Borst Bros. Constr. v. Fin. of Am. Commercial, 20-0972

CourtUnited States State Supreme Court of Iowa
Writing for the CourtMANSFIELD, JUSTICE
PartiesBORST BROTHERS CONSTRUCTION, INC., Appellee, v. FINANCE OF AMERICA COMMERCIAL, LLC Appellant. FINANCE OF AMERICA COMMERCIAL, LLC, Appellant, v. THOMAS DOSTAL DEVELOPERS, INC., and RANDY T. DOSTAL, Appellees, and KELLY CONCRETE COMPANY, INC., AFFORDABLE HEATING AND COOLING, INC., 5 STAR PLUMBING, INC., and BORST BROTHERS CONSTRUCTION, INC., Appellees, BORST BROTHERS CONSTRUCTION, INC. Appellee, v. FINANCE OF AMERICA COMMERCIAL, LLC, Appellant. FINANCE OF AMERICA COMMERCIAL, LLC, Appellee, v. THOMAS DOSTAL DEVELOPERS, INC., and RANDY T. DOSTAL, Appellants, and KELLY CONCRETE COMPANY, INC., DARNELL HOLDINGS, LLC d/b/a DARNELL CONSTRUCTION, AFFORDABLE HEATING AND COOLING, INC., 5 STAR PLUMBING, INC., BORST BROTHERS CONSTRUCTION, INC., and KEN-WAY EXCAVATING SERVICE, INC., Appellees.
Docket Number20-0972
Decision Date17 June 2022

BORST BROTHERS CONSTRUCTION, INC., Appellee,
v.

FINANCE OF AMERICA COMMERCIAL, LLC Appellant.

FINANCE OF AMERICA COMMERCIAL, LLC, Appellant,
v.

THOMAS DOSTAL DEVELOPERS, INC., and RANDY T. DOSTAL, Appellees,

and KELLY CONCRETE COMPANY, INC., AFFORDABLE HEATING AND COOLING, INC., 5 STAR PLUMBING, INC., and BORST BROTHERS CONSTRUCTION, INC., Appellees, BORST BROTHERS CONSTRUCTION, INC. Appellee,
v.
FINANCE OF AMERICA COMMERCIAL, LLC, Appellant.

FINANCE OF AMERICA COMMERCIAL, LLC, Appellee,
v.

THOMAS DOSTAL DEVELOPERS, INC., and RANDY T. DOSTAL, Appellants,

and KELLY CONCRETE COMPANY, INC., DARNELL HOLDINGS, LLC d/b/a DARNELL CONSTRUCTION, AFFORDABLE HEATING AND COOLING, INC., 5 STAR PLUMBING, INC., BORST BROTHERS CONSTRUCTION, INC., and KEN-WAY EXCAVATING SERVICE, INC., Appellees.

No. 20-0972

Supreme Court of Iowa

June 17, 2022


Submitted March 24, 2022

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On review from the Iowa Court of Appeals.

Appeal from the Iowa District Court for Linn County, Mary E. Chicchelly, Judge.

A commercial lender seeks further review of a court of appeals decision affirming the validity and superiority of certain mechanics' liens. DECISION OF COURT OF APPEALS AFFIRMED; DISTRICT COURT JUDGMENT AFFIRMED IN PART AND REVERSED IN PART ON APPEAL, AFFIRMED ON CROSS-APPEAL.

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John F. Fatino of Whitfield and Eddy, P.L.C., Des Moines, for appellant Finance of America Commercial, LLC.

Matthew L. Preston, Brad J. Brady, and David T. Meyers (until withdrawal) of Brady Preston Gronlund PC, Cedar Rapids, for appellee Borst Brothers Construction, Inc.

S.P. DeVolder of The DeVolder Law Firm, P.L.L.C., Norwalk, for appellees Thomas Dostal Developers, Inc. and Randy T. Dostal.

William H. Roemerman of Elderkin & Pirnie, P.L.C., Cedar Rapids, for appellee Kelly Concrete Co., Inc.

Mansfield, J., delivered the opinion of the court, in which Christensen, C.J., and Appel and Waterman, JJ., joined. McDermott, J., filed a dissenting opinion, in which McDonald and Oxley, JJ., joined.

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MANSFIELD, JUSTICE

I. Introduction.

Since 2012, Iowa has used a centralized, internet-based registry for mechanics' liens. To assure the smooth functioning of this registry, and also assure that homeowners and buyers are aware of the risk that such liens may be placed on a property, general contractors and owner-builders are supposed to post a notice of commencement of work to the central registry within ten days of starting work on a residential construction project. If that doesn't occur, a subcontractor may nonetheless post the notice. Indeed, if no notice has already been posted, a subcontractor must do so before posting a preliminary lien notice and obtaining a mechanics' lien.

In this case, an owner-builder didn't post notices of commencement on the registry for five residential lots that it was developing. Accordingly, two subcontractors did so, several months after the construction work had actually begun. When the project went into default, a priority dispute arose between these two subcontractors and the commercial lender for the project. The commercial lender claimed that its previously recorded mortgages had priority; the subcontractors argued that their mechanics' liens came first. The district court found in favor of the subcontractors, as did the court of appeals. We granted the lender's application for further review.

