Iowa Supreme Court Affirms Subcontractors Properly Posted Notice of Commencement

The case is Borst Bros. Constr., Inc. v. Fin. of Am. Com. LLC, No. 20-0972 (Iowa Sup. Ct. June 17, 2022).

On June 17, 2022, the Iowa Supreme Court affirmed that the ten-day deadline to post a notice of commencement of work applies to general contractors, not subcontractors. See Iowa Code § 572.13A. After a developer defaulted on a residential project, the bank initiated a foreclosure action claiming to have priority over the mechanics’ liens filed by two subcontractors on the property. Considering the statute as whole, the Court concluded that the subcontractors properly filed the required notices and, thus, had priority over the bank’s mortgages.

Background

A real estate developer began a residential construction project. The developer served as the general contractor and hired Borst Brothers Construction (Borst Brothers) and Kelly Concrete Company (Kelly) as subcontractors. Borst worked on the project from July 2017 until December 2017. Kelly performed various work on the project from September 2017 until January 2018.

At the end of 2017, the developer obtained five commercial loans for five properties. The bank recorded the first mortgage in November 2017. Although the developer never posted the statutorily required “notice of commencement” to the Mechanic’s Notice and Lien Registry (MNLR), Kelly posted notices of commencement on four of the five properties on February 1, 2018. That same day, it posted the required preliminary notices. Borst posted a notice of commencement on all five properties on February 2.

Within several months, the developer defaulted on the mortgages and the bank initiated foreclosure proceedings. Both subcontractors sought to foreclose on their respective mechanics’ liens claiming the developer failed to give full payment for their work. The bank resisted and alleged that the subcontractors failed to post notices of commencement within the statutory time frame or, alternatively, that any of the subcontractors’ liens were junior to the bank’s mortgages.  

After a bench trial, the district court held that Borst and Kelly had valid mechanics’ liens and that the subcontractors, along with the Bank were entitled to foreclosure on their respective mortgages and liens. However, because Kelly only posted a notice of commencement for four properties, it was only entitled to foreclose its mechanics’ liens on those properties. Additionally, the district court concluded that the subcontractors’ liens had priority over the bank, but Kelly had first priority because it posted its liens first. On appeal, the Court of Appeals affirmed. The bank again appealed.

Subcontractor Lien Validity

On appeal, the Supreme Court first considered whether the subcontractors had valid liens. There are two notices which specifically apply to residential construction properties. The “notice of commencement of work” and the “preliminary notice.” Iowa Code §§ 572.13A(5), .13B(5).

A general contractor or an owner-builder who contracts with a subcontractor must file a notice of commencement to the MNLR within ten days of beginning work. Iowa Code § 572.13A(1). Subcontractors must post a preliminary notice to the MNLR in order to be entitled to a lien; however, a notice of commencement must be posted first. Iowa Code § 572.13B, .13A(2). If the general contractor fails to post the commencement notice within the ten days, a subcontractor may post both notices.

If a general contractor or owner-builder fails to post the required notice of commencement of work . . . pursuant to subsection 1, within ten days of commencement of the work on the property, a subcontractor may post the notice in conjunction with the posting of the required preliminary notice pursuant to section 572.13B.

Iowa Code 572.13A(2) (emphasis added). The bank argued that the ten-day limit in the italicized clause above applied to the subcontractors’ commencement of work, while Borst and Kelly asserted that it applied to the general contractors/owner-builders.

Considering the clause within the context of the statute, the Supreme Court concluded that the ten-day time frame applied only to general contractors. Practically, it would be impossible for a subcontractor to post the notice within ten days because they must first wait to see if the general contractor met the deadline. Additionally, the Court concluded that the phrase “the work” was general and referred to the overall project rather than specifically referring to the work of one entity.

The Court disagreed with the bank that this reading would cause any unfairness to lenders by allowing subcontractor’s to obtain a lien long after construction begins. Under the current law, a construction mortgage lender, such as the bank, receives priority over a mechanics’ lien as long as the lender records the mortgage before the subcontractor begins work. Iowa Code § 572.18(2). Here, the bank recorded the mortgages several months after the subcontractors began working on the project. Accordingly, both subcontractors had valid mechanics’ liens.

Priority of Mechanics’ Liens

Next, the Court considered whether the mechanic’s liens had priority over the bank’s mortgages. A contractor or subcontractor has priority over all other liens if the mechanics’ lien is properly posted to the MNLR within 90 days of completing work. Iowa Code § 572.18. Borst posted its mechanics’ liens within 46 days of completing its work and Kelly posted its liens within 18 days. Additionally, as noted earlier, the subcontractors began working on the project before the bank recorded the first mortgage in November 2017. Therefore, the Court agreed that the subcontractors’ mechanics’ liens had priority over the banks mortgages.

Dissent

Three justices joined a dissenting opinion challenging the majority’s holding that the subcontractors properly posted the mechanics’ liens. Both the majority and the dissent found section 572A.13A(2) to be a conditional “if-then” statement. The dissent diverged from the majority on the placement of the implied “then” and read the statute to mean: “If a general contractor or owner-builder fails to post the required notice of commencement . . . pursuant to subsection 1, [then] within ten days of commencement of the work on the property, a subcontractor may post the notice in conjunction with the posting of the required preliminary notice.” See Iowa Code § 572.13A(2) (emphasis added).

In support of this argument, the dissent asserted that by reading “the work” to apply to a subcontractor’s work rather than the general contractor’s work, the statute provides a deadline. Conversely, interpreting “the work” as referring to the general contractor’s work would be repetitive as section 572.13A(1) already refers to the ten-day deadline for general contractors.  The subcontractors did not post a notice of commencement within ten days of beginning work and, thus, the dissent urged that the subcontractors did not properly post to the MNLR.