Lien priority can cause headaches, and the shuffle to stay at the front of the payment line is tiring. When there’s a lender, it may be even harder to make sense of it all. In Indiana, a recent case made it clear that lenders will prime lien claimants when the loan was provided to pay for the work being liened.
Indiana Lien Priority
A few recent cases help to understand how priority works for Indiana lienholders- lately we’ve discussed how courts have given more bargaining power to mechanics lien holders and the basics on Indiana lien priority. But what about when more variables enter the equation?
Recent changes to Indiana lien laws have made it more expensive to file and call for electronic registry in a few months – here’s our article.
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The Facts
Kellam (a GC) was hired by Sagamore (a leaseholder) to perform work on land it was leasing. After Kellam started providing work on the project, Sagamore ran out of funding. Sagamore then reached out to Community State Bank (“the Bank”) for funding, using its leasehold interest and other titles relating for collateral. In return, Sagamore agreed to provide quarterly payments to the Bank.
At closing, the Bank paid Kellam $1.6M for work done. In return for the the financed money, Kellam returned $1.6M in funds paid by Sagamore prior to the agreement. The Bank perfected its interest by recording the agreement with the county recorder, and Kellam continued work on the project.
Around a year later, Sagamore and Kellam got into a payment dispute, and Kellam filed a mechanics lien. In response, Sagamore claimed that Kellam was in breach of its contract. Kellam then filed to foreclose on the lien. The Bank also stepped in and foreclosed on Sagamore, alleging Sagamore was in default of the finance agreement. The Bank alleged that its lien had priority over Kellam’s, and Kellam disagreed.
Priority Rules
In Indiana, mechanics liens relate back to the first date of improvement. Also, if the land is sold or foreclosed by someone else, Indiana law provides that a mechanics lien attaches on the improved structure and the land on which it sits. However, in Indiana, a commercial mortgage takes priority over a mechanics lien that was recorded prior to the mortgage to the extent that the funds from the mortgage were loaned for the project to which the lien relates.
Ordinarily, Kellam’s lien would relate back, or, Kellam could take possession of the actual improvement if the land was otherwise sold or foreclosed. However, because the mortgage was granted in order to fund the project Kellam was liening, the Bank’s interest had priority over Kellam’s lien.
For further reading, Harold McComb & Son v. JPMorgan Chase Bank does a great job at discussing the interplay of Indiana lien priority rules.
The Court
Kellam went down swinging, though. First, the contractor asserted that the Bank’s interest was a leasehold mortgage rather than an actual mortgage. Kellam argued that this difference should prevent the Bank from jumping the priority line. However, Kellam provided little support for the argument. The court found that the difference in semantics was not enough to justify Kellam’s priority.
Kellam’s other arguments were just as futile. Kellam proposed that the Bank was not a “lender,” but a purchaser/owner of the property. The court remained unswayed. It found that as an Indiana-chartered banking institution, the Bank was indeed acting as a “lender.” In a last ditch effort, Kellam argued that the Bank’s loan was not made for the specific improvement that Kellam had contracted to complete. The court hardly entertained this assertion before dismissing it.
Takeaway
When it comes to mortgages and mechanics liens, priority will often go to the lender. Indiana lien priority is no different. Despite the fact that Indiana mechanics liens relate back and that work began before the mortgage was instituted, this lien claimant lost the priority battle. Had the mortgage been on the property for any reason other than to pay for the work at hand, though, the Indiana priority rules may have proved much more favorable.
For more on Indiana construction payment, take a look at our Indiana Resources. Not in Indiana? Select your state.
