Bailey Mortg. Co. v. Gobble-Fite Lumber Co., Inc.

• Decision Date: 25 May 1990
• Docket Number: GOBBLE-FITE
• Citation: 565 So.2d 138
• Parties: BAILEY MORTGAGE COMPANY v.LUMBER COMPANY, INC. 88-372.
• Court: Alabama Supreme Court

Page 138

565 So.2d 138

BAILEY MORTGAGE COMPANY v. GOBBLE-FITE LUMBER COMPANY, INC.

88-372.

Supreme Court of Alabama.

May 25, 1990.

Rehearing Denied Aug. 3, 1990.

Alicia J. Putt of Smyer, White & Putt, Birmingham, for appellant.

Robert H. Harris of Harris, Caddell & Shanks, Decatur, for appellee.

ON APPLICATION FOR REHEARING

ADAMS, Justice.

On application for rehearing, our original opinion of November 3, 1989, is withdrawn and the following opinion is substituted therefor.

Bailey Mortgage Company (hereinafter "Bailey Mortgage") appeals from a denial of its motion to set aside a default judgment. For the reasons set forth below, we find that the trial court's refusal to set aside the default judgment was in error, and, accordingly, we reverse and remand.

I. FACTS

C.W. Buffington was engaged in the construction and sale of houses in Huntsville. Gobble-Fite Lumber Company, Inc. (hereinafter "Gobble-Fite"), a seller of building materials and supplies, entered into an agreement with Buffington for credit purchases from Gobble-Fite. Under the terms of the agreement, charges for the credit sales were to be maintained separately with respect to building materials and supplies used in the construction of each house.

From August 11, 1987, until December 21, 1987, Buffington made credit purchases from Gobble-Fite that were incorporated into certain houses on nine lots. Buffington did not make the requisite payment for the credit purchases when the accounts came due and payable in December 1987 and January 1988.

Bailey Mortgage held construction loan mortgages on five of the parcels of real property. Four of the mortgages had been recorded prior to the initial delivery of any building materials or supplies by Gobble-Fite. When Buffington defaulted on his mortgage payments, Bailey Mortgage initiated foreclosure proceedings on the four parcels. On March 10, 1988, Bailey Mortgage foreclosed on these four mortgages. At the public sale, Bailey purchased the four parcels of property for $299,101.07.

On March 10, 1988, the same day as the foreclosure, Gobble-Fite filed a statement of lien claim on five of the parcels of real property in the office of the judge of probate. On April 28, 1988, Gobble-Fite filed a statement of lien claim on the remaining parcels.

On April 29, 1988, Gobble-Fite sued Buffington, Bailey Mortgage, Keith E. and Carol D. Ford, ¹ and numerous fictitiously named defendants. Gobble-Fite sought a twofold recovery: it sought and obtained a judgment against Buffington for materials sold and established a materialman's lien, pursuant to Ala.Code 1975, § 35-11-210 et seq., against certain parcels of land. Each of the complaint's nine counts enumerated the basis and amount of Gobble-Fite's claim against a separate, specifically described parcel of property.

On June 28, 1988, upon Gobble-Fite's request, a default judgment was entered against Buffington and Bailey Mortgage. This judgment found the amount of Buffington's indebtedness to be $101,792.39, with interest, and established a materialman's lien against the described properties for that amount. Additionally, the judgment established Gobble-Fite's priority of lien with respect to any other liens or claims against, or interest in, the properties, including any interest held by Bailey Mortgage.

On July 25, 1988, Bailey Mortgage filed a motion to set aside the default judgment, pursuant to Rule 55(c), A.R.Civ.P. This motion was deemed denied by operation of law after the expiration of 90 days, pursuant to Rule 59.1, A.R.Civ.P. Bailey Mortgage now appeals from the denial of its motion to set aside the default judgment.

II. STANDARD OF REVIEW

The applicable standard of review in appeals arising from a trial court's order granting or denying a motion to set aside a default judgment is whether the trial court's decision constituted an abuse of discretion. Kirtland v. Fort Morgan Authority Sewer Service, Inc., 524 So.2d 600 (Ala.1988); Johnson v. Moore, 514 So.2d 1343 (Ala.1987). Although Rule 55(c) vests the trial judge with a considerable amount of discretion, a ruling on a Rule 55(c) motion must not be made without taking into consideration restrictions on the use of that discretion and by examining certain guidelines. Jones v. Hydro-Wave of Alabama, Inc., 524 So.2d 610, 613 (Ala.1988).

