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October 16, 2006

INDIANA CASE REVIEW: Mechanic?s Liens

Indiana Case Review

Stephen E. Arthur


Mechanic’s Liens

    In order for a mechanic’s lien to attach to real estate, improvements to the property must be made under the authority and direction of the landowner.  More than inactive or passive consent is required. 

    In R.T.B.H., Inc v. Simon Property Group, __ N.E.2d __ (Ind. Ct. App. 2006), Dick’s Sporting Goods, Inc. (Dick’s) entered into a lease agreement with Simon Property (Simon) to establish a presence in one of the Simon shopping malls.  As part of that lease, Dick’s was required to demolish two existing structures located at the mall and pay for the construction of its own store.  Dick’s construction plans were reviewed and approved by Simon before execution of the lease.

    Thereafter, Dicks retained a general contractor for the project, who retained McAndrew’s to perform window and glass work on the project.  After completion of the store, the general contractor refused to pay and sued McAndrew’s for damages.  McAndrew’s counterclaimed against the general contractor and Simon.  McAndrew’s claimed a mechanic’s lien on the property and sought to foreclose.  The trial court determined that the mechanic’s lien was invalid as to Simon.   

The Indiana Court of Appeals affirmed because Simon had not actively consented to the improvements provided by McAndrew’s.   The court said a lease calling for improvements, even very detailed improvements, will not provide the sort of active consent needed to maintain a mechanic’s lien.  Simon’s review and approval of Dick’s plans was technical and perfunctory, and Simon did not receive a direct benefit from the construction.  Therefore, active consent was lacking and a valid mechanic’s lien could not attach to Simon’s interest in the property.

Dragnet Clauses and Junior Liens

A junior creditor may not take an assignment of a first mortgage holder’s “dragnet” mortgages, tack on her judgment lien, and leapfrog a second mortgage holder.

In The Money Store Investment Corp. v. Summers, __ N.E.2d __ (Ind. Ct. App. 2006), Summers granted a number of mortgages during the 1990’s, to Fort Wayne National Bank (National City).  Then, on September 15, 2000, Summers borrowed $508,275.00 from The Money Store and granted mortgages on three of the same parcels he had used to secure the National City mortgages, plus an additional six lots. 

Prior to the Money Store loans National City sent to The Money Store’s title company three pay-off statements and promised to release mortgages and assignments concerning those properties upon proper payoff of the loans.  On September 15, 2000, National City received payments for the loans, but one payment was $375.00 short of the amount of the debt. 

On August 10, 2001, Phillips filed a motion to enforce a settlement agreement in a previously dismissed matter.  One month later, Money Store filed its complaint for foreclosure.  On February 5, 2002, the trial court in the Phillips’ matter granted her a $205,700 judgment.

Phillips then purchased the National City Mortgages and National City assigned its interest to Phillips.  Phillips then moved to foreclose on the mortgages.  The trial court held the “dragnet” clauses contained in some of the National City Mortgages secured “all debts or obligations owed to Paula Phillips by Summers,” which included Phillips’ judgment lien against Summers. 

The Indiana Supreme Court disagreed holding that Phillips could not tack her judgment lien to a secured mortgage through a dragnet clause and thereby leap frog a creditor who held a priority status over the judgment lien.  “The court’s test for determining if a debt not specifically described is secured by a dragnet clause is whether the debt is of the general kind of those specifically secured or sufficiently close in relationship, and whether the mortgagee relied on the security in making the loan.”   

Phillips’ argument that the dragnet clauses secured any debt owed by Summers ignored language in the contract which limited debts to those between the mortgagor and the mortgagee.  Phillips’ judgment lien arose from unrelated litigation.   


Belated Grants of Motion to Correct Errors

The trial court may not belatedly grant a motion to correct errors where a party fails to file a notice of appeal and the motion to correct errors is deemed denied by operation of Trial Rule 53.3(A).  That rule provides that a motion to correct errors will be deemed denied if the court fails to rule within 30 days following a hearing on the motion.

In Garrison v. Metcalf, __ N.E.2d __ (Ind. 2006), a judgment was entered against Metcalf.  Metcalf did not file a notice of appeal, but rather filed a motion to correct errors.  The trial court held a hearing on the matter and, thirty-six days later granted the motion.  Garrison appealed, arguing that the motion had been denied by operation of Trial Rule 53.3(A). 

Indiana Supreme Court agreed and held that the motion to correct errors was deemed denied on the thirtieth day.  Significant to the court’s decision was Metcalf’s failure to file a notice of appeal.  Where a party files a notice of appeal together with a motion to correct errors, the Supreme Court has permitted the trial court to rule belatedly on the motion to correct errors.  Cavinder Elevators, Inc v. Hall, 726 N.E.2d 285 (Ind. 2000).  The court said to permit a late ruling, when a notice of appeal had not been filed, would only create an open-ended time for the court to rule on the motion and thereby undermine the intended operation of Trial Rule 53.3(A).


Lost Profits Improper in Real Estate Actions

    The general measure of damages for a vendor’s failure or refusal to convey land is usually the difference between the contract price and the fair market value of the land at the time of the breach plus the return of any payment made, with interest.  This is commonly referred to as the “loss of the bargain.”
   
In McGehee v. Elliott, __ N.E.2d __  (Ind. Ct. App. 2006), the Elliotts entered into a purchase agreement with McGehee to buy a tract of land.  As part of that agreement, the Elliotts were given a reservation of rights to purchase a second tract.  Under the belief the Elliotts could not purchase the second tract, McGehee sold it to a third party without giving notice of the sale to the Elliotts.  The Elliotts became aware of the sale and brought suit for damages including, among other things, expected lost profits from a meat producing sheep operation the Elliotts had planned to maintain on the tract. 

    McGehee argued the lost profits claim was speculative.  However, the trial court entered judgment in favor of the Elliotts.  Not relying on the argument advanced by either party, the Indiana Court of Appeals determined the award of lost profits was clearly erroneous.  The general measure of damages for a breach of a land contract is the difference of the land’s fair market value and its value at the time of the breach.  Future profits are relevant as they apply to the fair market value of the property at the time of breach, but are an erroneous measure of damages in an action arising from a seller’s refusal to convey land.

Stephen Arthur (sarthur@h-mlaw.com) is a partner with Harrison & Moberly, LLP, in Indianapolis, concentrating his practice in federal and state complex commercial litigation. Mr. Arthur is the author of the Civil Trial Practice and Indiana Procedural Forms volumes in West Publishing’s Indiana Practice series, and currently authors the pocket supplements for Professor Harvey’s Indiana Practice volumes. The author wishes to thank Paul Carroll for his assistance in the preparation of this case review.  The opinions and analysis expressed in this column are those of the author.

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