Iowa Supreme Court Narrows Application of Mechanic's Lien Statute

The Iowa Supreme Court recently addressed the question of whether a mechanic’s lien arising from the provision of materials and labor to a tenant can attach to the real property of the landlord where the landlord and the tenant are engaged in a mutually beneficial business arrangement. In Winger Contracting Co. v. Cargill,[i] the Court said that it cannot.

Facts

Cargill, Inc. entered into a 50-year lease with HF Chlor-Alkali, LLC (HFCA), under which HFCA built a salt conversion plant—which it owned—on land owned by Cargill as part of its biorefinery complex in Eddyville. In exchange, HFCA was to pay Cargill $12,000 per year in rent and pay the property taxes and some insurance. The lease specified that the companies were not in a partnership or joint venture together. The companies did, however, sign ancillary agreements under which HFCA would supply chemicals to Cargill, and Cargill would help HFCA obtain bond financing by agreeing to assume the construction mortgagee’s rights and obligations if HFCA defaulted.

Work began on HFCA’s new facility, but the project fell apart and the contractors, which filed mechanic’s liens on the facility, were not paid in full for their work.  The contractors ultimately sought to foreclose their mechanic’s liens against Cargill’s fee interest in the land upon which the facility was built. When HFCA defaulted on its bond interest payment, the bank holding the construction mortgage exercised a “put,” which required Cargill to pay the bank $80 million HFCA owed under the bond. In exchange, the bank assigned and transferred to Cargill all rights under the construction mortgage related to HFCA’s property.

Contractors’ Action to Recover against Cargill

The contractors, as holders of the mechanic’s liens, sought to establish that they were entitled to recover against Cargill’s real property. Specifically, they argued that the relationship between Cargill and HFCA was more than that of landlord and tenant because their ongoing business relationship established a joint venture. They also argued that the mechanic’s liens that attached against HFCA’s property were superior to the construction mortgage lien asserted by Cargill because the mortgage was merely “an artifice to deprive the mechanic’s lienholders of their just compensation.” The district court ruled in favor of Cargill, finding that the mechanic’s liens did not attach to Cargill’s property and that the construction mortgage lien on HFCA’s property had priority over the mechanic’s liens. On appeal, the Iowa Supreme Court affirmed.

Iowa Supreme Court Decision

The Court began by summarizing the purpose of a mechanic’s lien, created by Iowa Code chapter 572:

It is a claim against real property for the value of labor and materials furnished by the claimant in improvement of the property. The purpose of a mechanic’s lien is to protect persons who have supplied labor or material for the improvement of real property by giving the lienholder security independent of their contractual remedies against the owner of the land.

The Court then found that amendments made to the Iowa mechanic’s lien statute in 2007 and 2012 narrowed the definition of an “owner” whose property could be subject to a mechanic’s lien. “Owner” is now defined as “the legal or equitable titleholder of record.” Iowa Code § 572.2(1). Prior versions of the law, however, defined “owner” to include an “owner’s agent” and “every person for whose use or benefit any…improvement is made.”

Reasoning that a mechanic’s lien is a creature of statute, the court found that the current definition of “owner” should be given its “natural effect.” As such, the Court ruled that cases decided before these amendments, Romp[ii] and Stroh,[iii] were no longer good law. These cases involved contracts with tenants who were deemed to be agents of the owners of the fee because of beneficial relationships between the landlords and the tenants extending well beyond those of ordinary landlords and tenants.

Under the Court’s interpretation of the current mechanic’s lien statute, Cargill—which was not the legal titleholder of the improvements constructed by the contractors—was not the “owner.” As such, Cargill’s land was not subject to the liens.

The Court next ruled that Cargill’s construction mortgage lien remained superior to the mechanic’s liens because its mortgage lien interest in HFCA’s property did not merge with Cargill’s fee simple interest in the land. HFCA remained the title holder of the improvements. Cargill possessed only an interest in a construction mortgage and a resulting lien against HFCA’s property.

Finally, the Court rejected the contractors’ argument that Cargill engaged in fraud which caused the contractors to have no statutory remedy. The Court stated that because a mechanic’s lien is a creature of statute, substantive rights do not arise outside of the statute. It was public record that Cargill, the owner of the land, was the landlord and HFCA, the owner of the improvements, was the tenant. There was no suggestion that Cargill made misrepresentations to the contractors or that the contracts were in fact with Cargill, not HFCA. The Court also reasoned that the assignment of the construction mortgage to Cargill did not deprive the contractors of anything because prior to the assignment, the contractors’ interests were subject to the bank’s interest. The mortgage was on property owned by HFCA, not property owned by Cargill. Cargill was the assignee of the construction mortgage that financed the building owned by HFCA when the default occurred. The Court ruled that these circumstances did not constitute fraud.

Conclusion

This case is the Iowa Supreme Court’s first opportunity to consider amendments made to the mechanic’s lien statute in 2007 and 2012. The Court has now ruled that these amendments narrowed the application of the lien statute by restricting the property to which the lien can attach. The contractors argued that equity requires substance and that the Court should have considered intent, rather than form, to prevent injustice. The Court ruled, however, that because a mechanic’s lien is a statutory remedy, the words of the statute must control. As a result, contractors should closely review the terms of their contracts to ensure they understand the identity of the party with whom they are dealing. Their lien will not attach to the land upon which a building sits if that land does not belong to the owner of the building. It is also important for contractors to understand the nature of other liens that will attach to the property being built. In this case, the construction mortgage filed before the work began gave the bank a superior lien in the facility. When that mortgage was later assigned to Cargill, the lien maintained its superior position. As such, the contractors were left with no statutory remedy.