We now agree with the courts below and conclude that the 2012 law didn't change the principle that mechanics' liens will, in some circumstances, have priority over previously recorded mortgages. We also conclude that the ten-day

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deadline for posting the notice of commencement to the registry applies to general contractors and owner-builders but not to subcontractors. While the statutory language in isolation is potentially ambiguous, context provides clarity. It wouldn't make sense to allow subcontractors to step in only if the general contractor or owner-builder fails to post the notice of commencement within ten days, while requiring subcontractors to meet the same ten-day deadline. Meeting a missed deadline is impossible.

For these reasons, we affirm the decision of the court of appeals and the judgment of the district court on the questions of lien validity and priority in this case. On the remaining appellate issues, we let the decision of the court of appeals stand, although we modify its reasoning on one evidentiary point.

II. Background Facts and Proceedings.

A. Background Facts.

This case concerns a residential property development project in Cedar Rapids known as Hawks Point Seventh Addition. Five of the thirty-two lots are at issue here: Lots 5, 6, 7, 8, and 10. Thomas Dostal Developers, Inc. owned these properties and served as general contractor for their development.

In November and December 2017, Dostal Developers entered into five commercial loans with Finance of America Commercial (FAC)-one loan for each property. All five loans were memorialized by promissory notes, secured by

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mortgages, and secured also by guarantees signed by Randy Dostal.[1] The following table shows the amounts and dates of the five loans:

Lot #

Principal Amount ($)

Documents Signed

Mortgage Recorded

5

153, 000

11/10/17

11/13/17

6

141, 750

11/10/17

11/13/17

7

149, 250

11/10/17

11/13/17

8

170, 250

11/10/17

11/13/17

10

153, 000

12/20/17

12/20/17

By February 2018, Dostal Developers stopped making payments on these loans. In August, FAC sent notices of default and acceleration. Dostal Developers did not cure the defaults.

Meanwhile, Dostal Developers had hired several subcontractors to work on the properties, including Borst Brothers Construction and Kelly Concrete Company. Borst put in sanitary and storm sewers, installed the water main, created a temporary rock road, and graded the site. Borst's work began on July 3, 2017, and ended on December 19, 2017. Kelly performed various concrete jobs between September 2017 and January 15, 2018.

Dostal Developers never posted a statutory "notice of commencement of work" to the Iowa Mechanic's Notice and Lien Registry (MNLR) to provide notice of contracting with subcontractors. See Iowa Code § 572.13A(1) (2018). Instead,

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Kelly posted notices of commencement for four of the lots on February 1, 2018.[2]Kelly also posted preliminary notices and mechanics' liens that same day. See id. §§ 572.8(1), .13A(2), .13B(1). The following day, February 2, Borst posted a notice of commencement and a mechanics' lien for all of the Hawks Point properties it had performed work on.

B. The Borst-Kelly Foreclosure Action.

Neither Borst nor Kelly received full payment for their work. On September 12, Borst filed a petition to foreclose its mechanics' lien in Linn County District Court, alleging Dostal Developers still owed it $198, 316.59 plus interest.[3] Borst named other lien holders as parties, including FAC and Kelly.

Kelly filed an answer, cross-claim, and counterclaim on October 12. It asserted that its mechanics' liens had first-priority status and requested foreclosure of those liens in the amount of $39, 236.21 plus interest.

On October 17, FAC moved to dismiss the claims of Borst and Kelly. As to Borst, FAC asserted that it had not posted a timely notice of commencement of work as required by Iowa Code section 572.13A(2) or a preliminary notice as required by section 572.13B(4). Borst responded by posting its preliminary notice on November 8. As to Kelly, FAC argued that if Kelly were a subcontractor, it had not perfected its liens until February 1, 2018, and, therefore, they were inferior to FAC's mortgages as a matter of law.

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C. The FAC Foreclosure Action.

On November 26, the district court denied FAC's motions to dismiss in the Borst-Kelly lien foreclosure action to allow for further development of the parties' positions. By then, FAC had filed its own petition to foreclose its mortgages in the Linn County District Court. Therein, FAC alleged that its mortgages had priority over any mechanics' liens of Borst and Kelly. FAC also named Randy Dostal individually as a defendant, asserting that he was personally liable as a guarantor of FAC's loans. In total, FAC claimed to be owed $827, 983.52 plus interest. Early in 2019, the district court consolidated the Borst-Kelly case and the FAC case.

D. Summary Judgment and Trial in the Consolidated Proceedings.

On November 22, FAC moved for summary judgment in the consolidated case. FAC once again argued that the mechanics' lien holders had failed to post notices of commencement within ten days of beginning work, rendering their liens invalid. In the alternative, FAC maintained that all mechanics' liens were junior and inferior to its mortgages because the subcontractors' notices of commencement had not been posted until after FAC had recorded its mortgages. Kelly and Borst resisted. The district court denied FAC's summary judgment motion, and the case proceeded to a bench trial on all issues, including FAC's effort to enforce Randy Dostal's personal guaranties.

At trial, FAC's vice president of credit and implementation and underwriting, Mark Thomas, testified. Through Thomas, FAC offered into evidence letters addressed to Dostal Developers that detailed the current payoff amounts for all five loans. FAC's loan sub-servicer, BSI, had created these payoff

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statements per FAC's request. Thomas testified that BSI regularly provided such payoff statements whenever the borrower or the lender requested them. The Dostal defendants objected to the admission of the payoff statements on the ground that they were hearsay "clearly prepared for litigation purposes, not in the regular course of business." The district court overruled the objection and...

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