Kellam Excavating, Inc. v. Community State Bank

FILED
Sep 25 2017, 10:47 am
CLERK
Indiana Supreme Court
Court of Appeals
and Tax Court
ATTORNEYS FOR APPELLANT ATTORNEYS FOR APPELLEE
Mark S. Fryman, Jr. Mark R. Wenzel
Scott L. Starr Debra A. Mastrian
Starr Austen & Miller, LLP Martha R. Lehman
Logansport, Indiana SmithAmundsen LLC
Indianapolis, Indiana
IN THE
COURT OF APPEALS OF INDIANA
Kellam Excavating, Inc., September 25, 2017
Appellant-Intervening Defendant, Court of Appeals Case No.
09A02-1704-PL-760
v. Appeal from the Cass Circuit
Court
Community State Bank, The Honorable Leo T. Burns,
Appellee-Intervening Plaintiff Judge
Trial Court Cause No.
09C01-1504-PL-24
Baker, Judge.
Court of Appeals of Indiana | Opinion 09A02-1704-PL-760 | September 25, 2017 Page 1 of 11
[1] Community State Bank (the Bank) provided financing to Sagamore Warehouse,
LLC (Sagamore), for the construction of a fertilizer plant by Kellam
Excavating, Inc. (Kellam), on property Sagamore leased from Winamac
Southern Railway Company (Winamac). Kellam did not receive full payment
for its work and filed a mechanic’s lien. After Sagamore and Kellam filed
complaints against each other, the Bank intervened and filed a third-party
complaint to foreclose on its leasehold mortgage on Sagamore’s property. The
Bank also filed a motion for summary judgment, arguing that its interest in the
property should receive priority. The trial court entered summary judgment for
the Bank, finding that its mortgage takes priority over Kellam’s mechanic’s lien.
Kellam now appeals, arguing that the trial court erred in prioritizing the Bank’s
interest. Finding no error, we affirm.
Facts
[2] Sagamore operated a fertilizer wholesaler business that sold fertilizer to farmers
in the Midwest. It required a fertilizer storage, processing, and handling facility
(the Facility Improvements). On July 25, 2013, Sagamore and Winamac
entered into a land lease, pursuant to which Winamac leased Sagamore real
property (the Real Estate) located in Logansport. Sagamore’s right, title, and
interest in and to the Real Estate under the land lease is, collectively, the
“Leasehold Estate.”
[3] On July 30, 2013, Sagamore and Kellam entered into a construction contract
under which Kellam would build the Facility Improvements on the Real Estate.
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Kellam began construction on the Facility Improvements on October 25, 2013.
Meanwhile, Sagamore needed additional capital and sought financing for
construction of the Facility Improvements from the Bank.
[4] The Bank and Sagamore executed four instruments for its financing deal. On
December 31, 2013, the Bank and Sagamore entered into Master Lease 2013-
25, and on May 16, 2014, the Bank and Sagamore entered into Master Lease
2014-02, Master Lease 2014-03, and Master Lease 2014-04 (collectively, the
Master Leases). Under the Master Leases, the Bank financed the provision of
certain equipment to Sagamore, Sagamore agreed to make quarterly payments
to the Bank, and Sagamore acknowledged the Bank’s interest in the leased
equipment. The Bank filed financing statements for its interests described in
each Master Lease. After the May 2014 closing, the Bank paid Kellam
$1,620,156 for costs related to the construction of the Facility Improvements.
Kellam subsequently refunded $1,620,156 to Sagamore for funds Sagamore had
previously paid Kellam before the Bank financed the project. On June 23,
2015, each of the Master Leases was modified under a Master Lease
Modification Agreement. The Master Leases, the modifications, and the
financing statements are, collectively, the “Equipment Leases.”
[5] On May 16, 2014, Sagamore granted the Bank a Leasehold Mortgage, Security
Agreement, Assignment of Leases, and Rents and Fixture Filing (collectively,
the Leasehold Mortgage) to serve as collateral. The Bank perfected its lien on
June 24, 2014, by recording the Leasehold Mortgage with the Cass County
Recorder. Pursuant to the Leasehold Mortgage, Sagamore mortgaged to the
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Bank all of Sagamore’s right, title, and interest in the Leasehold Estate; in all
fixtures, appliances, and articles of personal property connected with the
operation of the Real Estate; and in all buildings, structures, and improvements
connected with the Real Estate.
[6] On March 6, 2015, Kellam recorded a mechanic’s lien for work performed on
the Facility Improvements. On April 27, 2015, Sagamore filed a complaint
against Kellam alleging breach of contract, among other claims. On August 6,
2015, Kellam filed a counterclaim against Sagamore, alleging that it had not
been paid for work completed and seeking foreclosure on its mechanic’s lien.
