Northwestern Nat. Bank of Sioux City v. Metro Center, Inc., 64676

• Decision Date: 18 March 1981
• Docket Number: No. 64676,64676
• Citation: 303 N.W.2d 395
• Parties: NORTHWESTERN NATIONAL BANK OF SIOUX CITY, Appellee, v. METRO CENTER, INC.; Iowa Public Service Company; Raymond G. Alvine & Associates, Inc.; Beam & McIntosh; Maurices Iowa Inc.; Audino Construction Company and Audino-Donovan; City Council of Sioux City; The City of Sioux City, Iowa; Woodbury County, Iowa; The State of Iowa and The Iowa Department of Revenue; The United States of America; J. Myron Olson and Sons, Inc.; Gerald F. Hoffman, d/b/a Consultants to Management International, Ltd.; Consultants to Management International, Ltd; Metz Baking Company, and Security National Bank of Sioux City, Iowa, Defendants, Audino Construction Company, Appellant.
• Court: Iowa Supreme Court

Page 395

303 N.W.2d 395

NORTHWESTERN NATIONAL BANK OF SIOUX CITY, Appellee, v. METRO CENTER, INC.; Iowa Public Service Company; Raymond G. Alvine & Associates, Inc.; Beam & McIntosh; Maurices Iowa Inc.; Audino Construction Company and Audino-Donovan; City Council of Sioux City; The City of Sioux City, Iowa; Woodbury County, Iowa; The State of Iowa and The Iowa Department of Revenue; The United States of America; J. Myron Olson and Sons, Inc.; Gerald F. Hoffman, d/b/a Consultants to Management International, Ltd.; Consultants to Management International, Ltd; Metz Baking Company, and Security National Bank of Sioux City, Iowa, Defendants, Audino Construction Company, Appellant.

No. 64676.

Supreme Court of Iowa.

March 18, 1981.

As Corrected April 9, 1981.

Rehearing Denied April 10, 1981.

James W. Redmond and Thomas M. Plaza of Gleysteen, Harper, Eidsmoe, Heidman & Redmond, Sioux City, for appellant.

Steven A. Carter of Carter & Sar, Sioux City, for appellee.

Considered by LeGRAND, P. J., and UHLENHOPP, McCORMICK, LARSON and SCHULTZ, JJ.

LARSON, Justice.

An extensive Sioux City urban redevelopment project, commenced with great enthusiasm and optimism, sputtered and eventually died. The site, intended for construction of a large shopping center, was dubbed the "Brandeis hole" when construction stopped at the excavation stage. The corporation charged with the development of the project, Metro Center, Inc., had borrowed money from the Northwestern National Bank of Sioux City. Audino Construction Company, and others, supplied labor and material for the project and claimed mechanics' liens under chapter 572, The Code 1979. This appeal, which involves only Audino and the bank, raises these issues: (1) was Audino entitled to a mechanic's lien on the property, and (2) if so, was it entitled to priority over the bank's mortgage under section 572.18.

The trial court noted that the principals of Audino Construction Company, Joseph and Frank Audino, were also shareholders and directors of Metro Center, Inc., the owner, which in its mortgage to the bank had certified that no liens existed on the property. The court, "piercing the corporate veil," held it would be inequitable to allow enforcement of the Audino lien under the circumstances. The court held that in any event no lienable activities had been performed by Audino because its services did not result in an "improvement" on the premises under section 572.2.

Audino's cross-claim for foreclosure of its mechanic's lien was rendered moot by the trial court's conclusion it was not entitled to assert a lien. Audino now challenges the court's ruling it was not entitled to assert the lien and requests a determination that its lien is entitled to priority over the bank's mortgage, under section 572.18, because its work on the property commenced before the mortgage was recorded. Because our review is de novo, we must examine the whole record and determine the parties' rights anew from the evidence presented. See Ringland-Johnson Crowley Co. v. First Central Service Corp., 255 N.W.2d 149, 151 (Iowa 1977). We conclude that Audino was entitled to assert its mechanic's lien and that it is entitled to priority over the mortgage. Accordingly, we reverse and remand for further proceedings by the trial court.

The underlying facts are largely without dispute. The land in question was acquired by the city of Sioux City for redevelopment as a part of its extensive urban renewal project. Metro Center, Inc. was formed by Joseph and Frank Audino, with four others, for the purpose of the redevelopment of the land in question. On February 4, 1974, Metro entered into a detailed "Contract for Sale of Land for Private Development" with the city, under which Metro agreed to construct the shopping center in accordance with approved plans and specifications and under which the city agreed to demolish the buildings and convey title to the land to Metro. On February 12, 1976, Metro, as owner, and Audino, as general contractor, entered into a contract for construction of the center. Thereafter, various work was done on the premises, some by Audino and some by other contractors. It was Audino's work done prior to recording of Northwestern's mortgage on November 15, 1976, which, it says, gives it priority over the bank's mortgage under section 572.18.

