Mechanic's Lien Case Law Update

02/05/2010 / Rob A. Stefonowicz

The Minnesota Court of Appeals recently decided two matters with implications on mechanic’s lien foreclosure procedures. The first case involves lien apportionment. In this matter, a lienholder filed a blanket mechanic’s lien on a 41-acre residential development, but then sought to foreclose its entire lien against only three of the lots in the development. The court of appeals held that under certain limited circumstances such a practice is permissible. The Minnesota Supreme Court has granted review of this matter. In the second matter summarized below, the court of appeals took up the issue of “actual notice” of prior lien interests for determining lien priority. Please note that this matter may also be subject to review by the Minnesota Supreme Court.

1. Lien Apportionment: Premier Bank v. Becker Development, LLC, 767 N.W.2d 691 (Minn. App. 2009).

Facts: The bank and the developer enter into a loan agreement to finance site work on a 41-acre residential development. The bank recorded the “development mortgage” in September 2005. The contractor (lien claimant) performed site preparation, street and sewer work for the project in October 2005. In February 2006, the bank enters into three separate construction loan agreements with the builder to build three model homes. Those loans are secured by “construction mortgages.” The bank, the developer and the builder then enter into a loan modification agreement, at which time the bank releases its development mortgage on the three model home lots. The contractor is not paid $267,000 for site work and files a blanket mechanic’s lien against the entire 41-acre development. Thereafter, the builder and the developer default on their loans and the bank commences foreclosure actions on both the development loan and the construction loan. The contractor’s mechanic’s lien was recorded after the development mortgage, but before the construction mortgages. The district court found that the contractor’s claim against the majority of the lots is subordinate to the development mortgage because the mortgage was recorded prior to the commencement of the construction work. The district court further found, however, that the contractor may foreclose its entire mechanic’s lien against the three lots that were released through the loan modification agreement. On appeal, the bank argued that the contractor must apportion its lien over all of the lots that it improved, rather than foreclosing on only three of the lots.

Issue: May a contractor who has filed a blanket mechanic’s lien against an entire development foreclose its lien against less than all of the property burdened by that blanket lien?

Court’s Decision: The mechanic’s lien statute allows a lienholder to file either a blanket lien or separate liens on each lot proportionate to the labor or materials provided to each such lot. The statute is silent, however, as to whether a lienholder who has filed a blanket lien may assert its entire claim against less than all of the property upon which the labor or materials were provided. The court of appeals, in a matter of first impression, concluded that under certain circumstances a contractor may foreclose its entire mechanic’s lien on less than the entire property. The court indicated that it must examine the specific circumstances of each case and determine whether allowing the foreclosure on less than all of the parties would unfairly burden the foreclosed property. Here, the court weighed the equities and determined that two primary factors favored allowing the contractor to foreclose on fewer than all of the improved lots. First, the court found that the purpose of the lien laws, which is to assure that the contractor receives full payment, would be served, and the bank would be prevented from reaping a windfall. Second, the bank could have, but did not require the contractor to agree to remain a junior lienholder on the released model home lots.

2. Lien Priority: Riverview Muir Doran, LLC v. JADT Development Co., LLC, 2009 WL 2928770 (Minn. App.) (Unpublished).

Facts: The developer hired an architect to provide design services associated with a housing project. The mortgages financing the project were recorded on March 23, 2005, but the architect had begun work on the project before the mortgages were recorded. At the time of the closing of the mortgages, 27 invoices for work completed by the architect were presented for payment and a check was issued to the architect. The architect executed a partial lien waiver when it received payment and but failed to identify any additional sums due. There was no evidence in the record that the banks had knowledge of any additional sums due to the architect. On November 27, 2006, the architect filed a mechanic’s lien in the amount of $235,000 against the property, which was later amended to $358,000. There had been no actual and visible improvements on the parcel on which the architect’s lien was filed. The district court concluded that the banks had “actual notice” of the architect’s prior mechanic’s lien, and therefore, the architect’s lien was prior and superior to the banks’ mortgages. The banks appealed the district court’s decision that the architect’s mechanic’s lien has priority.

Issue: Is actual knowledge of lienable work performed prior to the recording of a mortgage sufficient to render the later-recorded mechanic’s lien prior and superior to the mortgage?

Court’s Decision: The court of appeals reversed the district court’s decision and found that the architect’s mechanic’s lien is not superior and prior to the banks’ mortgages. The court of appeals examined the language set forth in Minn. Stat. § 514.05, subd. 1, which provides that “[a]s against a bona fide purchaser, mortgagee, or encumbrancer without actual or record notice, no lien shall attach prior to the actual and visible beginning of the improvement on the ground . . . .” In evaluating and interpreting “actual notice,” the court cited to a prior Minnesota Supreme Court decision – Kirkwold Constr. Co. v. M.G.A. Constr., Inc., 513 N.W.2d 241. The court of appeals found that the Kirkwold decision required not only actual knowledge of earlier-performed lienable work, but also knowledge that the lienholder had not been paid for the work performed. Here, the court concluded there was no evidence in the record establishing that the banks had actual knowledge that the architect had not been paid, and therefore, the architect’s lien is not superior or prior to the mortgages.