also found that it is well-settled that a mortgage lien for the construction of a house has the same priority as all mechanic’s liens.  Thus, pro-rata distribution was appropriate.

On December 27, 2010, the court handed down    

The facts:  The Hendersons owned commercial property in Indiana that was destroyed by a fire.  McIntyre has hired to clean up the debris and construct a new building on the property, and, yadda, yadda, yadda, filed a mechanic’s lien against the property.  Subsequently, a bank loaned money to the Hendersons to pay off two mortgages that pre-dated the filing of the mechanic’s lien.  The bank, however, failed to discover the mechanic’s lien held by McIntyre.  In subsequent foreclosure proceedings, lien priority was disputed.

The issue:  The bank claimed that the doctrine of equitable subrogation (lawyerese for “step in the shoes” of the mortgagee refinanced) granted priority to its mortgage lien, to the extent the funds were used to pay off one of the pre-existing mortgages.  McIntyre countered that the bank was not entitled to equitable subrogation because of its culpable negligence in not discovering the lien when refinancing.  The court, relying on Bank of New York v. Nally, found that the proper inquiry was not whether the bank had notice, but whether the intervening lienholder was prejudiced, (although “culpable negligence” on behalf of the bank was still relevant, although none existed in the case).  Thus, since the mortgage existed prior to McIntyre’s work and McIntyre would have expected it to be superior, there was no prejudice and equitable subrogation applied.

Happy New Year from Law under Construction!  Now… where are those cookies….