The Minnesota Supreme Court has rejected an attempt by the Court of Appeals to impose a new “integrated analysis” for determining whether a mechanic’s lien has priority over a mortgage when work is performed both before and after a mortgage is recorded. Minn Stat. § 514.05, the mechanic’s lien statute, provides that as against a bona fide mortgagee, “no lien shall attach prior to the actual and visible beginning of the improvement on the ground.” Long-established Minnesota law holds that a lien for work performed subsequent to the recording of a mortgage can relate back to improvements performed prior to such recording where the early improvements were done in contemplation of and as a part of the entire project. See Brettschneider v. Wellman, 41 N.W.2d 255 (1950). Rejecting the proposed integrated analysis, the Supreme Court held that the statute requires a fact-specific analysis to determine whether the post-mortgage work relates back to pre-mortgage work that is “part and parcel” of the ultimate improvement and thereby establishes a lien with priority over the mortgage. Big Lake Lumber, Inc. v. Sec. Prop. Invs., Inc., 836 N.W.2d 359 (2013).

Facts and Procedure

In Big Lake, work was first performed on an unimproved lot in Zimmerman, Minnesota in 2005, soon after its purchase by a company owned by Mark Hilde. Wruck Excavating, hired by Hilde, cut trees, cleared a driving path and building pad on the property and designed a septic system. Hilde also contracted with Big Lake Lumber Inc. to draft preliminary building plans.

On Oct. 26, 2006, Hilde sold the property and a mortgage was recorded. After that recording, Wruck, Big Lake and DesMarais Construction performed additional work on the home, including excavation, framing and installation of the septic system designed in 2005. Big Lake recorded a mechanic’s lien in March 2007 and then in July 2007, DesMarais recorded its own mechanic’s lien. Id. at 361.

After default on the mortgage by the purchaser, the bank foreclosed and Big Lake commenced a lien foreclosure action. A dispute resulted regarding lien priority and the district court determined that the post-mortgage work of Big Lake and DesMarais related back to the 2005 work by Wruck and therefore had priority over the bank’s 2006 mortgage. The court of appeals reversed and remanded. On remand, the district court again ruled in favor of Big Lake and DesMarais, holding that Wruck’s 2005 work “resulted in an open, obvious, and noticeable clearing up which a driveway and residential home could be built.” Id. at 362. The district court held that Wruck’s 2005 work together with the Big Lake and DesMarais work “forms the single improvement of constructing a home on the Property,” and that therefore the Big Lake DesMarais liens related back to the Wruck work in 2005, creating priority for the mechanic’s liens over the mortgage. Id. at 362.

The Court of Appeals again reversed, referring to two prior tests set forth in Minnesota jurisprudence established to determine whether the later work bore on, or related back to, the prior work. The first is a continuity test, determining whether two projects of improvement to property are separate and therefore not continuous. This test considers: (1) the parties’ intent; (2) the scope of the contracts; (3) the time lapse between projects; and (4) financing for the respective projects. Id. at 365 (citing lower court’s holding). The second test looks at whether a project of improvement has been abandoned, calling for related consideration of “the parties’ objective manifestations of their intent and the actual and visible condition of the property…as revealed by an inspection of the premises.” Id. The court of appeals attempted to integrate those two tests into a “single framework for application in all disputes over the priority of mechanic’s and mortgages under section 514.05.” Big Lake Lumber, Inc. v. Sec. Prop. Invs., Inc., 820 N.W.2d 253, 261 (Minn. Ct. App. 2012). The Court of Appeals held that the post-mortgage work did not constitute a part of the same continuous project of improvement, rejecting the district court’s finding that the work done was all related to the “single improvement of constructing a home on the Property.” This analysis yielded priority for the mortgage over the mechanic’s liens.

Supreme Court Decision

The Supreme Court reversed the Court of Appeals and determined that the district court’s decision was reasonably supported by the evidence. In doing so, the Supreme Court expressly rejected the “integrated analysis” adopted by the Court of Appeals. The court stressed that a mechanic’s lien priority inquiry is fact-specific and must defer to the statutory language rather than “a multi-factor test that imposes additional requirements beyond the statutory language.” Big Lake Lumber, Inc. v. Sec. Prop. Invs., Inc., 836 N.W.2d at 365.

The fact-specific determination should consider “whether the pre-mortgage work …‘bears directly on’ the project of improvement and not merely on the ‘overall project involved.’” The court also pointed to considerations of whether the pre-mortgage work is “a part and parcel of the work” of the improvement, citing a prior Supreme Court decision where excavation of a basement was found to be “part and parcel” of the work of building a house. Id. (citing Brettschneider, 41 N.W.2d at 260). The court did not throw out the continuity or abandonment tests, noting that they will often be relevant, but emphasized the importance of focusing on the statutory language itself for determining lien priority. Id. at 366.

The Court also clarified prior rulings regarding pre-mortgage inspections, making it clear that priority for a bona fide mortgagee against a mechanic’s lien is in no way dependent on any pre-mortgage inspection of property. The Court pointed out, however, that because Minn. Stat. § 514.05 in effect imposes an inspection duty on a mortgagee because they otherwise assume the risk that the mortgage will be subordinate to a mechanic’s lien, that such inspections would be “a prudent business practice in avoiding mechanic’s lien liability.” Id. at n.7.