Iowa Court Addresses Notice of Commencement Issues in Residential Mechanic's Lien Case

In Borst Constr., Inc. v. Finance of Am. Commercial, Inc., 2021 WL 3661426 (Iowa Ct. App. 2021), the Iowa Court of Appeals addressed the following three issues under Iowa's mechanic's lien statute in a residential construction dispute: the applicable deadline for a subcontractor to post a notice of commencement; whether work performed by a subcontractor prior to the posting of a notice of commencement is lienable; and a priority dispute between mortgages and mechanic's liens.

Thomas Dostal Developers, Inc., owned a residential construction project, and it obtained five commercial loans for the construction of it through Finance of America Commercial, LLC (FAC). The mortgages were recorded on Nov. 13, 2017. Dostal Developers contracted with Borst Brothers Construction, Inc., and Kelly Concrete Co. to furnish labor and materials for the project. Borst Brothers performed its work from July 3, 2017, to Dec. 19, 2017, and it posted its notice of commencement and mechanic's lien on Feb. 2, 2018, and its preliminary notice on Nov. 8, 2018. Kelly Concrete performed its work between September 2017 and Jan. 15, 2018, and it posted its notice of commencement, preliminary notice and mechanic's lien on Feb. 1, 2018.

A priority dispute arose between FAC (and its mortgages) on the one hand and Borst Brothers and Kelly Concrete (and their mechanic's liens) on the other hand. Seeking to establish its mortgages as having priority over the mechanic's liens, FAC filed a motion for summary judgment and argued that "a subcontractor must post a notice of commencement of work within 10 days of beginning work on a project and 'work performed by the subcontractor prior to the posting of the notice of commencement is not subject to any subsequent mechanic's lien even if the subcontractor later posts a preliminary notice.'" The district court rejected FAC's arguments and held that Borst Brothers' and Kelly Concrete's mechanic's liens had priority over FAC's mortgages.

On appeal, the Iowa Court of Appeals agreed with the district court's rulings on these issues. On the notice of commencement deadline issue, the court of appeals stated that Iowa Code "Section 573.13A(1) requires the general contractor/owner-builder—not the subcontractor—to post a notice of commencement of work within 10 days of the commencement of work," and "Section 572.13A(2) allows a subcontractor to make the posting if the general contractor/owner-builder does not." The court of appeals interpreted these provisions as not imposing the 10-day posting deadline upon subcontractors, but only upon general contractors and owner-builders. It reasoned that the "subcontractor might not know whether the general contractor/owner-builder satisfied its obligation to post the notice of commencement of work until after the 10-day period set forth in section 572A.13A(1) expires. The subcontractor's first opportunity to post its notice of commencement would be on the 11th day after commencement of work."

On the lienability issue, the court of appeals provided no analysis or explanation of its decision, but only stated, "We discern no error in the district court's interpretation of Iowa Code section 572.13. On our de novo review, we further conclude the court's findings of fact and application of law to fact are supported by the record and are equitable." There is no analysis by the court of appeals of the following provision in Iowa Code Section 572.13A(1), which reads, "A notice of commencement of work is effective only as to any labor, service, equipment, or material furnished to the property subsequent to the posting of the notice of commencement of work." (Italics added.) On its face, this language appears relevant to the lienability issue in the case because both Borst Brothers' and Kelly Concrete's notices of commencement were posted after both of their last dates of work. The court of appeals also did not address how its ruling squares with the purpose of the notice of commencement requirement, which it had previously held was "twofold. It requires identification of 'who was working on the property' and notice of any claims by those persons. In short, the statute is intended to provide the owner with the identity of subcontractors unknown to the owner who might have potential claims against the property and provide a mechanism to force the subcontractors to file notice of any potential claims." Standard Water Control Sys., Inc. v. Jones, 888 N.W.2d 673, 676 (Iowa Ct. App. 2016). It is unclear if allowing a subcontractor to lien for work performed prior to the posting of a notice of commencement furthers the purpose of the notice of commencement requirement.

Finally, on the priority issue, the court of appeals affirmed the mechanic's liens' priority over the mortgages under Section 572.18(1) because Borst Brothers and Kelly Concrete "began their work in July and September 2017 respectively, well before FAC recorded its mortgages." This statement indicates that the court of appeals applied Section 572.18's "relation-back" rule to both mechanic's liens so that their priority dates related back to Borst Brothers' and Kelly Concrete's first dates of work, both of which were prior to the filing of the mortgages. Midland Sav. Bank FSB v. Stewart Group, LC, 533 N.W.2d 191 (Iowa 1995); Barker's, Inc. v. B.D.J. Dev. Co., 308 N.W.2d 78 (Iowa 1981), superseded by statute as recognized in Midland. Relation-back treatment of the liens was critical to Borst Brothers' and Kelly Concrete's success on the priority dispute because if they had not posted their liens within 90 days of their last dates of work then their liens' priority dates would have been the dates the owner received written notice of the posted liens. Iowa Code Sections 572.11, 572.14, 572.16, 572.18(3), and 572.33A(1). Their lien postings were Feb. 1 and 2, 2018, both of which were after the mortgage filings, which would have given the mortgages priority over the liens.

FAC has the right to ask the Iowa Supreme Court to hear a further appeal in this case, so it remains to be seen if the court of appeals' decision will stand. If the Supreme Court declines to hear a further appeal in this case, then the court of appeals' decision will apply to these issues until and unless the Supreme Court addresses them in another case.

-Stephen Marso, Whitfield & Eddy Law

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Thursday, 28 October 2021

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