Mortgagees in Indiana Have Priority Over Mechanic's Lien Holders Improving Land for a Residential Subdivision

Prior to the economic downturn, there was no shortage of residential subdivisions being developed and built in Indiana. One issue which emerged from such construction was the relative priorities afforded to those who funded the development and those who made the improvements to the development prior to the construction of any residences where the owner failed to pay. On August 10, 2009, the Indiana Court of Appeals resolved this issue in Lincoln Bank v. Conwell Construction, et al. The Court of Appeals held that the mortgagee had priority over the lien claimants. The property was platted and developed as a residential subdivision. The general contractor agreed to construct improvements, infrastructure, and storm, sanitary and water utility structures. In furtherance of its obligations, the general contractor entered into multiple subcontracts for the construction of concrete curbs and gutters, subsurface curb drains, and asphalt paving. The mortgagee funded the development and recorded its mortgage in 2006. The four lien claimants later filed mechanic’s liens in 2007.

The trial court determined that the lien claimants and mortgagee were equal in priority with the mortgagee based in significant part upon Indiana Code § 32-28-3-5(d), which provided that a mortgagee’s "super-priority" over subsequently recorded mechanic’s liens did not apply to work performed for the development or construction of residences or for improvements auxiliary to residences. The Court of Appeals reversed however, noting that although the lien claimants performed their work to prepare the land for a residential subdivision, no homes had yet been built upon the land when the work was performed. Therefore, the exceptions noted above and relied upon by the trial court under §32-28-3-5(d) were inapplicable. Although the Court of Appeals acknowledged that the lien claimant's work clearly added value to the property, none of it was performed to develop or construct residences or for improvements “auxiliary to [residences].”

Recent cases appeared to leave the door open for lien claimants similarly situated to those at issue in Lincoln Bank to argue that their mechanic's liens were at least equal, if not superior to, mortgages on the property. However, this decision indicates that mortgagees will continue to enjoy priority over these types of lien claimants under these circumstances.

Posted by: Brian M. Falcon

Categories: Current Developments / Legislation, Mechanics’ Liens