Home Lumber Co. v. Kopfmann Homes, Inc.
| Decision Date | 28 July 1995 |
| Docket Number | No. C2-94-172,C2-94-172 |
| Citation | 535 N.W.2d 302 |
| Parties | HOME LUMBER CO., petitioner, Appellant, v. KOPFMANN HOMES, INC., et al., Defendants, MidAmerica Bank Maplewood, Respondent, Sullivan Services, Inc., Pella Products, Inc., petitioners, Appellants. |
| Court | Minnesota Supreme Court |
Syllabus by the Court
1. The question of whether advances made pursuant to a duly recorded mortgage are optional or obligatory is determined solely on the basis of the controlling documents themselves.
2. Intervening mechanics liens do not have priority over advances made pursuant to a mortgage when the advances are obligatory on the part of the mortgagee.
Todd A. Sattler, Lang, Pauly & Gregerson, Ltd., Minneapolis, for Home Lumber Co.
Robert R. Roos, Minneapolis, for Sullivan Services, Inc.
Mark Anderson, Wagner, Falconer & Judd, Minneapolis, for Pella Products, Inc.
Michael D. Quayle, Dudley Younkin, Merrigan, Johnson, Quayle & Younkin, Minneapolis, for MidAmerica Bank Maplewood.
Bradley N. Beisel, Scholle & Beisel, Ltd., Minneapolis, for amicus curiae MN Land Title Assoc.
Heard, considered and decided by the court en banc.
In this case, we consider whether mortgage loan disbursements made subsequent to the attachment of mechanics liens have priority over those liens. Kopfmann Homes, Inc. (Kopfmann) obtained a construction loan mortgage from MidAmerica Bank Maplewood (Bank) in order to build a residence for resale. In the construction loan agreement, the Bank was authorized to disburse funds for the construction project, pursuant to its inspector's progress reports or "acceptable invoices and lien waivers." Some disbursements were made but, for reasons which are not clear in the record, the Bank stopped making disbursements.
Subsequently, businesses that had supplied materials and labor for the construction project (appellants) brought mechanics lien foreclosure actions. The trial court held that the mechanics liens had priority over all disbursements the Bank made after the date the mechanics liens attached because the disbursements were "optional." The court of appeals reversed, holding that the disbursements were "obligatory" and, thus, had priority over the mechanics liens. We agree and affirm the court of appeals.
In April 1990, Kopfmann entered into a construction loan mortgage of $450,000 with the Bank. The mortgage was recorded on April 20, 1990. Disbursements were made on April 18, May 23, June 20, August 15 and September 20, 1990, for a total amount of approximately $271,000. The mechanics liens at issue attached no later than May 16, 1990. Thus, certain disbursements were made prior to the time the liens attached, and others were made after that date.
A number of businesses, including Home Lumber, that had provided materials and labor for the project filed mechanics lien foreclosure actions. Disposition of this case at trial turned on whether the disbursements made after the date the mechanics liens attached retained the priority of the prior recorded mortgage or had been "optional" and thus lost their priority. The trial court held that, "in light of the nature of the entire transaction," including the lack of clarity in the loan documents, the behavior of the responsible Bank official and the failure of the Bank to comply with disbursement safeguards, the advances made after May 16, 1990, were "optional and discretionary" and thus, inferior to the mechanics liens. The court of appeals reversed, holding that the advances were obligatory.
Appellants argue first that the court of appeals erred in applying a de novo standard of review. The "[c]onstruction and effect of a contract presents a question of law, unless an ambiguity exists." Trondson v. Janikula, 458 N.W.2d 679, 681 (Minn.1990) (citing Hydra-Mac, Inc. v. Onan Corp., 450 N.W.2d 913, 916-17 (Minn.1990)). Here there is no question of ambiguity. The issue before us is the effect of the Bank's waiver of certain disbursement conditions on the priority of the mechanics liens. Because we conclude that the question of priority is to be determined solely by reference to the controlling documents, the question is one of law and our standard of review is de novo.
