January-February Vol. 5, No. 1

Casenotes

Indiana

Mechanic's Liens

City Savings Bank v Eby Construction, 954 NE2d 459 (Ind Ct App, 2011).

Facts: Beginning in December 2004, City Saving Bank made a series of loans to Adele Schmidt for the improvement of certain real estate. The first loan was not secured by a mortgage, however the second and third were. After the second loan, Schmidt contracted with Eby Construction to make improvements to the property. Then, before Eby was paid, City Savings Bank made a third loan to Schmidt, in August 2007, also secured by a mortgage on the property. Schmidt used the money from this third loan to pay a different construction company, and Eby remained unpaid for its work.

Eby recorded a mechanics lien in February 2008 and filed an action to foreclose on that lien in March 2008. City Savings Bank filed a motion for summary judgment, arguing that its mortgage had priority over Eby's mechanics lien because it was filed first and the doctrine of first-in-time gave its mortgage priority. Eby also filed a motion for summary judgment. Indiana statues and case law provided that City Savings Bank's mortgage liens should have priority, however the trial court granted Eby's motion, holding that public policy favored granting Eby lien priority. City Savings bank appealed.

Holding: Reversed and remanded. The trial court had given Eby lien priority because it decided that City Savings Bank had come to court with "unclean hands" and therefore the equitable remedy was to grant priority to Eby. The trial court reasoned that because City Savings Bank knew about the work Eby had done that had not yet been paid for, the bank should not have granted the third loan to Schmidt. In doing so the court said, the bank "essentially authorized the payment of the third contractor before the second contractor." The court said that City Savings Bank was in the best position to avoid the loss and so public policy mandated that it should bear the loss.

While the court of appeals agreed with the principle that "he who is best able to avoid a loss should bear it," it disagreed that City Savings Bank was in that position or that it came to court with unclean hands. According to the court of appeals, Eby was actually in the best position to avoid the loss because it knew the real estate was encumbered by a mortgage when it took the job. The second loan City Savings Bank had granted to Schmidt was secured by a mortgage on the property and thus Eby knew that any mechanic's lien it might have would already be second in priority. The court also pointed out that it was Schmidt's decision, not the Bank's, to pay the subsequent contractor instead of Eby. Schmidt's decision did not make the Bank's hands unclean.

The court recognized that foreclosure actions are equitable in nature and that the trial court had discretion to issue a decision based on equity, however equity must follow the law. The court found that statutory and case law in Indiana dictated that the City Savings Bank's mortgage lien should have priority over Eby's mechanic's lien, and there was nothing unjust about that result.

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