• November 8, 2010

UPDATE:  Architect KKE provided services to developer, which went belly up, and the issue became whether KKE had mechanics’ lien priority over a lender/mortgagee.  The lender’s mortgage loan came after KKE had started architectural work but the lender’s lien was recorded before KKE’s lien was recorded (and before any ground-breaking on KKE’s work).

Between KKE’s lien and the bank’s lien on the same property, who has priority?  The answer hinges on whether Minnesota law requires that the lender/mortgagee, at the time that it gave its loan secured by a mortgage, had “actual notice” of “lienable work”  (the lender had “notice of lienable work”) or had “actual notice” of unpaid lienable work (which it did not have).  (The bank knew KKE had provided architectural services, knew that it was to be paid out of loan proceeds for that work, might have been able to speculate that KKE’s work was on-going and not fully paid for, but the lender did not have actual knowledge of this (and did not inquire)).  Over a dissent by Justice Paul Anderson, Justice Dietzen, for the Court ruled:

Consistent with our prior case law, when there has been no actual and visible beginning of the improvement on the ground, the priority of a lien claimant and mortgagee under section 514.05, subdivision 1, depends upon whether the mortgagee had notice of an existing lien.  We conclude that an existing lien under section 514.05 contemplates past, lienable services for which a lien claimant has not been paid.  In contrast, when a mortgagee has paid all known, outstanding invoices for lienable services at the time the mortgage is recorded, the mortgagee does not have ‘actual notice’ of an existing lien within the meaning of section 514.05.  It does not matter whether the mortgagee is aware that future architectural services might be performed; rather, the ‘actual notice’ requirement in section 514.05 pertains to actual notice of an existing lien—meaning lienable work that already has been performed.

(Ellipses and citations omitted and emphasis added.)  (So how is an architect to secure her right to payment for on-going work with a secured interest in  real property against a subsequent lender? By recording first and not relying on “actual notice” of “lienable work.”) Original post from April 14, 2010, after the jump.

[Original Post, April, 2010]:  Of interest to those who work with  or around construction law and lien priority, the Minnesota Supreme Court heard argument on April 8 on the appeal from Riverview Muir Dolan v. KKE Architects, et al., Minn. App. Case No.  A09-312.  At issue, whether a mortgage lenders’ knowledge of debt for an architect’s services on a particular property constitutes “actual notice” of a lien interest for future debt/ future architectural services related to the property for purposes of determining lien priority under Minn. Stat. 514.05.  (Lenders knew of architects’ work and claim for payment but thought the architects were fully paid off at closing. They weren’t.  The district court held that the lenders had actual notice of the architect’s prior work and lien claim, and that was sufficient to preserve the architect’s lien priority.)

The trial court held that the lender had “actual notice” of the architect’s lien.  The Court of Appeals reversed.

[I]t is difficult to understand how a party could be held to have had actual notice of a prior lien when that party knew that work had been completed, but not that a debt was owed for the work….The record supports [lender’s] assertion that the only notice they had of any debt for unpaid work owed to KKE in relation to Parcel I came from the 27 invoices, which were paid in full at the closing….KKE’s chief financial officer admitted that KKE never directly communicated with appellants regarding the Project, and that KKE never informed the closer or appellants that the 27 invoices did not represent the entire debt owed for KKE’s design services.

Larry Espel argued on behalf of KKE Architects.  Ryan Dreyer argued on behalf of Riverview, et al.  (Though Espel is a named partner in the distinguished Greene Espel law firm and an established member of the Twin Cities civil litigation bar and Dreyer, a relatively recent law school grad, it is a close question, the argument was close, and outcome is too close to call.)

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