Winger Contracting Co. v. Cargill, Inc., 17-1169

• Decision Date: 12 April 2019
• Docket Number: No. 17-1169,17-1169
• Citation: 926 N.W.2d 526
• Parties: WINGER CONTRACTING COMPANY, Appellant, v. CARGILL, INCORPORATED, Appellee. Tracer Construction, LLC, Plaintiff, v. Cargill, Incorporated, Appellee, and Winger Contracting Company, Peterson Contractors, Inc., American Piping Group, Inc., Tri-City Electric Company of Iowa, and TAI Specialty Construction, Inc., Appellants.
• Court: Iowa Supreme Court

926 N.W.2d 526

WINGER CONTRACTING COMPANY, Appellant,

v.CARGILL, INCORPORATED, Appellee.

Tracer Construction, LLC, Plaintiff,

v.Cargill, Incorporated, Appellee,andWinger Contracting Company, Peterson Contractors, Inc., American Piping Group, Inc., Tri-City Electric Company of Iowa, and TAI Specialty Construction, Inc., Appellants.

No. 17-1169

Supreme Court of Iowa.

Filed April 12, 2019

Nick Critelli and Lylea D. Critelli of CritelliLaw, P.C., Des Moines, and Patrick Curran of Harrison, Moreland, Webber & Simplot, P.C., Ottumwa, for appellant Winger Contracting Company.

Abby S. Wessel of Rickert & Wessel Law Office, P.C., Reinbeck, for appellant Peterson Contractors, Inc.

Benjamin J. Patterson and Timothy B. Gulbranson of Lane & Waterman LLP, Davenport, for appellants American Piping Group, Inc.; Tri-City Electric Company of Iowa; and TAI Specialty Construction, Inc.

John F. Fatino and Erik S. Fisk of Whitfield & Eddy, P.L.C., Des Moines, for appellant Tracer Construction, LLC (until withdrawal).

Dana L. Oxley, Samuel E. Jones, and Jared S. Adam of Shuttleworth & Ingersoll, PLC, Cedar Rapids, for appellee.

APPEL, Justice.

In this case, we are called upon to decide whether mechanic’s liens arising from the provision of materials and labor to a lessee attach to the property of the lessor under the facts and circumstances of this case. The case also presents the question of whether a construction mortgage lien ultimately obtained by the owner of the land on the leasehold and property of the lessee has priority over later-filed mechanic’s liens.

The proceedings below were heard in the Iowa Business Specialty Court, a district court. A number of businesses sought to foreclose mechanic’s liens against the property of a lessor for work authorized by a lessee. They also asked the court to declare their liens superior to the construction mortgage lien held by the property owner. Pursuant to a case management order, the parties filed competing motions for partial summary judgment to resolve the key underlying issues related to priority of the liens.

The district court ruled that the mechanic’s liens did not attach to the property of the lessor and that the construction mortgage lien on the lessee’s property had priority over the mechanic’s liens. As a result, the district court denied the mechanic’s lien claimants’ motions for summary judgment and granted the lessor’s motion for summary judgment. The mechanic’s lien claimants filed a motion for expanded findings and conclusions under Iowa Rule of Civil Procedure 1.904(2). Except for refining the question of the scope of the land subject to the court’s ruling, the district court denied the motion.

The mechanic’s lien claimants appealed. We granted interlocutory review. For the reasons expressed below, we affirm the ruling of the district court.

I. Factual and Procedural Background.

A. The Lease Between Cargill and HFCA for Construction of Chlor-Alkali Facility.

1. General overview. Cargill, Incorporated entered into a fifty-year lease with HF Chlor-Alkali, LLC (HFCA) to allow HFCA to construct a chlor-alkali manufacturing facility and other improvements on land owned by Cargill in Eddyville, Iowa. The lease required HFCA to pay $12,000 annual rent along with other consideration, including payment of property taxes, reimbursement for security services, and under some circumstances, insurance. In the lease, HFCA covenanted to Cargill that it would not use the land for anything other than a chlor-alkali facility without Cargill’s approval.

The lease provided that Cargill would continue to own the land, while HFCA would own the chlor-alkali facility. The lease stated,

All additions, alterations and improvements to the Land made from time to time over the Term, including, without limitation, the Facility, the Improvements and all of Lessee’s Property located therein, shall be the property of Lessee and Lessee shall have title to all such additions, alterations and improvements, subject to the provisions of Article XIX herein.

Article XIX, in turn, required HFCA to remove the facility from the land after the lease ends unless different arrangements are made between the parties. Specifically, Article XIX stated, in part,

Unless otherwise approved by Cargill in writing, Lessee shall have the obligation, as soon as commercially practicable after the expiration or earlier termination of this Lease, to remove any and all Improvements and Lessee’s Property or other improvements of any nature and kind from the Land, and provided that the portion of the Land to which such items may have been affixed shall be restored by Lessee to substantially the condition existing on the Effective Date.

