Provident Bank v. Tri-County Southside Asphalt, Inc. ( 2004 )

OPINION

BAKER, Judge.

This case presents an issue of priority between the lien of a mortgage on real estate with a residence thereon and a mechanic's lien for the value of a driveway constructed on the property after the mortgage had been recorded. Appellant defendant Provident Bank ("Provident"), the holder of the mortgage lien, appeals the trial court's entry of summary judgment in favor of the appellee-plaintiff TriCounty Southside Asphalt, Inc. ("TriCounty"), the holder of the mechanic's lien. Concluding that the mortgage lien has priority as to the land and buildings, we reverse the trial court.

FACTS

The facts most favorable to Provident, the non-moving party, reveal that on December 9, 1998, April Repass extended a mortgage for her single-family residence located in Indianapolis, Indiana ("the Property"), in favor of Bank One, N.A. ("Bank One"), in the amount of $186,900. Bank One recorded this mortgage on February 5, 1999. On November 5, 1999, Re-pass conferred a second mortgage for the Property in the amount of $229,500. This mortgage is currently owned by Provident and was recorded on December 8, 1999. On June 7, 2000, Repass entered into a contract with Tri-County, whereby TriCounty agreed to pave an asphalt driveway on the Property. On June 18, 2000, Tri-County furnished labor and materials for paving the driveway. Tri-County received no payment for its services, and, on August 11, 2000, it recorded a mechanic's lien on the Property in the amount of $6,296.01.

Tri-County filed a complaint to foreclose on its mechanic's lien and named Bank One and Provident as defendants. Bank One filed its own complaint to foreclose its mortgage, naming Provident and TriCounty as defendants. The two actions were consolidated.

Tri-County filed a motion for summary judgment, claiming that no genuine issue of fact remained for trial and that it was entitled to judgment as a matter of law. Bank One also filed a motion for summary judgment. The trial court granted TriCounty's motion for summary judgment but denied Bank One's motion. The trial court's order provided, in relevant part:

[Tri-County] is entitled to judgment on its mechanic's lien in the amount of six thousand two hundred ninety six dollars and 01/100 ($6,296.01). ... Said lien has priority over all but the appropriate tax liens.

Appellant's App. p. 15. Both Provident and Bank One filed motions to correct error, which the trial court denied. Provident now appeals.¹

DISCUSSION AND DECISION

I. Standard of Review

We first note that the party appealing from "a summary judgment decision has the burden of persuading the court that the grant or denial of summary judgment was erroneous." Severson v. Bd. of Tr. of Purdue Univ., 777 N.E.2d 1181, 1188 (Ind.Ct.App.2002). Summary judgment is appropriate only if the pleadings and designated evidence show that "there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Ind. Trial Rule 56(C). "On a motion for summary judgment, all doubts as to the existence of material issues of fact must be resolved against the moving party." Owens Corning Fiberglass Corp. v. Cobb, 754 N.E.2d 905, 909 (Ind.2001). When reviewing a trial court's statutory interpretation, however, we use a de novo standard because in such matters we "owe the trial court no deference." Family & Soc. Servs. Admin. v. Schluttenhofer, 750 N.E.2d 429, 432 (Ind.Ct.App.2001).

IIL. Indiana Code Section 32%-21-L-1(b)

The priority of encumbrances on land is governed by Indiana Code section 32-21-4-1(b), which provides that "[a] conveyance, mortgage, or lease takes priority according to the time of its filing." Provident recorded its mortgage lien on December 3, 1999. Our mechanic's lien statute, Indiana Code section 32-28-3-5, states that "[the recorded lien relates back to the date the mechanic or other person began to perform the labor or furnish the materials or machinery." Tri-County began paving the driveway on June 13, 2000. Thus, by virtue of its earlier recordation date, Provident's mortgage lien has priority over Tri-County's mechanic's lien with respect to the land and attached buildings. Greyhound Financial Corp. v. R.L.C., Inc, 637 N.E.2d 1325, 1328 (Ind.Ct.App.1994) (holding that "date on which a mortgage is recorded is dispositive for determining its priority with respect to a me-chanie's lien").

