“Lien on Me”: Minnesota Lenders Need to Take Note of Recent Mechanics Lien Case

Years ago, Minnesota Continuing Legal Education put on a seminar entitled “Mechanics Liens: Traps for the Unwary.”  Truer words were never spoken.  It seems that at least once a year there is a Minnesota court decision which adds another nuance to an already complicated set of statutes.

Minnesota’s mechanics lien law exists to ensure that contractors and subcontractors who improve real estate and take the steps required by law to “perfect” their lien claim are paid for the work they perform to enhance the value of a property through their improvement.  If a lien claimant has a properly perfected lien, Minnesota courts have repeatedly held that the mechanics lien statutes must be liberally construed in favor of the lien claimant. 

A recent Minnesota Court of Appeals case is a perfect example of Minnesota courts’ policy in action, and the result has far-reaching implications, especially for the scores of Minnesota banks presently engaged in modifications, workouts and restructures with their commercial real estate loan portfolios.

One aspect of Minnesota’s mechanics lien statutes is the concept of “priority”; that is, a mechanics lien has “priority” over later-recorded liens, including mortgages.  In other words, if work giving rise to a lien claim is started at a property prior to the mortgage being recorded, and the lien claimant goes unpaid, the lien claimant can actually foreclose not only the owner’s position, but the mortgage holder’s as well.

In the case of Premier Bank v. Becker Development, LLC, et al, Premier Bank held a mortgage on land which was unquestionably senior to any mechanics lien claims, as the first work on the development started after the Bank’s mortgage was recorded. 

Here, however, is where it gets interesting.  Premier Bank later modified its mortgage with Becker Development and, in the process, agreed to release three lots from the mortgage.  As part of the modification agreement, Boone Builders, a homebuilding company affiliated with Becker Development, agreed to construct a model home on each of the three lots.  Guess who provided the construction loans for those models?  You guessed it, Premier Bank, as part of the loan modification.

In the case, the Court of Appeals held that when Premier Bank modified its loan with Becker and in turn released the lots, because the lien claimant, Kuechle Underground, Inc., had a perfected mechanics lien (which originally was junior to Premier’s mortgage), Kuechle’s mechanics lien jumped ahead of Premier’s construction mortgage on the three lots now owned by Boone Builders.  Furthermore, because of Minnesota’s public policy favoring properly perfected lien claimants, Kuechle was allowed to foreclose its entire mechanics lien claim against the three lots even though some of the amounts which comprised the lien related to work performed by Kuechle on other lots in the development which were still subject to Premier’s original mortgage.  This was new ground in Minnesota mechanics lien law, as the statutes did not specifically address this situation. 

What’s the moral of the story after all of this?  For Minnesota lenders who are doing everything to bring their commercial real estate loans back into conforming status, make sure to have updated title work prior to entering into any loan modification, especially where any portion of the collateral is being released.  Also, make sure to have appropriate legal representation so that your attorney can explain the legal consequences of your agreements.