Opinion handed down September 11,
2012
In June 2008, Blue Springs
Xtreme Powersports purchased property using loan funds obtained from Hawthorn
Bank; as security for the loan, Hawthorn Bank took a purchase-money deed of
trust on the property, but failed to record it until November 2008.[2] Prior to recording the deed, Xtreme
Powersports hired two contractors, DeGeorge and KSD Christian, to make
improvements on the property. After
Xtreme failed to pay the contractors several months later, the contractors
filed a mechanic’s lien against Xtreme’s property.[3] Although Hawthorn Bank’s deed of trust was
not recorded at the time the contractor’s began making improvements on the
property, Hawthorn Bank claimed its deed had priority over the contractors’
mechanic’s liens. The Supreme Court of
Missouri looked to well-established statutory and case law regarding priority
interests between mechanic’s liens and deeds of trust on the same property.[4] Ultimately, the Court held that the
contractors’ mechanic’s liens had superior priority because Hawthorn’s deed of
trust was unrecorded at the time the contractors’ liens “attached” to the
property, which was consistent with traditional Missouri law on the subject.[5]
I. Facts & Holding
On June 4, 2008, Blue
Springs Xtreme Powersports (“Xtreme”) purchased a building and three tracts of
land.[6] To finance the purchase of the
property, Xtreme obtained a loan from Hawthorn Bank, which Hawthorn Bank
secured by taking a purchase-money deed of trust on the property.[7] However, Hawthorn Bank failed to record the
deed of trust at the time of Xtreme’s purchase of the property.[8]
Prior to its purchase of the
property, Xtreme entered into a contractual agreement with DeGeorge, a general
contractor, to remodel the building located on the property.[9] Several days later, on June 8, 2008, DeGeorge
began work on the structure, and his subcontractor, KD Christian, began work
several weeks later.[10] Both DeGeorge
and KD Christian completed work on the project pursuant to the contract with
Xtreme; however, Xtreme failed to pay DeGeorge for the remodel and, as a
result, DeGeorge was unable to pay the money it owed to KD Christian.[11]
Because of Xtreme’s
non-payment, DeGeorge filed a mechanic’s lien against the property on November
18, 2008. [12] The next day, on November
19, 2008, Hawthorn Bank recorded its purchase-money deed of trust.[13] Several months later, KD Christian also filed
a mechanic’s lien against Xtreme’s property.[14]
DeGeorge subsequently
brought an action against Xtreme in order to foreclose on its mechanics lien,
and KD Christian intervened to do the same.[15]
DeGeorge and KD Christian then brought claims against Hawthorn Bank in
an attempt to enforce their mechanic’s liens by establishing priority of their
liens over Hawthorn’s purchase-money deed of trust on the property.[16] In January 2010, DeGeorge filed a motion for
summary judgment against Hawthorn Bank and, in response; Hawthorn Bank filed
motions for summary judgment against DeGeorge and KD Christian, claiming the
superiority of its purchase-money deed of trust against their mechanic’s liens.[17] Ultimately, the trial court found that
DeGeorge’s mechanic’s lien was superior and granted its motion for summary
judgment and denied Hawthorn Bank’s motions for summary judgment against
DeGeorge and KD Christian.[18]
Furthermore, the court concluded that DeGeorge and KD Christian were
entitled to enforce and foreclose on their liens.[19] Hawthorn Bank appealed
the decision, and after an opinion by the Court of Appeals, the Supreme Court
of Missouri granted transfer pursuant to Mo. Const. art. V., sec. 10..[20]
In its opinion, the Supreme
Court of Missouri stated that competing priorities of a mechanic’s lien and a
purchase-money deed of trust are administered by operation of Missouri’s
recording statutes and the statutory rules of priority for mechanics liens enumerated
in sections 442.380 and 442.400.[21] The
Court noted that Hawthorn Bank’s purchase-money security deed of trust was an
instrument covered by section 442.380 and the consequences of failing to record
such an instrument, articulated in secetion 442.400, governed.[22] The practical effect of section 442.400
postpones the effectiveness of an unrecorded instrument against a third-party
who does not have knowledge of the instrument.[23] Accordingly, an unrecorded purchase-money
deed of trust will be invalid against third parties who do not have actual
notice of the deed.[24]
The Supreme Court of
