Miles Homes of Indiana, Inc. v. Harrah Plumbing and Heating Service Co., Inc.

• Citation: 408 N.E.2d 597
• Decision Date: 14 August 1980
• Docket Number: No. 1-879A219,1-879A219
• Parties: MILES HOMES OF INDIANA, INC. (Miles Homes Division of Insilco Corporation), Appellant (Defendant, Counter-Claimant and Cross-Claimant Below), v. HARRAH PLUMBING AND HEATING SERVICE CO., INC., Appellee (Plaintiff, Counter- Defendants Below), John W. Lee and Margaret Lee, Appellees (Defendants, Cross-Defendants Below). John W. LEE and Margaret Lee, Appellants (Defendants, Cross-Defendants Below), v. HARRAH PLUMBING AND HEATING SERVICE CO., INC., Appellee (Plaintiff Below), Miles Homes of Indiana, Inc. (Miles Homes Division of Insilco Corporation), Appellee (Defendants, Counter-Claimant and Cross-Claimant Below).
• Court: Court of Appeals of Indiana

Page 597

408 N.E.2d 597

MILES HOMES OF INDIANA, INC. (Miles Homes Division of

Insilco Corporation), Appellant (Defendant, Counter-Claimant and Cross-Claimant Below), v. HARRAH PLUMBING AND HEATING SERVICE CO., INC., Appellee

(Plaintiff, Counter- Defendants Below),

John W. Lee and Margaret Lee, Appellees (Defendants,

Cross-Defendants Below).

John W. LEE and Margaret Lee, Appellants (Defendants, Cross-Defendants Below), v. HARRAH PLUMBING AND HEATING SERVICE CO., INC., Appellee

(Plaintiff Below),

Miles Homes of Indiana, Inc. (Miles Homes Division of

Insilco Corporation), Appellee (Defendants,

Counter-Claimant and Cross-Claimant Below).

No. 1-879A219.

Court of Appeals of Indiana, First District.

Aug. 14, 1980.

Cox, Zwerner, Gambill & Sullivan, Terre Haute, for appellant.

Brames Bopp & Haynes, Terre Haute, Pedro S. Martinez, Jr., Indianapolis, for appellees.

ROBERTSON, Presiding Judge.

This is an appeal by Miles Homes of Indiana, Inc. (Miles Homes) from a judgment foreclosing the mechanic's lien of Harrah Plumbing and Heating Service Co., Inc. (Harrah) on real property to which Miles Homes holds title and in which John W. and Margaret Lee (Lees) hold an interest as conditional land contract purchasers.

We reverse and remand.

Miles Homes provided materials to build a "shell house", (i. e., a house without electricity, plumbing and interior finishing) to the Lees. Miles Homes took a mortgage on the real estate upon which the house was built as security for the note executed by the Lees for the materials. The amount of the note was $7,814.00. This was on August 13, 1971. The Lees fell behind in their payments and the Lees, in exchange for the cancellation of the note held by Miles Homes, conveyed the property to Miles Homes by warranty deed on April 12, 1974. The amount of consideration stated in the deed was the amount then owed $8,779.93. The deed contained the term: "It is the intention of the grantee that the interest conveyed herein will remain separate and distinct from the separate mortgagee's interest previously acquired." At the same time, an installment or conditional land contract was entered into whereby Miles Homes agreed to sell the real estate for $8,300.00 at the rate of $78.69 a month until March 15, 1975, when the remaining unpaid balance would be due. The Miles Homes official testified the contract was entered into to give Lees time to refinance or find another mortgage.

The contract contained a term that no improvements could be made upon the property without written agreement of the vendor. However, on cross-examination, an official from Miles Homes admitted that the Lees were free to, and expected to, make such improvements as to make the house modern and habitable. The Lees did not make payments on time and were in possession at trial. The Lees made 16 payments after the contract was to be paid off in full. On August 5, 1975, a contract was entered into between the Lees whereby Harrah would provide plumbing for the house at a cost of $3,600. The work was completed, as found by the trial court, on or about July 20, 1976, at a slightly higher cost because of extras. The contract price was not paid and Harrah filed a mechanic's lien, giving notice to the Lees and Miles Homes. Miles Homes brought an action within the same suit against the Lees for forfeiture of the conditional land sale contract or in the alternative for foreclosure of its alleged unmerged mortgage.

The trial court, without intervention of a jury, found that the mechanic's lien was properly perfected, that Harrah had priority over any claim of Miles Homes and that the real estate should be sold in foreclosure with the claims of Harrah paid first, then the Miles claim with the Lees to receive any excess.

Miles Homes and the Lees appealed. The Lees' appeal was dismissed for various deficiencies on the motion of Miles Homes. Miles Homes has presented a plethora of errors on appeal; however, because of our decision we need address only two groupings of them. The first is whether Miles Homes has priority over Harrah based on its alleged first mortgage; and second, whether it is possible for Harrah to acquire a mechanic's lien against the interest of Miles Homes based on a contract entered into with the contract purchasers, the Lees.

