Wells Fargo Bank v. Rieth-Riley Construction Co. (IN)

Summary: A previously recorded mortgage lien on land has priority over a mechanics' lien claim. However, mechanics' lien claimant can recover by removing the improvements to the building.

Wells Fargo Bank, N.A. v. Rieth-Riley Construction Co., 38 N.E.3d 666 (Ind. App. 2015).

Facts: Woodmar Hammond LLC (“Woodmar”) held title to Lot 1 of the Woodmar Shopping Center in Hammond, Indiana. In August of 2007, Wells Fargo loaned Woodmar $6,200,000 to refinance Lot 1. Woodmar, through execution of a promissory note, promised to repay the principal plus interest by April 30, 2011. Woodmar also executed a first mortgage lien on its rights to Lot 1 for Wells Fargo, which was recorded on January 8, 2008. On April 30, 2011, Woodmar defaulted by failing to pay the principal balance on the loan.

In November 2011, Woodmar hired Rieth-Riley to provide paving services to improve the parking lot of Lot 1. Woodmar failed to make payments for their services. As a result, Rieth-Riley filed a mechanics' lien against Lot 1 for $251,800 in February 2012. On February 4, 2013, Rieth-Riley filed a complaint for breach of contract and sought to foreclose its mechanics' lien. The complaint listed Wells Fargo as a defendant and stated that the mechanics' lien had priority over the mortgage. Wells Fargo filed to foreclose the mortgage shortly thereafter.

After cross-complaints, counterclaims, and third-party complaints, the trial court granted Wells Fargo’s motion for summary judgment because their lien on the property had priority. The trial court also noted that Wells Fargo was empowered to bid for the property with the judgement amount to be credited with the amount bid by Wells Fargo.

On June 6, 2014, Rieth-Riley filed a motion to clarify and/or correct error. It stated that allowing Wells Fargo a credit bid for Lot 1 would deprive Reith-Riley of any recovery, because there would likely be no cash in the pot to distribute following the sale. On October 3, 2014, the trial court ruled in favor of Rieth-Riley’s breach of contract claim and awarded them $337,370 plus interest. Wells Fargo’s lien would remain the highest priority but would have to provide Rieth-Riley their award in cash once a bid reached that total. Wells Fargo appealed.

Holding: Reversed and remanded. The appeals court first looked at Indiana statute to determine the priority of encumbrances on the land. The statute states that a mortgage takes priority according to the time of its filing. I.C. § 32-21-4-1(b). Wells Fargo recorded the mortgage in January 2009, and Rieth-Riley recorded it mechanics' lien in February 2012. Mechanics' liens, however, date back to the time of the service. In this case, they performed their services in November 2011. The court determined that Wells Fargo’s lien held priority over the mechanics' lien.

The court then looked at what to do with the mechanics' lien. Relying on case law, the court determined that Rieth-Riley had priority as to any improvements it made to Lot 1 and may assert this priority to the extent that it is able to remove and sell these improvements. Reith-Riley was not entitled to a pro-rata share of the proceeds and could not gain any proceeds from the sale until Wells Fargo’s judgment was satisfied.

Rieth-Riley asserted that they could recover the asphalt of the parking lot. Wells Fargo asked the court that they stop Rieth-Riley from destroying the parking lot. The issue turned on whether the parking lot was considered an improvement on the building. If it was, then Rieth-Riley could recover the asphalt from the parking lot. The appeals court circumvented the definition issue and looked at the legislative purpose of mechanics' liens. A mechanics' lien is meant to intervene in favor of a mechanic or laborer, and secure to them a return on what they have done to enhance the value of the land. The court determined that a parking lot fell into Indiana’s code that allows to be removed to satisfy a mechanics' lien.

The case was remanded to determine if the removal of the asphalt from the parking lot was practical. If not, Rieth-Riley’s mechanics' lien would remain junior to Wells Fargo’s mortgage lien.

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By: ATG Underwriting Department | Posted on: Fri, 08/19/2016 - 2:43pm