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COA finds for bank in construction lien litigation

September 25, 2017

The Indiana Court of Appeals has ruled in favor of a bank in a legal battle over which lien in a construction project should take priority, with the court determining the bank’s lien was superior to a mechanic’s lien because the bank’s mortgage on the project secured its loan of funds to the construction project.

In Kellam Excavating, Inc. v. Community State Bank, 09A02-1804-PL-760, Sagamore Warehouse, LLC solder fertilizers to farmers in the Midwest and operated a fertilizer storage, processing and handling facility. Winamac Southern Railway Company leased Sagamore real property in Logansport on which it could build that facility.

Then, Sagamore and Kellam Excavating, Inc. entered into a construction contract that called for Kellam to build the fertilizer facility on the land Winamac had leased to Sagamore. While Kellam was working on the construction project, Sagamore sought financing for the project from Community State Bank.

The bank entered into four master leases with Sagamore that financed the provision of equipment to Sagamore as long as Sagamore agreed to make quarterly payments and acknowledged the bank’s interest in the leased equipment. Then in May 2014, Sagamore granted the bank a leasehold mortgage to serve as collateral, and the bank recorded that mortgage with the Cass County recorder, perfecting its lien.

Kellam then recorded a mechanic’s lien in March 2015 for work performed as part of the construction project. Sagamore responded with a complaint against Kellam alleging breach of contract, while Kellam filed a counterclaim alleging it had not been paid for its work and seeking foreclosure on its mechanic’s lien. The bank also intervened to file a third-party complaint, alleging Sagamore was in default and seeking foreclosure of its lien.

The bank then moved for summary judgment and sought an order finding the lien created by the leasehold mortgage was superior to any other interest. Kellam filed a response in opposition to the bank’s summary judgment motion and moved for partial summary judgment, claiming its mechanic’s lien was superior.

After a hearing, the Cass Circuit Court granted the bank’s motion for summary judgment and denied Kellam’s motion, finding the bank’s master leases constitute financing arrangements that take priority. Kellam appealed, but the Indiana Court of Appeals affirmed the trial court’s decision in a Monday opinion.

Specifically, Judge John Baker pointed to the holding in Harold McComb & Son, Inc. v. JP Morgan Chase Bank, NA, 892 N.E.2d 1255, 1259-62 (Ind. Ct. App. 2008), in which the court found that, “With regard to commercial property where the funds from the loan secured by the mortgage are for the specific project that gave rise to the mechanic’s lien, the mortgage lien has priority over the mechanic’s lien recorded after the mortgage.”

Kellam argued that holding, known as the lender exception, could not apply because the bank did not have a mortgage and was not a lender, and because its interest did not relate to the construction project. But Baker wrote the bank’s leasehold mortgage fit within the definition of a mortgage and that its role as an Indiana-chartered banking institution qualified it as a “lender.”

Finally, “Sagamore sought additional financing from the Bank for the construction of the Facility Improvements, and the Bank’s funds were used for such construction. … Thus, the Bank’s lien relates to the specific project for which Kellam contracted with Sagamore,” Baker wrote.

“In short, the Bank’s mortgage secured its loan of funds used to construct the Facility Improvements,” Baker continued. “The Lender Exception applies, and as a result, the Bank’s mortgages are superior to Kellam’s mechanic’s lien.”

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