We first discuss whether the mortgage of Miles Homes remained unmerged when it took title to the property. We note that Miles Homes expressly intended to keep the mortgage alive, however:

if the conveyance is made and accepted as payment of the mortgage debt no question of merger is possible. The debt is discharged by payment, or perhaps more accurately, by substituted performance or accord and satisfaction; but not by merger. The creditor now has full title to the property with no debt in existence for it to secure. If the mortgage debt is extinguished, the mortgage itself is never kept alive. Consequently, there is automatic merger of the two interests in the property and no intent on the part of the creditor can keep them separate. (Citations omitted.)

G. Osborne, Handbook on the Law of Mortgages, § 274, (2d Ed. 1970).

There is authority for the proposition that the lien will be revived so as to prevent junior lienors from gaining a windfall priority by a merger. Id. § 275. In the situation at hand, if Harrah had attained its lien after the Miles Homes mortgage, but before the transfer of deed in lieu of foreclosure, to allow Harrah priority over Miles Homes would be a windfall, since Miles Homes could have obtained foreclosure and, assuming its debt equalled the value of the real estate, cut off any junior lien of Harrah's. The cases cited by Miles Homes follow this pattern.

However, to allow Miles Homes to "revive" the mortgage in the situation at hand would be equally a windfall for Miles Homes. There is no intervening lienor here, rather there is a lienor subsequent to taking title. Thus, the same consideration of "windfall priority" is not a factor here, and we reject any "revival" here.

As to the second general category of error alleged, the trial court made two findings concerning the part Miles Homes took in the plumbing contract. Finding number three states that Harrah furnished work, labor and materials at the special instance and request of the Lees "with the full knowledge and consent of Miles Homes. . . ." Finding number thirteen states that Miles Homes only implicitly knew, consented and authorized any work and furnishing of materials to the house.

Our examination of the record shows that the second finding is undoubtedly the one shown by the evidence. There was no testimony of actual knowledge, authorization or consent by Miles Homes, but rather there was implicit consent, knowledge and authorization based on the fact that Miles Homes was aware the house was incomplete and that work and materials would have to be provided by someone to finish the house. We, thus, reject finding number three as clearly erroneous and accept the latter finding.

We turn to the law on the subject. A long line of cases in Indiana has held that in order for a mechanic's lien to attach to the titleholder's interest for materials used in and on the real estate and its improvements, it is necessary that such material be furnished by the authority and direction of the titleholder, and something more than inactive consent on the part of such owner is necessary in order that a lien be acquired against him. Woods v. Deckelbaum, (1963) 244 Ind. 260, 191 N.E.2d 101; The Dallas Co., Inc. v. William Tobias Studio, Inc., (1974) 162 Ind.App. 215, 318 N.E.2d 568 (and cases cited therein.)

As noted by Potter v. Cline, (1974) 161 Ind.App. 349, 316 N.E.2d 422, there is "loose and imprecise language" existing in the long line of cases that suggest that the mechanic cannot place a lien on any interest of the real estate when the conditional vendee or lessee enters in the contract without active consent of the titleowner. Such a view is incorrect, it is only the titleowner's interest that cannot be reached; the interest of the lessee or, as here, conditional vendee can be so reached.

The statute and the cases clearly show that the interest of a contract purchaser or conditional vendee is subject to a lienable interest. Potter, supra; Kendall Lumber & Coal Co., Inc. v. Roman, (1950) 120 Ind.App. 368, 375, 91 N.E.2d 187, 190; Ind.Code 32-8-3-2 ("The entire land upon which any such . . . improvement is situated . . . shall be subject to lien to the extent, of all the right, title and interest owned herein by the owner thereof . . ..") See Mid America Homes, Inc. v. Horn, (1979) Ind., 396 N.E.2d 879 (analysis of term "owner"). Thus, in the case at hand, although Harrah does not have a possible lien against Miles Homes, it does against the Lees, on their interest as contract purchasers.

We must now consider, however, the effect of the third-party action by Miles Homes against the Lees on the possible mechanic's lien of Harrah on the Lees' interest. Miles Homes, because of the default of the Lees on the contract, prayed for forfeiture of the contract, or in the alternative, foreclosure of their "first" mortgage. We have already determined that Miles Homes has no mortgage interest here, as there is no debt owed. In examining the record, we can find no reason why the Lees' interest cannot be forfeited under the rule of Skendzel v. Marshall, (1973) 261 Ind. 226, 301 N.E.2d 641, which examines whether a forfeiture would act as a penalty. Here, the Lees have paid no principal towards the contract, and owed more at the time of trial than they did when the contract began. They presented no evidence at trial that they have any equity in the house.

Miles Homes was entitled, then, to a forfeiture of the installment land sale contract and we must examine the effect of such a forfeiture on the possible lien of Harrah's on the Lees' interest. The slim authority we can find states that the lien is extinguished with the...