In Zehner v. Johnston, the issue addressed was whether the statute existing at the time-which was nearly identical to the present statute-provided that a me-chanie's lien was "superior to the mortgage lien" of a defendant. 22 Ind.App. 452, 452, 53 N.E. 1080, 1082 (1899). The Zehner court held that a mortgage lien was superi- or to a mechanic's lien if the mortgage was recorded before the mechanic's work was begun or materials furnished. Id. at 458, 53 N.E. at 1082. The facts in that case showed that the owners of real property contracted with Zehner on June 16, 1896, to complete work on a greenhouse. Also in June 1896, the owners of the realty executed a mortgage to a third party, who then recorded the mortgage, thereby perfecting the mortgage lien. Zehner began farnishing materials for the greenhouse on August 18, 1896. Meanwhile, the mortgage executed by the owners had been transferred to Citizen's Bank. Because of non-payment, the bank foreclosed on the mortgage. Zehner sought to recover for his labor and materials and argued that his mechanic's lien was senior to the bank's mortgage. Although it is not clear from our reading of Zehner when the mechanic's lien was recorded, the trial court held that Zehner's mechanic's lien was junior to the mortgage. The Appellate Court affirmed the trial court, noting that "the mortgage was executed and recorded long before the work was done and material furnished for which [Zehner] prosecutes this action." Id.

Here, the situation is nearly identical to that in Zehmer. Although Provident recorded its mortgage on December 3, 1999, Tri-County did not begin its work until June 13, 2000. Borrowing from the Zeh-ner rationale, "the mortgage was executed and recorded long before the work was done and materials furnished" by TriCounty. Id. Thus, with respect to the land and buildings, Tri-County's lien is clearly junior to Provident's.

III. Indiana Code Section 32-28-3-2²

Keeping in mind the seniority of Provident's mortgage lien over the land and buildings, Indiana Code section 82-28-3-2, our mechanic lien statute, asserts, in relevant part:

(a) The entire land upon which the building, erection, or other improvement is situated, including the part of the land not occupied by the building, erection, or improvement, is subject to a lien to the extent of the right, title, and interest of the owner for whose immediate use or benefit the labor was done or material furnished.

(b) If:

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(2) the land is encumbered by mortgage; the lien, so far as concerns the buildings erected by the lienholder, is not impaired by forfeiture of the lease for rent or foreclosure of mortgage. The buildings may be sold to satisfy the lien and may be removed not later than ninety (90) days after the sale by the purchaser.

The plain language of this statute protects the mechanic lien holder inasmuch as it protects his priority as to the improvement for which he provided the labor and materials. The statute contemplates that the holder of a mechanic lien may sell the improvements to satisfy the lien and remove them within ninety days of the sale date. Here, Tri-County has priority as to the improvement: the driveway. Thus, under Indiana Code section 32-28-8-2(b), Tri-County could have sold and removed the driveway.

The trial court did not enter findings of fact and conclusions of law but its order essentially adopted Tri-County's argument that its "lien has priority over any mortgages." Appellant's App. p. 57. Such a proposition, however, eviscerates the intent behind Indiana Code section 32-21-4-1(b). The trial court's decision effectively gave a later-recorded mechanic lien priority over a prior-recorded mortgage lien. This was error.

When read together, Indiana Code see-tions 32-21-4-1(b) and 82-28-8-2(b) give Tri-County's mechanic lien priority over the - improvement-the - driveway-only. We acknowledge that separate removal of the driveway poses "practical ramifications." Appellee's Br. p. 7. These "practical ramifications" notwithstanding, such is the result envisioned by both Indiana Code sections 32-21-4-1(b) and 32-28-3-2). This result-though perhaps not perfect-effects the intent behind Indiana Code section 32-21-4-1(b), that a prior-recorded lien have priority over a later-recorded lien. Moreover, Tri-County's interest is protected by its priority as to the improvement, as contemplated by Indiana Code section 32-28-3-2(b). This result allows the intent behind both statutes to be fulfilled. See Quakenbush v. Lackey, 622 N.E.2d 1284, 1290 (Ind.1993) ("Where two statutes are in apparent conflict they should be construed, if it can be reasonably done, in a manner so as to bring them into harmony"). In sum, requiring the removal of the driveway may not be the ideal solution. Removal is, however, not impossible and is the solution that effects the intent behind both Indiana Code see-tions 32-21-4-1(b) and 82-28-8-2(b).