On April 18, 2016, the Bank intervened to file a third-party complaint alleging
that Sagamore was in default under the Equipment Leases and the Leasehold
Mortgage and seeking foreclosure on its Leasehold Mortgage.
[7] On May 31, 2016, the Bank filed a motion for summary judgment, arguing that
the trial court should enter judgment in favor of the Bank with regard to the
Equipment Leases and the Leasehold Mortgage, and enter an order finding that
the lien created by the Leasehold Mortgage is superior to any other interest and
foreclosing on it in favor of the Bank. On September 6, 2016, Kellam filed a
response in opposition to the Bank’s motion for summary judgment and a
motion for partial summary judgment, arguing that because the Bank is an
owner and not a lender, Kellam’s mechanic’s lien is superior to the Bank’s
interest.
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[8] A hearing took place on December 16, 2016, regarding the parties’ motions.
On March 14, 2017, the trial court granted the Bank’s motion for summary
judgment and denied Kellam’s motion for partial summary judgment, finding
that the Bank’s Master Leases constitute financing arrangements that take
priority over Kellam’s mechanic’s lien. Kellam now appeals.
Discussion and Decision
[9] Kellam appeals the trial court’s entry of summary judgment in favor of the
Bank, arguing that the trial court erred in prioritizing the parties’ liens.
[10] Our standard of review on summary judgment is well established:
We review summary judgment de novo, applying the same
standard as the trial court: “Drawing all reasonable inferences in
favor of . . . the non-moving parties, summary judgment is
appropriate ‘if the designated evidentiary matter shows 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.’” Williams v.
Tharp, 914 N.E.2d 756, 761 (Ind. 2009) (quoting T.R. 56(C)). “A
fact is ‘material’ if its resolution would affect the outcome of the
case, and an issue is ‘genuine’ if a trier of fact is required to
resolve the parties' differing accounts of the truth, or if the
undisputed material facts support conflicting reasonable
inferences.” Id. (internal citations omitted).
Hughley v. State, 15 N.E.3d 1000, 1003 (Ind. 2014).
[11] Three statutes govern priority between a mortgage and a mechanic’s lien:
Indiana Code sections 32-21-4-1(b), 32-28-3-2, and 32-28-3-5(d). Our goal in
statutory interpretation is to determine, give effect to, and implement the intent
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of the legislature as expressed in the plain language of its statutes. Clark Cty.
Drainage Bd. v. Isgrigg, 966 N.E.2d 678, 680 (Ind. Ct. App. 2012).
[12] Our Court has previously discussed the interplay between the three relevant
statutes and the question of mortgage lien priority versus a later-recorded
mechanic’s lien as to improvements provided on commercial property as
follows:
The first statute relevant to this dispute is Indiana Code section
32-21-4-1(b), which provides, in pertinent part, that “[a]
conveyance, mortgage, or lease takes priority according to the
time of its filing.” Relying on this statute, we have said that a
mortgage lien is superior to a mechanic’s lien “if the mortgage
was recorded before the mechanic's work was begun or materials
furnished.” Provident Bank v. Tri-County Southside Asphalt, Inc.,
804 N.E.2d 161, 163 (Ind. Ct. App. 2004), aff’d on reh’g, 806
N.E.2d 802 (Ind. Ct. App. 2004), trans. denied.
However, we also have Indiana Code section 32-28-3-2, which
provides:
(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:
(1) the owner has only a leasehold interest; or
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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.
We have said that “[t]he 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.”
Provident Bank, 804 N.E.2d at 164. “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.” Id. This statute, as written and as applied by this court,
seems to favor the mechanic’s lienholder with regard to new
improvements even if the mortgage is recorded before the
mechanic’s lien is recorded and before the mechanic’s lienholder
begins its work or furnishes any materials.
Finally, we have Indiana Code section 32-28-3-5(d), which
provides that, as to commercial property (including commercial
residential property, e.g., apartment complexes), “[t]he mortgage
of a lender has priority over all liens created under this chapter
that are recorded after the date the mortgage was recorded, to the
extent of the funds actually owed to the lender for the specific
project to which the lien rights relate.” The first clause of
subsection (d)—“The mortgage of a lender has priority over all
liens created under this chapter that are recorded after the date
the mortgage was recorded”—appears to give priority to the
mortgage of a lender as long as it is recorded first, in contrast to
Indiana Code section 32-28-3-2, which, as noted above, seems to
favor the mechanic’s lienholder with regard to new
improvements even if the mortgage is recorded before the
effective date of the mechanic's lien. . . .
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[U]nder subsection (d), the mortgage of a lender has priority only
“to the extent of the funds actually owed to the lender for the
specific project to which the lien rights relate.” I.C. § 32-28-3-
5(d). . . .
