Mechanic’s lien claimants need to know how the priority of their liens relate to the priority of mortgages and other mechanic’s liens that may be recorded against the same piece of real estate. (I discuss this issue in depth in “Who’s on First?: Priority Issues Between Mortgages and Mechanic’s Liens,” which you can read here.) This issue has been addressed by the Indiana Court of Appeals no less than four times over the past dozen years, most recently in the case of Wells Fargo Bank, N.A. v. Reith-Riley Construction Co., et al., which was decided on June 26, 2015. TheWells Fargo decision re-affirmed how the various lien priority statutes in Indiana are intended to relate to one another, and clarified the available remedies for a successful mechanic’s lien claimant.
The general rule regarding lien priorities in Indiana is found at Ind. Code § 32-31-4-1(b), which provides that mortgages and liens are given priority based on their respective times of recording (i.e., the “first in time” rule). That general rule was recognized in Provident Bank v. Tri-County Southside Asphalt, Inc. (2004), where the Indiana Court of Appeals stated that a mortgage takes priority over a mechanic’s lien “if the mortgage was recorded before the mechanic’s work was begun or materials furnished.” For priority purposes, mechanic’s liens relate back to the date when work began.
This doesn’t necessarily mean that a lien claimant with a subsequently recorded mechanic’s lien is without a remedy, though. In analyzing just such a scenario, the Provident Bank court looked to the language of Ind. Code § 32-28-3-2, and held that, although the prior mortgage has priority as to the real estate, the subsequent mechanic’s lien had priority over the mortgage with respect to the particular improvement that provides the basis for the mechanic’s lien, and that the improvement could be removed by the lien claimant and sold to satisfy its claim.
There is a further statutory exception to the Provident Bank holding, however, which can be found at Ind. Code § 32-28-3-5(d), which states that if the mortgage secures funding for the construction project to which the mechanic’s lien relates, then the mortgage has absolute priority over the lien to both the real estate and the improvements. Neither Provident Bank nor Wells Fargo dealt with a construction mortgage.
The dissent in Provident Bank argued that the Indiana lien statutes should be read to allow for funds from the sheriff’s sale in a mortgage foreclosure to be held in trust to satisfy mechanic’s lien claims. In other words, the dissent argued, the portion of the sheriff’s sale proceeds that could be allocated to the value of the improvement that was the subject of the mechanic’s lien would be paid to that lien claimant.
This argument was raised again in the Wells Fargo case by the mechanic’s lien claimant, Reith-Riley Construction. The trial court found that the mortgage had priority over Reith-Riley’s mechanic’s lien under the “first-in-time” rule. However, the trial court followed the dissent in Provident Bank and held that Wells Fargo could not simply bid its judgment at sheriff’s sale, but that it had to deposit cash in an amount sufficient to satisfy Reith-Riley’s mechanic’s lien as part of its bid at the sheriff’s sale – with the result being that Wells Fargo’s recovery at sheriff’s sale would be diminished by the amount of Reith-Riley’s mechanic’s lien.
On appeal, however, the Wells Fargo court reversed and re-affirmed the majority holding from Provident Bank: the mortgage holder (Wells Fargo) had priority to the real estate, while the mechanic’s lien claimant (Reith-Riley) had priority to its improvement (a parking lot). As such, Wells Fargo was entitled to submit a credit bid for the real estate without having to make a separate cash deposit in order to protect Reith-Riley’s lien interest. Reith-Riley’s remedy was that it entitled to remove the parking lot and have the materials sold in order to recover the amount owed on its lien claim.
Finally, the Wells Fargo decision contains a discussion of what the mechanic’s lien claimant is entitled to remove in order to satisfy its claim. The statute states that the “buildings may be sold to satisfy the lien ...” Wells Fargo, not wanting to see the parking lot on the real estate taken out, argued that a parking lot is not a “building”, and so Reith-Riley should not be allowed to remove it.
The Court of Appeals disagreed with Wells Fargo, citing the intent of the mechanic’s lien statute to provide a remedy to unpaid lien claimants, and holding that the term “building” should be broadly interpreted as being the same as an “improvement.” Thus, Reith-Riley is entitled to have the parking lot that it built removed, and the materials sold, to satisfy its mechanic’s lien claim.