Brenneman Mechanical & Elec., Inc. v. First Nat. Bank of Logansport

• Citation: 495 N.E.2d 233
• Decision Date: 17 July 1986
• Docket Number: No. 2-885A251,2-885A251
• Parties: BRENNEMAN MECHANICAL & ELECTRICAL, INC., Korschot's Heating & Air Conditioning, Inc., Closson Lumber Co., Hoosier Glass Co., Inc., and General Builders of Lafayette, Inc., Defendants-Appellants, v. The FIRST NATIONAL BANK OF LOGANSPORT, Cass Investment Co., a Limited Partnership, Cass Investment, Inc., a Corporation, John E. Smith, Donald R. Smith, Independence Engineering, Inc., Jack Gillis Tile Co., Crews Roofing, Carter Concrete Block, Inc., Amco Elevators, Inc., Treasurer of Cass County, Indiana, and State of Indiana, (All defendants below, except Plaintiff The First National Bank of Logansport)--Appellee.
• Court: Indiana Appellate Court

Page 233

495 N.E.2d 233

BRENNEMAN MECHANICAL & ELECTRICAL, INC., Korschot's Heating

& Air Conditioning, Inc., Closson Lumber Co.,

Hoosier Glass Co., Inc., and General

Builders of Lafayette, Inc., Defendants-Appellants, v. The FIRST NATIONAL BANK OF LOGANSPORT, Cass Investment Co.,

a Limited Partnership, Cass Investment, Inc., a Corporation,

John E. Smith, Donald R. Smith, Independence Engineering,

Inc., Jack Gillis Tile Co., Crews Roofing, Carter Concrete

Block, Inc., Amco Elevators, Inc., Treasurer of Cass County,

Indiana, and State of Indiana, (All defendants below, except

Plaintiff The First National Bank of Logansport)--Appellee.

No. 2-885A251.

Court of Appeals of Indiana,

Second District.

July 17, 1986.

Thomas L. Williams, William C. Burns, Schultz, Ewan, Burns & Heid, Lafayette, for defendants-appellants.

Donald J. Tribbett, Mary Ann Welsh, Logansport, for appellee.

RATLIFF, Judge, writing by designation.

STATEMENT OF THE CASE

Brenneman Mechanical and Electrical, Incorporated, et al. appeal the trial court's decision granting the First National Bank of Logansport priority over various mechanics' liens by relation-back of two mortgages to prior mortgages after default by investors on loans acquired to finance a renovation project. We affirm.

FACTS

Donald R. Smith (Donald), an accountant, with offices in the Captain Logan Hotel in Logansport, Indiana, approached John E. Smith (John), a builder and developer and one of Donald's clients, with an idea for purchasing and renovating the Captain Logan Hotel. John was sole or part owner of approximately twenty-seven (27) organizations operating under the umbrella name of "Smith Enterprises." Among these businesses were General Builders, in which John owned 85% of the stock, and Cass Investment, Inc. and Jesco Construction Corporation, both wholly owned by John. On September 1, 1979, Donald and John, together with Donald's two accounting partners, entered into an agreement to purchase and develop the hotel into an office building called Logan Square. Under this "turn-key" agreement, Jesco Construction Corporation (Jesco) would purchase and renovate the building and then transfer ownership to Cass Company (Cass Co.) (a limited partnership of Cass Investment, Inc.) in consideration of which Cass Co. would pay Jesco the "costs, expenses, overhead, and profit...." Record at 2159.

On December 18, 1979, Jesco purchased the hotel (hereinafter referred to as Logan Square) and entered into a loan agreement with the First National Bank of Logansport ^BL to finance the purchase and remodeling. John, as president of Jesco, executed a promissory note for the loan. The loan totalled $600,000.00, $196,742.19 disbursed immediately with the remaining $403,257.81 available for remodeling expenses. The loan was to be repaid on December 18, 1981. The loan was personally guaranteed by Donald, John, and Donald's partners. In addition, to secure the loan Jesco gave FNBL a mortgage in Logan Square which was recorded in the office of the Recorder of Cass County on December 18, 1979, and has never been released of record.

General Builders, the general contractor on the project, began renovation work on July 1, 1980, with other mechanics performing their first work or first furnishing materials subsequent to that date. By approximately August 26, 1981, General Builders had spent the entire $600,000.00 of the December 8, 1979, loan. Therefore, the Smiths requested an additional loan of $200,000.00 to continue the project.

On September 11, 1981, FNBL loaned $200,000.00 to Jesco, John signing the promissory note on behalf of Jesco. This note was due on December 18, 1981. Jesco gave FNBL a mortgage for $200,000.00 to secure the loan, which FNBL recorded in the Cass County Recorder's Office on September 14, 1981. This mortgage was never released of record. In addition, John and Donald guaranteed this loan and the 1979 loan in a Guaranty Agreement for $800,000.00. The funds from this new loan were used to pay the contractor and subcontractors. Both the 1979 and 1981 loans became delinquent and were defaulted on.