Section 572.18 provides in part:

Mechanics' liens shall be preferred to all other liens which may attach to or upon any building or improvement and to the land upon which it is situated, except liens of record prior to the time of the original commencement of the work or improvements ....

(Emphasis added.)

The bank counters that no lienable services were performed before the recording of the mortgage and further, because Metro was not the owner of the land until November 15, 1976, no prior services under a contract with it could be the basis for a lien.

I. Dual Status of Audino Construction Company.

Joseph and Frank Audino have been in the construction business in Sioux City since 1957. In 1974 they joined four other persons to form Metro Center Inc., investing $10,000 each. These six were later joined by a seventh person who became the president of Metro as well as a shareholder and director. The sole purpose of Metro's formation was to provide a vehicle through which to take title to the urban renewal project and to complete the proposed improvements. It is undisputed, moreover, that the only reason the Audino brothers became involved in Metro was to assure their participation in the project as general contractors. From August, 1975, until November 15, 1976, the bank had advanced funds to Metro on the project without taking security in the real estate. On that date, Metro executed a note for $438,000 to cover the sums previously borrowed, as well as funds with which to acquire a deed from the city and $50,000 to continue development. This loan was secured by a mortgage. The mortgage contained this provision:

Said Mortgagors hereby covenant with Mortgagee, or successor in interest, that said Mortgagors hold clear title to said personal property, and title in fee simple to said real estate; that they have good and lawful authority to sell, convey and mortgage the same; that said premises are Free and Clear of all Liens and Encumbrances Whatsoever except as may be above stated; and said Mortgagors Covenant to Warrant and Defend the said premises and the said personal property against the lawful claims of all persons whosoever, except as may be above stated.

The bank argues, and the trial court held, that this covenant of Metro was in effect the covenant of its shareholders, including the Audino brothers. It held it would be inequitable to allow the Audinos to retain the benefits of the mortgage loan obtained on the strength of the no-lien covenant and still pursue their mechanic's lien. The Audino Company argues that they were separate entities and the acts of Metro cannot be deemed to be the acts of Audino. Further, it argues that as of the date of the mortgage, November 15, 1976, there were no mechanic's liens because the first lien was filed after that date. We may summarily resolve the last argument: the mechanic's lien arises upon furnishing of labor or material; not upon its filing. If lienable labor or material was furnished on the project prior to the mortgage recordation, as Audino claims, there was at least one mechanic's lien in existence, despite the fact that no lien statement had been filed. See Society Linnea v. Wilbois, 253 Iowa 953, 959, 113 N.W.2d 603, 606-607 (1962) (lien effective "from the day (the workman) commences work or furnishes material"). The lien in such case actually predates the filing, which then relates back to the date of commencement. See 57 C.J.S. Mechanics' Liens § 177, at 730 (1948).

We must assume then, that Metro's covenant did not state the true situation with regard to the existence of liens as of the date of the mortgage. We must determine what effect, if any, that has upon Audino's right to pursue its lien. The trial court held the overlapping of interests by the Audinos was sufficient in itself to void any liens presented by them.

We have said that central to corporate law is the concept that a corporation is an entity separate and distinct from its shareholders. Briggs Transportation Co., Inc. v. Starr Sales Co., Inc., 262 N.W.2d 805, 809 (Iowa 1978). The separate-entity concept of the corporation may be disregarded "under exceptional circumstances, for example, where the corporation is a mere shell, serving no legitimate business purpose, and used primarily as an intermediary to perpetuate fraud or promote injustice." Id. at 810. The Court of Appeals for the Eighth Circuit, in applying Iowa law in a diversity case, said the factors to be considered when contemplating in "piercing of the corporate veil" were whether the corporation (1) was undercapitalized, (2) was without separate books, (3) had mingled personal and corporate assets, (4) was used to promote fraud or illegality, or (5) was merely a sham. Lakota Girl Scout Council, Inc. v. Havey Fund-Raising Management, Inc., 519 F.2d 634, 638 (8th Cir. 1975).

The trial court here apparently assumed the existence of elements requisite to piercing the corporate veil of Metro Center, Inc. Upon our examination of the record, we conclude the requisite elements were not established. The bank makes no claim of fraud, and there is no evidence that the corporation was established for such a purpose; to the contrary, the corporation was apparently established, pursuant to redevelopment regulations, to be the entity responsible for development of the project. No claim was made that Metro was undercapitalized; the Audinos and Metro maintained separate bank accounts, apparently in separate banks; complete records were maintained; and there was no commingling of assets. The bank does not contend Metro was a sham or shell, and we find no evidence to...