Mechanic’s lien priority case reminds us: “equity follows the law”

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LAW under CONSTRUCTION is back to its regularly scheduled programming.  Some interesting cases have been decided over the last few months, including a recent decision from the Indiana Court of Appeals on mechanic’s lien priority.  You may recall a similar post here.

In City Savings Bank n/k/a LaPorte Savings Bank v. Eby Construction, LLC, a construction company sought to foreclose a mechanic’s lien related to costs and materials it provided during the construction of buildings and other facilities on some commercial real estate.   The bank had previously loaned money to the owner of the property to fund the construction, loans which were secured by mortgages on the real estate.  The construction company asserted that its mechanic’s lien had priority over the liens held by the bank.

The trial court held that although Indiana statutory and case law provides that the mortgages should have priority over the later-recorded mechanic’s lien, the mechanic’s lien has priority over the mortgages pursuant to principles of equity and on public policy grounds.  Thus, the court ruled in favor of the construction company.

On appeal, the decision of the trial court was reversed.   The Court of Appeals first noted that it has previously held “[w]ith 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.”  Citing Harold McComb & Son v. JP Morgan Chase Bank, 892 N.E.2d 1255 (Ind. Ct. App. 2008).  Since it was undisputed that the mortgages were recorded before the mechanic’s lien, the Court of Appeals held that the mortgages were superior.

The court went on to say “[t]he trial court, although attempting to use its equitable powers to achieve what it believed to be a more fair and balanced result, failed to appreciate the importance of the doctrine ‘equity follows the law.’ While equity has the power, where necessary, to pierce rigid statutory rules to prevent injustice, where substantial justice can be accomplished by following the law, and the parties’ actions are clearly governed by rules of law, equity follows the law.  Because there is nothing in the designated evidentiary material to indicate that substantial justice cannot be accomplished by following the law, and the parties‟ actions are clearly governed by our priority statutes, equity must follow the law.”

The full text is available .

Tis the season … for mechanic’s lien priority cases

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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….

Contractors and Bankruptcy: Getting the Piper Paid


This , which provides an overview of basic strategies for contractors, subcontractors and suppliers who are faced with non-payment from a bankrupt entity on a project, can be found on , Christopher Hill’s excellent construction law blog (our second guest posting honor) (click ).  I hope you won’t have a construction project affected by a bankruptcy any time soon, especially as we emerge from the recession.  But just in case you do, check out my post and be prepared for getting paid for work you performed or materials you supplied.


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