First, a trial judge, in exercising his discretion under Rule 55(c), must begin with the presumption that a litigant has a paramount right to defend on the merits and that, therefore, cases should be resolved on the merits whenever practicable. Jones v. Hydro-Wave of Alabama, Inc., supra; Kirtland v. Fort Morgan Authority Sewer Service, Inc. Finally, when exercising discretion under Rule 55(c), a trial court must consider the three-factor analysis enunciated by this Court in Kirtland v. Fort Morgan Authority Sewer Service, Inc., supra. As a threshold matter, we must look at whether the defendant has a meritorious defense. Following this determination, we must consider "whether the plaintiff will be unfairly prejudiced if the default judgment is set aside" and "whether the default judgment was a result of the defendant's own culpable conduct." Kirtland, supra, at 605.

III. WHETHER THE DEFENDANT HAS A MERITORIOUS DEFENSE

As recently stated in Ex parte Illinois Central Gulf R.R., 514 So.2d 1283 (Ala.1987), and reiterated in Kirtland, "to meet the meritorious-defense element, the movant need not satisfy the trial court that the movant would necessarily prevail at a trial on the merits, only that the movant is prepared to present a plausible defense." 514 So.2d at 1288. A plausible defense is established by a viable legal theory supported by a factual basis. Bailey Mortgage claims that, despite its foreclosure on the four mortgages, it retains priority as a mortgagee by virtue of Ala.Code 1975, § 35-11-211. Before we can determine whether Bailey Mortgage has a meritorious defense established by a viable theory, and because of some confusion in our own case law, we must take a closer look at § 35-11-211 and at Alabama's law regarding the priority of mortgages and mechanic's and materialman's liens.

A. History of Mechanic's Liens

The first mechanic's lien law was passed in Maryland in 1791. Alabama followed and enacted its first mechanic's lien statute in 1821, for the protection of its materialmen and mechanics. The underlying premise of the early statute was to protect and maintain the interest of the materialman. The Court in Wimberly v. Mayberry & Co., 94 Ala. 240, 10 So. 157 (1891), recognizing that interest, stated:

"The purpose of the act was to intervene in favor of the mechanic or material man, and secure to him a paramount lien upon what he put upon the land in the way of 'buildings or improvements or repairs thereto,' and prevent the operation of the common law, which, without the act, would give an existing mortgage or lien a priority over it. The property improved in such cases merges into the realty, but subject to the mechanic's lien to the extent of the value of the improvements. It was to protect those by whose labor and materials the value of the property was increased, as far as possible, to the extent of the enhanced value of the property."

94 Ala. at 246, 10 So. at 159.

The section of the statute concerning priorities remained virtually unchanged until 1933. Prior to 1933, a materialman had a definite advantage over a lender. The materialman was given absolute priority, and this put a severe burden on construction lenders. The plea of the construction lenders did not go unnoticed, however, and the legislature amended the priority section in 1933. ² The effect of the amendment was to reverse the priorities between the lien of a materialman and a prior recorded mortgage. ³

However, even after the 1933 amendment the debate about the priorities between mechanic's liens and construction loan mortgages continued. See Comment, The Priority Problem Between Construction Mortgages and Mechanics' Liens in Alabama, 6 Cumb.L.Rev. 23 (1975) (article favors mechanic's liens). One commentator has fittingly recognized the clash between the priorities of mechanic's liens and construction mortgages:

"The conflict here is between the two basic underlying public policies--one favoring a lien for those whose work or material has contributed to the improvement, and the other favoring the security of contracts and prior recorded mortgages, the availability of construction financing, a vigorous building industry, more construction starts, and more jobs for artisans, workers, and building material manufacturers, etc."

Scholl, Priorities Between Mechanics' Liens and Construction Loan Mortgages in Alabama, 23 Ala.Law. 398, 431 (1962) (article favors construction lenders).

B. Steps to Perfection

Mechanic's and materialman's liens, being statutory creations, can be perfected only by complying with the requirements found in Ala.Code 1975, § 35-11-210 et seq. Lily Flagg Building Supply Co. v. J.M. Medlin & Co., 285 Ala. 402, 232 So.2d 643 (1970); Wilkinson v. Rowe, 266 Ala. 675, 98 So.2d 435 (1957). The liens are inchoate and will be lost if the lienors fail to perfect them according to the mandates of the statute. Ex parte Douthit, 480 So.2d 547 (Ala.1985); United States v. Costas, 273 Ala. 445, 142 So.2d 699 (1962).

Every mechanic or materialman must properly comply with three essential steps before a lien can be perfected: (1) provide statutory notice to the owner; (2) file a verified statement of lien in the probate office of the county where the improvement is located; and (3) file suit to enforce the lien. Ala.Code 1975, § 35-11-210. Each of these steps will be examined more closely below.

1. Provide statutory notice to the owner. According to § 35-11-210, there are essentially two types of liens, one for the full price of the materials furnished and another for the amount of the unpaid balance due the contractor from the owner. These two types of liens have...