The critical issue is whether the Bank had a legal obligation to make disbursements after attachment of the liens. On this issue, appellants argue that, based upon "the entire transaction," the disbursements made after the attachment of the mechanics liens can only be considered "optional."
To determine the issue of priority, we begin with the controlling statutes. Minn.Stat. § 507.34 (1994) establishes mortgage priority from the date of recording with the county recorder or the registrar of titles. Minn.Stat. § 514.01 (1994) grants a mechanics lien to anyone who contributes to the improvement of real estate by performing labor or furnishing skill, material or machinery. A mechanics lien attaches, takes effect, and is preferred to any mortgage not then of record from the time the first item of material or labor is furnished upon the premises for the beginning of the improvement, unless the lienholder had actual notice thereof. Minn.Stat. § 514.05, subd. 1 (1994). Mechanics lienholders can bring foreclosure suits pursuant to Minn.Stat. § 514.10 (1994). This statutory scheme is intended to protect the prior mortgagee. See Reuben E. Johnson Co. v. Phelps, 279 Minn. 107, 112, 156 N.W.2d 247, 251 (1968), reh'g denied, (Minn. Mar. 5, 1968).
In addition to the statutory provisions, the common law provides that a mechanics lien has priority over certain mortgage payments if the subsequent payments are "optional." Finlayson v. Crooks, 47 Minn. 74, 79, 49 N.W. 398, 400 (1891), reh'g denied, (Minn. Aug. 27, 1891). 1 Where a mortgage is given to secure future advances, the mortgage has priority over mechanics liens attaching after the mortgage is given but before such advances are made, if the advances are "obligatory" upon the mortgagee under the terms of the mortgage. Erickson v. Ireland, 134 Minn. 156, 158, 158 N.W. 918, 919 (1916). Although appellants suggest that confusion has existed as to whether the characterization of the payments as "optional" or "obligatory" is determined strictly by reference to the contract, or whether the court may consider the circumstances surrounding the payments, we hold, consistent with our earlier cases, that this question is to be answered solely on the basis of the terms of the controlling documents themselves.
In Landers-Morrison-Christenson Co. v. Ambassador Holding Co., we said:
[T]he undertaking of a mortgagee to make future advances is not deemed optional within the rule which gives subsequent incumbrances priority over...
To continue reading
Request your trial
-
Cont'l Cas. Co. v. Nat'l Union Fire Ins. Co. of Pittsburgh
...Union had a duty to defend. 27. In support of its argument that Continental lacks standing, Valspar cites to Home Lumber Co. v. Kopfmann Homes, Inc., 535 N.W.2d 302 (Minn.1995). Home Lumber involved lien claimants that “were neither parties to, nor the intended beneficiaries of, [a] constru......
-
In Re Cornerstone E & P Company
...of the loan agreement, and that no inquiry or examination of extrinsic evidence is permitted, relying in part upon Home Lumber Co. v. Kopfmann, 535 N.W.2d 302 (Minn.1995); and (iii) even assuming that examination of extrinsic evidence is proper, the Weatherford Plaintiffs had offered no evi......
-
Minnwest Bank v. Petitioner
...liens take priority as of the date of the first item of material or labor furnished for that improvement. Home Lumber Co. v. Kopfmann Homes, Inc., 535 N.W.2d 302, 304 (Minn. 1995). Minnwest challenges the district court's ruling that the lien of FTK Group for work it commissioned on the ret......
-
Shaw Acquisition Co. v. Bank of Elk River
...(disallowing mortgagee to claim benefit of security for junior portion of split-priority mortgage); cf. Home Lumber Co. v. Kopfmann Homes, Inc., 535 N.W.2d 302, 304 (Minn.1995) (restating obligatory-optional advance When property is sold under the execution of the power of sale, the proceed......