With regard to priority over improvements, Indiana Code section
32-28-3-2 provides the general rule. As stated in Provident Bank,
804 N.E.2d at 164, the plain language of that statute “protects the
mechanic lien holder inasmuch as it protects his priority as to the
improvement for which he provided the labor and materials.”
On the other hand, Indiana Code section 32-28-3-5(d) provides
the more specific rule with regard to priority over improvements
on commercial property where the funds from the loan secured
by the mortgage are intended to finance those improvements and
where the mortgage is recorded before the mechanic’s liens. . . .
[W]e explicitly hold today what has previously been stated only
in dicta in a dissenting opinion: 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.
Harold McComb & Son, Inc. v. JP Morgan Chase Bank, NA, 892 N.E.2d 1255, 1259-
62 (Ind. Ct. App. 2008) (emphasis added). This holding is commonly referred
to as the Lender Exception.
[13] Kellam makes several arguments on appeal as to why the trial court erred. Of
significance is Kellam’s argument that the Lender Exception does not apply to
this case because the Bank does not have a mortgage, the Bank is not a lender,
and the Bank’s interest does not relate to the Facility Improvements. At the
same time, Kellam acknowledges that the Bank “could have loaned the funds to
build the [Facility Improvements], took [sic] a mortgage and the Lender
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Exception would have prioritized [the Bank’s] mortgage over Kellam’s
mechanic’s lien.” Appellant’s Br. p. 15. We find this “hypothetical” situation
to be exactly what happened in this case.
[14] Kellam argues that the Leasehold Mortgage is not a mortgage because the
mortgage is described as a leasehold mortgage, Sagamore did not promise to
repay the Bank for the funds the Bank expended, and Sagamore did not execute
a promissory note. A mortgage is defined as a “conveyance of title to property
that is given as security for the payment of a debt or the performance of a duty
and that will become void upon payment or performance according to the
stipulated terms” and as a “lien against property that is granted to secure an
obligation (such as a debt) and that is extinguished upon payment or
performance according to stipulated terms.” Mortgage, Black’s Law Dictionary
(10th ed. 2014).
[15] The Bank’s Leasehold Mortgage fits squarely into this definition. Kellam’s
emphasis on the word “leasehold” in the instrument’s title places semantics
over substance. Regardless of what the Bank’s financing document is called, it
operates like a typical mortgage. The instrument granted the Bank a lien
against Sagamore’s property rights; the lien secured Sagamore’s obligation to
repay the Bank for the funds the Bank expended. The Master Leases show that
Sagamore was obligated to make quarterly payments to the Bank until the funds
were fully repaid. Appellant’s App. Vol. IV p. 26, 45, 73, 97. As for Kellam’s
contention that the Leasehold Mortgage is not a mortgage because Sagamore
did not execute a promissory note, Kellam fails to cite any authority that states
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that a promissory note is required to execute a valid mortgage, nor do we find
any. Accordingly, we find that the Bank’s Leasehold Mortgage is a mortgage
for the purposes of the Lender Exception.
[16] Kellam next argues that the Bank is not a lender but instead a purchaser and
owner. A “lender” includes a supervised financial organization or any other
entity that has the authority to make loans. I.C. § 32-28-3-5(a). A supervised
financial organization includes a business that is “organized, chartered, or
holding an authorization certificate under the laws of a state . . . that authorizes
the [business] to make loans and to receive deposits . . . .” Ind. Code § 26-1-4-
102.5(a). Because the Bank is an Indiana-chartered banking institution, see
Appellant’s App. Vol. II p. 93, it is a supervised financial organization under
the statute. In short, the Bank is a “lender” under the Lender Exception.
[17] Lastly, Kellam contends that the Lender Exception does not apply because the
Bank’s lien does not relate to the specific project—the construction of the
Facility Improvements—but rather to the Leasehold Estate. We disagree.
Simply put, Sagamore sought additional financing from the Bank for the
construction of the Facility Improvements, and the Bank’s funds were used for
such construction. Appellant’s App. Vol IV p. 149; Appellant’s App. Vol. VI p.
84. Thus, the Bank’s lien relates to the specific project for which Kellam
contracted with Sagamore.
[18] The parties do not dispute that the Real Estate and Facility Improvements are
commercial property or that the Bank recorded its Leasehold Mortgage before
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Kellam recorded its mechanic’s lien. The funds that the Bank loaned were
secured by the mortgage for the specific project—the Facility Improvements—
that gave rise to Kellam’s mechanic’s lien. In short, the Bank’s mortgage
secured its loan of funds used to construct the Facility Improvements. The
Lender Exception applies, and as a result, the Bank’s mortgages are superior to
Kellam’s mechanic’s lien. Because we find that the Lender Exception applies,
we need not consider Kellam’s remaining arguments. The trial court did not err
in prioritizing the liens.
[19] The judgment of the trial court is affirmed.
Najam, J., and Pyle, J., concur.
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