2. Powers and limitations on HFCA. The lease allowed HFCA to encumber, assign, or mortgage to a secured creditor either its leasehold estate in the land or its fee estate in the facility. Notably, however, the lease contained a provision limiting the nature of the Cargill–HFCA relationship. Specifically, section 22.14 of the lease provided that nothing in the lease should be construed "as creating a partnership, joint venture, or association" between Cargill and HFCA or "cause either party to be responsible in any way for the debts or obligations of the other party." Further, section 22.14 provided that neither the method of computing rent, nor any provision of the lease, nor any acts of the parties "shall be deemed to create any relationship" between Cargill and HFCA "other than the relationship of landlord and tenant."

Section 23.05 of the lease related to liens. This provision stated that "Lessee shall keep the Premises free from any and all liens arising out of any work performed, materials furnished or obligations incurred due to Lessee or its Affiliates."

3. Conditions precedent. The lease contained a number of conditions precedent. The lease declared that as a condition precedent, HFCA "will receive Cargill’s approval of the plans and specifications for the Improvements ... which approval Cargill shall not unreasonably withhold." Under the lease, the term "Improvements" meant "all buildings, fixtures, structures and other improvements built by Lessee on the Land."

Another condition precedent to the lease provided that the parties would enter into six "ancillary agreements." In the first ancillary agreement, Cargill agreed to purchase and HFCA agreed to supply a "long-term stable supply of [chemicals] for use at [Cargill’s] processing facilities." The second ancillary agreement provided that HFCA’s affiliate would purchase from Cargill the chemicals produced by HFCA that exceeded Cargill’s requirements. Like the first ancillary agreement, the second ancillary agreement included a price and an initial term of ten years. In the third and fourth ancillary agreements, Cargill agreed to process, treat, and sell water to HFCA, an essential input to HFCA’s production of chlor-alkali. The fifth ancillary agreement related to security services, and the sixth ancillary agreement allowed HFCA additional access to Cargill’s property. The lease agreement between Cargill and HFCA provided for termination in the event of a breach of any obligation under the ancillary agreements.

4. Recording of memorandum of lease with county recorder. A memorandum of lease was filed with the Monroe County recorder. The memorandum of lease identified the lease agreement as related to the Cargill property by legal description, identified the parties, stated that the lease was for a term of fifty years, and declared that it incorporated by reference all the terms and conditions of the lease. While the public record revealed the description of the land and the incorporation of the lease by reference, the specific terms of the lease were not recorded.

B. Financing the Construction of the Chlor-Alkali Facility. In order to finance construction of the chlor-alkali facility, Cargill assisted HFCA in obtaining $80 million in bond financing through the Iowa Finance Authority. As part of the financing arrangements, U.S. Bank issued a letter of credit guaranteeing payment to the bond trustee and HFCA agreed to reimburse U.S. Bank for payments made under the letter of credit. Under the agreement, HFCA covenanted to U.S. Bank that it would execute and deliver a leasehold mortgage and assignment of rents and leases. Pursuant to the leasehold mortgage, HFCA granted a first priority leasehold mortgage lien and security interest to U.S. Bank that encumbered all of HFCA’s rights in the leasehold estate and the chlor-alkali facility. As a condition precedent to U.S. Bank’s issuing the letter of credit guaranteeing payment to the bond trustee, Cargill agreed to purchase the rights and obligations of U.S. Bank in the event HFCA defaulted. The parties refer to this condition precedent as a "put agreement." HFCA also obtained at least $40 million in financing from a Cargill subsidiary. U.S. Bank recorded the mortgage on August 29, 2013.

C. Mechanic’s Liens, Enforcement Action, Loan Default, and Exercise of the Put. HFCA entered into contracts with two general contractors to construct the facilities. Either HFCA or the general contractors entered into contracts with a number of subcontractors, including Winger Contracting Company, Peterson Contractors, Inc., Tri-City Electric Company of Iowa, TAI Specialty Construction, Inc., and American Piping Group, Inc. Neither Winger nor any of the general contractors or other subcontractors entered into any contracts with Cargill regarding the construction of the facility or any improvements to Cargill’s land. Unfortunately, the project fell apart, and the contractors were not paid in full for their work on the project.

The contractors filed mechanic’s liens based upon their work on the facility in 2015 and early 2016. They sought to foreclose their mechanic’s liens against Cargill’s fee interest in the real property on which the facility is located. Two foreclosure actions were filed in district court, one in September 2015 and...