Thereafter, John and Donald requested the outstanding obligation of $800,000.00 be renewed in the name of Cass Co., which was approved by FNBL and contained in a loan commitment letter John accepted on behalf of Cass Co. On January 15, 1982, the parties closed on Logan Square. In On May 18, 1982, this note was renewed by a demand note payable not later than November 18, 1982. This May 18, 1982, note showed a second renewal of the $800,000.00 debt. A mortgage extension agreement was also executed on this date and subsequently recorded. Prior to the November 18, 1982, due date, the principals of Cass Co. approached FNBL requesting additional funds to finance Logan Square.

                executing the deed, John transferred Logan Square from Jesco to Cass Co.  FNBL received both a promissory note and a mortgage, in the amount of $800,000.00, as security.  These instruments were executed by John as president of Cass Investments, Inc., general partner of Cass Co.  The same people guaranteed the new note.  Cass Co. paid the interest on the outstanding Jesco notes.  The terms of the Cass Co. note were identical to those of the Jesco notes.  The loan commitment letter and agreement outlining the procedure followed and approved by John stated that the "$800,000.00 loan to Cass Investment Co. ... will serve to renew the ... Jesco Construction Corporation loans."   Record at 1390.  In addition, the note was classified on its face as a renewal.  Record at 1384, 1711-1713.  This new note was due on May 18, 1982
                

On August 11, 1982, an additional $200,000.00 credit was extended to Cass Co. and the existing $800,000.00 indebtedness was renewed and extended. The new $200,000.00 note was due November 11, 1982, while the $800,000.00 note was due on demand but not later than August 11, 1983, and contained an automatic acceleration clause if Cass Co. failed to pay any other obligation to FNBL. In addition, FNBL requested and received, pursuant to an "Escrow Agreement," a deed held in escrow pending payment of the $200,000.00 and $800,000.00 obligations. This agreement provided if Cass Co. paid the $200,000.00 obligation on or before November 11, 1982, and paid the $800,000.00 one on or before August 11, 1983, the deed would be delivered to Cass Co., otherwise, FNBL would record the deed.

The $200,000.00 note of August 1982, was not paid nor was any portion of the principal paid at the time of trial, therefore FNBL recorded the deed. On November 17, 1982, FNBL made formal demand on Cass Co. for repayment of the total indebtedness of $1,000,000.00 plus interest by November 29, 1982, or foreclosure proceedings would ensue. Cass Co. remained in possession of the property following recording of the deed, continuing to collect rent and manage Logan Square. On January 7, 1983, Cass Co. began removing its presence from the building.

On December 9, 1982, FNBL filed a complaint to foreclose its mortgage lien requesting judgment against Cass Co. for $1,000,000.00 plus interest and costs, and requested a foreclosure sale of Logan Square. Twelve additional parties, including appellants, were named to answer as to any interest they might claim in Logan Square. All five of the appellants were made parties as a result of mechanics' liens. The various suppliers and mechanics filed counterclaims and crossclaims to foreclose their liens.

On August 1, 1983, Brenneman Mechanical and Electrical, Incorporated (Brenneman) ¹ joined by Korschot's Heating and Air Conditioning, Incorporated, filed a motion for partial summary judgment. This motion alleged that FNBL owned Logan Square by reason of the deed executed by Cass Co. on August 11, 1982, which had the effect of extinguishing the mortgage, and, therefore, FNBL took the property subject to the various mechanics' liens. The trial court denied Brenneman's motion and granted partial summary judgment to FNBL on the issue of ownership, pursuant to Indiana Rules of Procedure, Trial Rule 56(B). The court found that the deed from Cass Co. to FNBL was in actuality a security instrument and FNBL therefore held only a mortgage interest in Logan Square.

FNBL moved, on September 21, 1984, for leave to amend its complaint and responses On June 24, 1985, the trial court entered its amended findings and judgment, directing the sale of Logan Square by the Sheriff of Cass County. The judgment granted the requests of FNBL and all lienholders for foreclosure of their liens. The trial court found FNBL's mortgage lien superior to all other liens to the extent of the first $600,000.00 of the loan proceeds plus interest and attorneys' fees. The trial court further declared that FNBL was on parity with the liens of all mechanics with regard to the remaining $400,000.00 of loan proceeds plus interest and attorneys' fees and, therefore, awarded pro-rata shares, to FNBL and all the mechanics, of the remaining sale proceeds after FNBL's senior lien position was satisfied. Thereafter, five of the mechanics perfected this appeal of the partial summary judgment and final judgment. Cass Co., its principals, and the remaining mechanics' lien claimants have not joined in this appeal.

to certain discovery in order to attempt to foreclose on the December 18, 1979, and September 11, 1981, mortgages, not previously foreclosed. On October 4, 1984, nunc pro tunc October 2, 1984, the trial court denied this motion.

ISSUES

Brenneman presents six issues for review which we have subsumed and rephrased into the following:

1. Whether the trial court erred in granting partial summary judgment in favor of FNBL, finding that the deed held in escrow from Cass Co. to FNBL was merely a security device and that, therefore, FNBL retained a mortgage lien which took priority over the mechanics' liens because it related back to the prior Jesco mortgages.

a. Whether the trial court erred in finding that FNBL was not an "own...