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COA: Mortgage lien holder has priority

September 3, 2008

The Indiana Court of Appeals determined today that two contractors with mechanic's liens did not have priority over the mortgage lien held by the bank in a foreclosure action, discussing a law in a ruling for only the second time since it was enacted in 1999.

At issue in Harold McComb & Son, Inc. and American Renovations of Indiana, Inc. v. JPMorgan Chase Bank, NA, No. 02A04-0802-CV-60, is whether Harold McComb & Son and American Renovations of Indiana, who held mechanic's liens on work they did as general contractors on a property JPMorgan Chase foreclosed on, should have priority over Chase's mortgage lien.

In a consolidated action, the trial court granted partial summary judgment to Chase, finding Harold McComb had no legal standing to challenge Chase's foreclosure action because it wasn't party to the construction loan agreement or the note between Chase and the commercial property owner.

But the general contractors believed the trial court erred in its prioritizing of the liens of the parties, granting Chase priority over the mechanic's liens.

The Court of Appeals examined Indiana Code Section 32-28-3-5(d), which the General Assembly passed in 1999 to fill a statutory gap identified by the Indiana Supreme Court in 1910 regarding mechanic's liens. The appellate court looked to Judge John Sharpnack's dissent in Provident Bank v. Tri-County Southside Asphalt, Inc., 804 N.E.2d 161, 163 (Ind. Ct. App. 2004) - which is the only other time the Court of Appeals has discussed that section of Indiana Code - and determined the judge's discussion of the section was correct, wrote Judge Patricia Riley.

Because the statutes in existence when Ward v. Yarnelle, 173 Ind. 535, 91 N.E. 7 (1910), was decided didn't address the lien priority between a mortgage executed to raise funds for construction of improvements on a property and the mechanic's liens of those who provided the labor and supplies, the General Assembly adopted Section (d) to say that when the funds from the loan secured by the mortgage are for the project that gave rise to the mechanic's lien, then the mortgage lien has priority over the mechanic's liens recorded after the mortgage, wrote Judge Riley citing Judge Sharpnack's dissent.

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