Recent Court Decisions Regarding Minnesota Mechanic’s Lien Law
By: PETER J. DIESSNER & JOSEPH G. SPRINGER
December 2009
Due to the collapse of the real estate market, many new developments are experiencing financial difficulties. As a result, payment disputes involving developments—and in particular, mechanic’s lien disputes—have become increasingly contentious in Minnesota. That is why it is so important to understand the latest developments in Minnesota’s mechanic’s lien laws. To that end, this article discusses two important mechanic’s lien cases that have been decided in the past few months, one by the Minnesota Court of Appeals and one by the Minnesota Supreme Court.
First, in Premier Bank v. Becker Development, LLC, 767 N.W.2d 691 (Minn. Ct. App. 2009), the Minnesota Court of Appeals allowed a contractor with a blanket mechanic’s lien to foreclose the entire amount of its lien against less than all of the liened property. At the same time, the appellate court encouraged lenders to be more diligent in protecting their interests when financing construction projects.
In the Becker case, a residential real estate developer entered into a loan agreement with a bank that included a promissory note and a development mortgage. The bank recorded its development mortgage on September 9, 2005. Weeks later, on October 3, 2005, the developer’s general contractor started work at the development. The statutes controlling priority between a mortgage and a mechanic’s lien are Minn. Stat. §§ 507.34 and 514.01, and these sections basically state that a mortgage that is recorded before the first day of visible improvement to the property has priority over a mechanic’s lien. Therefore, at the outset, the bank’s development mortgage had priority over the contractor’s mechanic’s lien.
On October 10, 2006, months after the work had begun, the bank and the developer modified their loan. The bank released three lots in the development from the development mortgage in exchange for three new mortgages against these lots. Because these new mortgages were then recorded after the first day of visible improvement at the development, the contractor’s mechanic’s lien now had priority over these three mortgages. After the contractor was not paid for its final draw, the contractor brought an action to foreclose its blanket mechanic’s lien. The loans also went into default, and the bank sought to foreclose its mortgages.
The district court granted the contractor’s motion for summary judgment, finding that the contractor could foreclose the entire amount of its blanket mechanic’s lien on only the three properties on which its lien had priority. The bank appealed the district court’s decision.
The Minnesota Court of Appeals affirmed the district court’s decision, and in doing so made two equitable observations. First, the Court of Appeals noted that if the contractor could not foreclose the entire amount of its lien against only the three properties on which the contractor had priority, the bank would foreclose its large blanket mortgage and end up owning the development, including the improvements made by the contractor, with no obligation to compensate the unpaid contractor. Second, the Court of Appeals also noted that the bank could have required the contractor to remain a junior lien holder on the three lots that the bank released, but it chose not to. In other words, the Court of Appeals believed that the bank could have been more diligent in protecting its interests.
Finally, it is important to note that the decision in the Becker case was based, at least in part, on the fact that allowing the contractor to foreclose the entire amount of its lien on less than all of the property did not “unfairly burden one owner or property over other owners or properties.” Because the Court of Appeals engaged in this “fairness” analysis, there is still no clear legal standard to determine a lender’s priority in relation to a blanket mechanic’s lien claimant with priority over less than all of the liened property. The Becker case has been appealed to the Minnesota Supreme Court, and the petition for review has been granted. Perhaps the decision of Minnesota’s highest court will provide additional guidance for determining priority in a situation like that presented in the Becker case.
The second recent case is T.A. Schifsky & Sons, Inc. v. Bahr Construction, LLC, No. A08-1295 (Minn. Oct. 22, 2009). The T.A. Schifsky case concerns a party’s right to appeal a district court’s decision in a mechanic’s lien dispute when the amount of the attorney’s fees that a lien claimant is entitled to recover is not yet determined. Although the Minnesota Supreme Court’s decision in this case is based in large part upon legal procedural concepts that an attorney should be expected to handle, it is still important for lenders, developers, and contractors to understand their legal rights—especially their right to appeal a decision they believe is incorrect.
In the T.A. Schifsky case, a lien claimant sought to foreclose four mechanic’s liens and then a bank contested the validity of those liens. On November 26, 2007, the district court entered an Order finding that the liens were valid and determining the fair and reasonable value of those liens. The district court’s November 26, 2007, Order also found that the lien claimant was entitled to recover reasonable attorney’s fees but that the amount of the attorney’s fees would be determined at a later date. Judgment on the November 26, 2007, Order was entered on December 13, 2007. Then, on May 22, 2008, the district court entered a second Order determining the amount of lien claimant’s attorney’s fees and costs. Judgment on the May 22, 2008, Order was entered on July 24, 2008.
Six days later, on July 30, 2008, the bank filed a notice of appeal that referenced both the December 13, 2007, Judgment and the May 22, 2008, Order. The Minnesota Court of Appeals dismissed the bank’s appeal as untimely, and the bank sought review of the appellate court’s decision from the Minnesota Supreme Court.
The Minnesota Supreme Court held that when the validity of a mechanic’s lien, the amount of a mechanic’s lien, and the lien claimant’s right to recover attorney’s fees have all been determined, and a judgment to that effect has been entered, a party must not wait until after the amount of the attorney’s fees has been finally decided to file an appeal. By waiting too long, the Bank lost the right to appeal the amount and validity of the mechanic’s lien.
As the ever-changing landscape of Minnesota mechanic’s lien laws continues to develop, one thing seems certain: issues like those presented in the Becker and T.A. Schifsky cases will continue to be decided by hard-fought legal battles. Because claims involving mechanic’s liens are fraught with potential pitfalls, it is imperative to stay on top of the latest decisions affecting Minnesota’s mechanic’s lien actions to avoid falling victim to the latest developments.