Iowa Court Affirms Subcontractors’ Liens have Priority over Mortgages

On August 18, 2021, the Iowa Court of Appeals determined the priority of three creditors’ claims against a real estate developer. After the developer defaulted on several mortgages, the bank initiated this foreclosure action claiming to have priority over the mechanic’s liens filed by two subcontractors on the property. Because the subcontractors began work on the properties before the bank recorded the mortgages, the Court of Appeals affirmed that the bank had a junior interest under Iowa Code § 572.18(1).

Background

To fund a residential construction project, a real estate development company obtained five bank loans which were secured by mortgages on the properties. The president of the company, Randy Dostal, agreed to personally guarantee the loans. To assist with the project, the developer hired two subcontractors, Borst Bros. Construction (Borst) and Kelly Concrete Company (Kelly).

The company eventually defaulted on the loans and the bank initiated foreclosure proceedings. The subcontractors, having both posted a statutory notice of commencement of work and a preliminary notice to the Iowa Mechanic’s Notice and Lien Registry (MNLR), sought to foreclose on their respective mechanic’s liens. In addition to the mortgages, the company allegedly owed Borst $143,317 and Kelly $39,236. The bank resisted, claiming that Borst’s liens were not valid or, alternatively, that if a valid lien did exist, it was junior to the bank’s mortgages.

The district court conducted a bench trial and concluded that the bank was entitled to foreclose on the mortgages. However, it found that Borst’s mechanic’s liens had priority over the bank. Additionally, the mechanic’s liens that Kelly filed had super priority because Kelly had filed the requisite notices before Borst. Lastly, the court held that the company’s president was not individually liable as the guarantor.

Validity of a Subcontractor’s Lien

On appeal, the bank claimed that Borst and Kelly failed to comply with Iowa Code § 572A.13(1) to perfect their liens. A general contractor or an owner-builder must file a notice of commencement to the MNLR within ten days of beginning work. Iowa Code § 572.13A(1). Borst began working on the properties on July 3, 2017, but did not post a commencement notice until February 2, 2018. Similarly, Kelly began working in September 2017, but posted the commencement notice and the preliminary notice on February 1, 2018. Thus, the bank argued that because both subcontractors failed to post a commencement notice within ten days of beginning work the liens were not valid.

The court disagreed, finding that only general contractors and owner-builders are required to file a commencement notice within the ten days. Subcontractors, on the other hand, are allowed to post a commencement notice if the general contractor/owner-builder fails to do so, but are only statutorily required to post a preliminary notice to the MNLR. Iowa Code § 572.13B(1). Because a commencement notice must be posted before a preliminary notice, many subcontractors will file both notices. See Iowa Code § 572.13A(2), (4).

Additionally, the statute only requires a subcontractor to post preliminary notice before the balance due is paid to the owner-builder. The developer never sold any of the properties, so both subcontractors posted notice before the balance was due to the developer. Because the subcontractors complied with the statutory filing and timing requirements, the liens were valid.

Priority of Mechanic’s Liens

Next, the court considered whether the mechanic’s liens had priority over the bank’s mortgages. The bank argued that because it had recorded all the mortgages before the subcontractors posted to the MNLR, it had priority. However, a mechanic’s lien has priority over all over liens, as long as the work began before the competing lien was filed. Iowa Code § 572.18(1). Both subcontractors began work before the bank recorded the mortgages in December 2017. Therefore, the court affirmed that the subcontractors had priority over the bank, and Kelly, having posted notice first, had super priority.

Guaranty Agreements

Lastly, the court considered whether the district court erred in finding that the company’s president was not personally liable for the mortgages. “The extent of a guarantor’s obligation must be determined from the parties’ written contract.” Rabo AgServices, Inc. v. Dallas Collins Farm P’ship, 2009 WL 139496, at *2 (Iowa Ct. App. Jan. 22, 2009). The contract stated that the president would irrevocably guarantee the payments the company owed under the terms of the mortgage. The president signed the guaranty agreements individually as Randy Dostal. The court found this stood in stark contrast to the mortgages which he signed in his capacity as the president of the company. The court, therefore, reversed the lower court’s order and found that the guaranty agreements were enforceable against the president individually.