Northwest Wholesale Lumber, Inc. v. Citadel Co., C5-89-1866

• Decision Date: 12 June 1990
• Docket Number: No. C5-89-1866,C5-89-1866
• Citation: 457 N.W.2d 244
• Parties: NORTHWEST WHOLESALE LUMBER, INC., Plaintiff, v. The CITADEL COMPANY, et al., Defendants, Builders Finance, Inc., Appellant, Darlis Gray, d/b/a Interiors and Walls by DAR, and Genz-Ryan Plumbing & Heating Company, Intervenor, Respondents.
• Court: Minnesota Court of Appeals

Page 244

457 N.W.2d 244

NORTHWEST WHOLESALE LUMBER, INC., Plaintiff, v. The CITADEL COMPANY, et al., Defendants Builders Finance, Inc., Appellant Darlis Gray, d/b/a Interiors and Walls by DAR, and Genz-Ryan Plumbing & Heating Company, Intervenor, Respondents.

No. C5-89-1866.

Court of Appeals of Minnesota.

June 12, 1990.

Syllabus by the Court

1. Commencing an action to enforce a mechanics' lien is not an act to perfect a property interest for purposes of the exception to the automatic stay provided by the Bankruptcy Code. A party who is neither a bankrupt debtor nor a creditor of the bankrupt debtor does not have standing to enforce the automatic stay arising with the bankruptcy petition.

2. For purposes of prelien notice, a party may be both an owner of the property to be improved and the general contractor on the improvement project.

3. The trial court did not err in finding the actual and visible work on the improvement predated recording of the mortgage on the property.

4. The trial court did not err in refusing to allow portions of a witness' deposition read into the record when the party offering the deposition evidence reserved the right, but refused to recall the witness.

5. The trial court erred by calculating prejudgment interest at 18% where the judgment debtor was not a party to any agreement to pay 18% interest on amounts past due.

6. The trial court erred in awarding attorney fees and costs under Minn.Stat. Sec. 514.14 where the award exceeds the amount of judgment secured.

7. The trial court erred by awarding attorney fees and costs under Minn.R.Civ.P. 11 and Minn.Stat. Sec. 549.21 as a sanction for bringing post-judgment motions.

8. The trial court erred by refusing to amend its judgment as mandated by this court's previous decision in this matter.

Peter J. McCall, Stapleton, Nolan & McCall, St. Paul, for plaintiff.

Gerald G. Workinger, Jr., Minneapolis, for appellant.

James A. Fridland, Minneapolis, for Darlis Gray, d/b/a Interiors and Walls by DAR.

Kevin P. Carroll, McMenomy, Hansen, Carroll & McCann, P.A., Rosemount, for Genz-Ryan Plumbing & Heating Co.

Considered and decided by FOLEY, P.J., HUSPENI and LESLIE ^*, JJ.

OPINION

DAVID R. LESLIE, Judge.

In this appeal after remand, Builders Finance, Inc. challenges an amended judgment entered against it establishing three mechanics' liens against property it owned. It also challenges a judgment of attorney fees entered against it as a sanction for its post-judgment motions. As set out below, we affirm the amended judgment in part, reverse it in part, and remand. We also reverse the separate judgment awarding attorney fees and costs incurred in connection with Builders Finance's motions.

FACTS

The property involved in this dispute, Lot 7, was conveyed by warranty deed to The Citadel Company in February 1984. Citadel is a building and design firm. Appellant, Builders Finance, granted Citadel a mortgage on the property which was recorded on February 24, 1984.

Citadel contracted with Northwest Wholesale Lumber, Inc., David H. Nichols, Genz-Ryan Plumbing & Heating Company, and Darlis Gray d/b/a Interiors and Walls by DAR to furnish labor and materials in the improvement of the lot. Work on the property began sometime in February and was completed sometime after August 1984.

Citadel filed a petition for Chapter 7 bankruptcy relief on December 11, 1984. The bankruptcy trustee formally abandoned Lot 7 in February 1985. Northwest Wholesale Lumber was granted relief from the automatic stay to enforce its mechanics' lien on March 8, 1985. On March 20, 1985, the bankruptcy court granted Builders Finance relief from the stay to foreclose its mortgage. Northwest began this action in April 1985, naming the above parties as defendants. Citadel did not answer or appear in the action and was found to be in default.

Darlis Gray, one of the respondents on appeal, asserted her mechanics' lien as a cross claim in the answer she filed in April 1985. In March 1986, she was granted relief from the automatic stay to enforce her lien.

On June 11, 1985, Builders Finance foreclosed on the property and bought it. The redemption period expired in December 1985.

Genz-Ryan, the other respondent on appeal, intervened in the action, filing its answer in August 1985. It also asserted its mechanics' lien as a cross claim. Builders Finance raised the "defense" of the automatic stay for the first time on the first day of trial, claiming it stepped into Citadel's shoes when it bought the property. Genz-Ryan was granted ten days to seek relief for the stay in bankruptcy court. Relief was not sought.

