This month we begin with a case that comes from the Court of Appeals for Ohio, Fifth Appellate District. The court was asked to determine if the dismissal of claims against the owners of the property terminated a subcontractor’s claim against a cash deposit made with the court. Our second case comes from the Court of Appeals for Kentucky. The issue before the court was whether silos installed by a subcontractor were fixtures on real property for purposes of maintaining a lien on the real property.  

Dismissal of Claims Against Property Owner Doesn’t Necessarily Mean a Mechanics’ Lien Claim Dies

Mechanics’ lien law is complicated, and it is imperative that any owner or other party involved in a mechanic’s lien claim understand their rights under Ohio law. Where a party files a mechanics’ lien claim and later dismisses the defendants from its claim, does the lien claimant’s rights in the mechanics’ lien terminate? The Fifth Appellate District of Ohio addressed this issue in Mid-Ohio Mechanical, Inc. v. Eisenmann Corporation, 2009-Ohio-5804.

In Eisenmann, owners of a factory contracted with a general contractor to upgrade the factory’s machinery and equipment on its paint line responsible for applying high-tech coatings to car bumpers. The general contractor subcontracted with a company to remove old equipment and install new equipment. The subcontractor in turn subcontracted with Mid-Ohio Mechanical to construct part of the work.

Problems arose and Mid-Ohio Mechanical was not paid in full. Mid-Ohio filed a mechanics’ lien claim against the owners of the property. Under an indemnity agreement with the owners of the property, the general contractor posted a cash deposit with the court to release the property from the lien and clear the title. With a cash deposit now taking the place of the property in the mechanics’ lien claim, Mid-Ohio dismissed its claims against the property owners.

The general contractor posting the cash deposit as security for a mechanics’ lien argued that the dismissal of claims against the owners of the property terminated the subcontractor’s claim against the cash deposit because the owners were the only remaining defendants named in the mechanics’ lien claim. Therefore, the cash deposit should be released upon the dismissal of claims against the remaining defendants.

Under Ohio Revised Code, a cash deposit is a permissible means of security to substitute for the security of the lien – voiding the lien and discharging the property. The action on the lien is terminated and the action on the lien proceeds as an action on the alternative security. The statute allows for the release of the deposit where the suit against the security is dismissed, not where the suit against the defendants is dismissed.

To determine whether a mechanics’ lien claim terminates where a plaintiff dismisses its claims against the defendants, the court discussed whether a mechanics’ lien claim was an in rem or in personam action. The court’s discussion distinguished in rem actions (actions against a thing, such as property) and in personam actions (actions against persons). A mechanics’ lien claim is an in rem action. It is an action against a thing as opposed to a person. As an in rem action, the lien does not follow the owners or former owners of a property. The lien follows the property itself. There can be no in personam right unless there is a separate contractual relationship.

In addition, dismissal of the owners had no effect on the lien claim because the general contractor’s interest was not as a party Mid-Ohio was asserting claims against, but as a party who had an interest in the cash deposit. Dismissal of claims against the owner had no effect on the claim against the cash deposit. The lien claim was valid and was against the cash deposit. The lower court rightfully refused to release the deposit and was correct in allowing Mid-Ohio’s claim to continue.

Work on Tenant’s Trade Fixture – No Mechanics’ Lien Rights Against Landlord in Kentucky

Kentucky’s mechanics’ lien statute provides contractors and suppliers with a lien on the real property that is improved by their work or materials. The requirement that the improvement be on real property was the issue in Southern Industrial, LLC v. Maxine, LLC, 2009 Ky. App. Unpub. LEXIS 996.

In Southern Industrial, Applied Chemical Technologies, Inc. leased commercial property located in Lexington, Kentucky, from Maxine, LLC to conduct its fabrication business. Applied Chemical placed four silos on the property to store resin pellets for use in connection with its business. Each silo was forty-feet tall, weighed several tons, and was bolted onto eight-feet-deep concrete pads that were constructed to accommodate them.

The lease between Applied Chemical and Maxine allowed Applied Chemical to install the silos on the property. The lease also specifically provided that all moveable trade fixtures installed would remain the property of Applied Chemical.  

Applied Chemical hired Southern Industrial, LLC to perform work and provide labor for improvements on the silos. Applied Chemical never paid Southern for its work and eventually declared bankruptcy. Southern thereafter asserted a mechanics’ lien under Kentucky Revised Statute 376.010 against the real property owned by Maxine and sought to enforce it. KRS 376.010 provides, in part, that “[a]ny person who performs labor or furnishes materials, for the erection, altering, or repairing of a house or other structure or for any fixture or machinery therein…” In arguing that its work on the silos created lien rights to Maxine’s real property, Southern argued that the silos were either “fixtures” or “structures” under KRS 376.010.  

The court in Pennington v. Black, 261 Ky. 728 (1935), held that fixtures are items affixed to the soil that become part of the land and are subject to the same rights of property.

According to the court, the test for determining whether an item is a fixture is:

  1. annexation to the realty, either actual or constructive;  
  2. adaptation or application to the use or purpose to which that part of the realty to which it is connected is appropriated; and  
  3. intention to make the article a permanent accession to the realty.

For the first element, the court stated that an item is annexed to the land if it cannot be removed without serious injury to itself and the land. The court found, even though the silos are more than forty-feet tall, weigh several tons, and are bolted to the property, they were not annexed to the land because they can be unbolted and removed from the property without significant damage to themselves or the real property.

Next, for the second element, adaptation, the court stated that this element is met when the item in question has been adapted or applied to the use or purpose of that part of the property with which it is connected. The court found that Maxine established that it had no use for the silos and that Applied Chemical installed the silos and customized them specifically to store resin pellets for use in connection with its business. Thus, the court found that the silos were not adapted to the property.

The court then stated that annexation and adaptation are merely part of the comprehensive third test of intention. The court stated that the intention to make an article a permanent accession to the realty must affirmatively and plainly appear, and if the matter is left in doubt and uncertainty the legal qualities of the article are not changed, and it must be deemed a chattel.

The court found that the only reasonable conclusion was that the silos were placed on the real property to further Applied Chemical’s business and not to make them part of Maxine’s realty. The purpose of the silos was for storage and gravity flow of resin pellets for Applied Chemical in its business. Finally, the lease between Applied Chemical and Maxine stated that “all moveable trade fixtures installed by Applied Chemical shall be and remain the property of Applied Chemical.”

The court stated that the language of KRS 376.010 applies to improvements that become a part of the realty and since Southern’s work was limited only to the silos, which are trade fixtures and never became part of Maxine’s realty, the work performed by Southern on the silos did not subject Maxine’s property to Southern’s mechanic’s lien.