IV. Public Policy ~

In addition to the statutory requirement that Tri-County receive priority as to only the driveway, public policy calls for this result as well. Public policy holds that he who is best able to avoid a loss should bear it. The famous case of Phelps v. McQuade, 220 N.Y. 232, 115 N.E. 441 (1917), was the genesis of Uniform Commercial Code section 2-408. In Phelps, Gwynne falsely represented himself to a jewel vendor and obtained jewelry on credit from Phelps. Gwynne then sold the jewelry to McQuade. Phelps filed a claim for replevin of the jewelry, arguing that under common law title did not pass to McQuade. The Phelps court, however, noted that it was the "intention of the person having title to the goods and delivering them to another" that determined whether good title then passed to a purchaser for value. Id. at 442., Thus, the. Phelps court held that Phelps had to bear the economic loss due to Gwynne's false representation because Phelps had dealt directly with Gwynne.

The Uniform Commercial Code drafters incorporated the sound policy behind the result in Phelps. . The drafters noted that U.C0.C. section 2-408 was "predicated on the policy that where a transferor has voluntarily delivered the goods to a purchaser, he, the transferor, ought to run the risk of the purchaser's fraud as against innocent third parties." U.C.C. § 2-403, comment 4.(2002). The policy is just inasmuch as he who deals directly with a person is in the best position to prevent a financial injury. See M & K Corp. v. Farmers State Bank, 496 N.E.2d 111, 112 (Ind.Ct.App.1986) (holding that the "employer is normally in a better position to prevent such forgeries by reasonable care in the selection or supervision of his employees").

'We note that "[rlecording acts were passed for the purpose of providing a place and a method by which an intending purchaser or encumbrancer can safely determine just what kind of a title he is in fact obtaining." State v. Anderson, 170 N.E.2d 812, 815, 241 Ind. 184, 190 (1960) (quoting State v. Young, 238 Ind. 452, 456, 151 N.E.2d 697, 699 (1958)). Thus, just as he who deals directly with a person is in the best position to protect against losses, a mechanic who fears non-payment for his labor and materials may easily determine whether the property upon which he will work is encumbered. Thus, our decision recognizes the reasoning behind our recording statute and gives effect to the public policy that places the risk of loss on he who is best able to avoid that loss.

Moreover, we cannot minimize the economic ramifications on the alienation of land were we to hold otherwise. Lenders can currently ensure that mechanics liens will not encumber a property by simply observing the property to determine if work has begun and waiting sixty days prior to making a loan, as a person seeking to establish a mechanic's lien must "file a copy ... in the recorder's office of the County not later than sixty (60) days after the date of the first delivery or labor performed." - Ind.Code § 82-28-3-10(2). Were we to allow Tri-County to receive priority over the entire proceeds of a foreclosure sale, a mechanic's lien filed years after the recording of a mortgage lien could conceivably "jump to the head of the line." A lender would thus have to factor this risk into its lending calculations, the result of which would be unnecessarily increased interest rates and fees.

CONCLUSION

In light of the issues addressed, we conclude that Indiana Code section 82-21-4-1(b) provide Provident with priority over the proceeds from a foreclosure sale. However, Indiana Code section 32-28-8-2(b) provides Tri-County with priority as to the driveway. Thus, we reverse the entry of summary judgment in favor of Tri-County and remand this case to the trial court with instructions that it enter summary judgment in favor of Provident.

The judgment of the trial court is reversed.

BROOK, C.J., concurs. SHARPNACK, J., dissents with opinion.

1 . - Bank One is not a party to this appeal.

2 . This statute, recodified during this litigation, was formerly Indiana Code section 32-8-3-2. P.L. 2-2002 § 128. The statute was not substantively changed.