Judgment was entered in February 1987, granting mechanics' liens to Northwest, Gray, and Genz-Ryan. On appeal, this court held that Northwest's lien was invalid because it filed its lien statement after the 120-day time period for perfecting a mechanic's lien. Northwest Wholesale Lumber, Inc. v. Citadel Co., 415 N.W.2d 399, 402 (Minn.App.1987), pet. for rev. denied (Minn. Feb. 12, 1988). We then remanded for findings on whether Citadel was both an owner and a contractor for purposes of the exception to the prelien notice requirement. Id. at 405.

On remand, the trial court found that Citadel was both owner and contractor. It again established valid liens in favor of Northwest, Gray, and Genz-Ryan. This appeal followed.

ISSUES

1. Are the mechanics' lien claims unenforceable as violations of the automatic stay in effect upon Citadel's petition in bankruptcy?

2. Did the trial court err by applying the exception to prelien notice provided by Minn.Stat. Sec. 514.011, subd. 4a?

3. Did the trial court err in finding the actual and visible beginning of improvements to have predated the mortgage?

4. Did the trial court err in refusing to allow a witness' deposition to be read into the record?

5. Did the trial court err in calculating prejudgment interest at 18%?

6. Did the trial court err in awarding attorney fees and costs under Minn.Stat. Sec. 514.14?

7. Did the trial court err in awarding attorney fees and costs under Minn.R.Civ.P. 11 and Minn.Stat. Sec. 549.21 in connection with Builders Finance's post-judgment motions?

8. Did the trial court err in denying Builders Finance's motion to enter judgment in accordance with our previous decision?

ANALYSIS

1. Builders Finance claims that Gray's and Genz-Ryan's lien claims are void because they were filed during the automatic stay in bankruptcy. Genz-Ryan argues alternatively that the claims were merely voidable and Builders Finance did not seek enforcement of the stay, that the claims were excepted from operation of the stay under 11 U.S.C. Sec. 362(b)(3) (1982), and that Builders Finance does not have standing to assert the stay. Because we agree that Builders Finance does not have standing to assert the stay to avoid the mechanics' liens, we need not address whether the lien claims are void or voidable.

Because the trustee abandoned Lot 7, it was property of the debtor, Citadel, at the time this action was commenced. Federal bankruptcy law provides an automatic stay against any act to create, perfect, or enforce any lien against property of the debtor. 11 U.S.C. Sec. 362(a)(5). Unless relief from the stay is granted, the stay continues until the case is closed or dismissed. 11 U.S.C. Sec. 362(c)(2).

The stay does not operate against actions to perfect an interest in property when the trustee's rights and powers would be subject to the perfection under section 546(b). 11 U.S.C. Sec. 362(b)(3). The trustee's rights are subject to generally applicable laws that permit post-petition perfection of a property interest created prior to bankruptcy to relate back to the date the interest was created. 11 U.S.C. Sec. 546(b).

Genz-Ryan claims its action to enforce its lien is an act to perfect its interest in Lot 7 under Minnesota's mechanics' lien laws. We disagree. Filing a lien statement within the prescribed time period is the means of perfecting a mechanics' lien claim. Minn.Stat. Sec. 514.08 (Supp.1983); Sterling Electric Co. v. Kent, 233 Minn. 31, 34, 45 N.W.2d 709, 711 (1951). Once a lienholder has filed the lien statement and served a copy of it on the property owner, the action to enforce the lien may be commenced. Minn.Stat. Sec. 514.11 (1982). Thus, while filing a lien statement is an act to perfect a lien which is excepted from the automatic stay, see Yobe Electric, Inc. v. Graybar Electric Co. ( In re Yobe Electric, Inc.), 728 F.2d 207, 208 (3d Cir.1984), an action to enforce or foreclose the lien is not excepted, Victoria Grain Co. v. Janesville Elevator Construction, Inc. ( In re Victoria Grain Co.), 45 B.R. 2, 6 (Bankr.D.Minn.1984). See Schiffer v. Arvada Steel Fabricating Co. ( In re Cantrup ), 38 B.R. 148, 150-51 (Bankr.D.Colo.1984) (filing lien statement is perfection excepted from stay while commencing action to foreclose lien violated stay). Thus, the exception provided by 11 U.S.C. Sec. 362(b)(3) does not apply.

Standing to enforce the automatic stay in bankruptcy is based on the policy underlying the stay. Its purpose is two-fold: (1) to give the debtor a "breathing spell" from creditors, permitting the debtor to attempt to plan repayment or reorganization; and (2) "to prevent one creditor from rushing to enforce its lien to the detriment of the other creditors," permitting orderly liquidation in which all creditors are treated equally. Ahlers v. Norwest Bank Worthington (In re Ahlers ), 794 F.2d 388, 393-94 & nn. 3-4 (8th Cir.1986) (citations omitted), rev'd on other grounds, 485 U.S. 197, 108 S.Ct. 963, 99 L.Ed.2d 169 (1988). Thus, both bankrupt debtors and their creditors are protected by the stay. See, e.g., James v. Washington Mutual Savings Bank (In re Brooks ), 871 F.2d 89, 90 (9th Cir.1989) (no standing, party not a creditor or joint debtor); A.H. Robins Co. v. Piccinin (In re A.H. Robins Co.), 788 F.2d 994, 999 (4th Cir.1986) (bankrupt debtor's co-defendants have no standing to...