Missouri also highlighted the relevant provisions of Missouri statutes that
govern the priority of a mechanic’s lien against other encumbrances on real
property.[25] The Court noted that the
“first-spade rule” under section 429.060, which gives a mechanic’s lien
“relation-back” priority to the date when work first commenced, applied to
DeGeorge’s lien on Xtreme’s property.[26]
Therefore, in order to determine which party had superior priority, the
Court compared the priority rules applicable to Hawthorn Bank’s purchase-money
deed of trust to the “first spade” rule applicable to DeGeorge’s and KD
Christian’s mechanic’s liens.[27]
After analyzing the
competing interests under the applicable rules , the Court concluded that
DeGeorge’s and KD Christian’s mechanic’s liens were superior to Hawthorn Bank’s
purchase-money deed of trust because Hawthorn failed to record its deed of
trust until November 19, 2008, nearly 5 months after both DeGeorge and KD
Christian had begun to commence work on Xtreme’s property.[28] As a result, Hawthorn Bank’s purchase-money
deed was ineffective against DeGeorge and KD Christian at the time there
mechanic’s liens attached to the property because neither DeGeorge nor KD
Christian had actual knowledge of Hawthorn’s purchase-money interest until it
was recorded.[29]
However, Hawthorn Bank contended that its deed of trust should have been entitled to priority.[30] Hawthorne claimed, according to the Supreme Court of Missouri’s holding in Westinghouse Electric Co. v. Vann Realty Co.[31] a purchase-money deed of trust will always be superior to mechanics’ liens, regardless of when the purchase-money deed was recorded.[32] Hawthorn Bank highlighted specific language in the Westinghouse opinion in support of its argument, which stated “[m]echanic’s liens do not take precedence over a purchase money deed of trust . . .”[33] The Court rejected Hawthorn’s argument because the result in Westinghouse was consistent with the general application of the recording and mechanic’s lien statutes because, in Westinghouse, the purchase-money deed of trust was recorded before the contractor’s commencement of work on the property.[34]
Furthermore, the Court
determined that giving support to such a broad rule in favor of purchase-money
deeds would “discourage prompt recording of liens on real estate after closing
and would frustrate the purpose of the recording statues to provide a system of
statutory priorities for encumbrances on real estate based on constructive
notice of prior encumbrances.”[35] As a
result, the Supreme Court of Missouri overruled other cases that had cited Westinghouse as authority for holding that unrecorded
purchase-money deeds of trust are entitled to priority over mechanics’ liens
that arise after transfer of legal title.[36]
Ultimately, the Supreme
Court of Missouri affirmed the trial court’s ruling and held that “the
mechanics’ liens filed by DeGeorge and KD Christian are entitled to priority
over Hawthorn Bank’s purchase-money deed of trust.”[37]
II. Legal Background
Under Missouri law, the
relative priority of a purchase-money deed of trust when compared to other
encumbrances, such as a mechanic’s lien on property, is governed by Missouri’s
recording statutes enumerated in sections 442.380 and 442.400.[38] Section 442.380 states that “[e]very
instrument in writing that conveys any real estate or whereby any real estate
may be affected, in law or equity . . . shall be recorded in the office of the
recorder of the county in which such real estate is situated.” This provision provides a centralized
depository for land-title information and “imparts notice to all persons and
all subsequent purchasers” of prior conveyances and encumbrances that are
recorded on the property.”[39] For instruments
covered by this provision, section 442.400 provides the consequences for
failing to record the instrument with the appropriate recorder’s office,
stating that “[N]o such instrument in writing shall be valid, except between
the parties thereto, and such as have actual notice thereof, until the same
shall be deposited with the recorder for record.” [40]
Therefore, under sections
442.380 and 442.400, until an instrument is recorded, it will remain
ineffective against a third party who does not have actual knowledge of the
instrument’s existence.[41] Accordingly,
the Missouri legislature enacted the recording statues in order to protect
persons who acquire an interest in real property without notice of prior
encumbrances and to “establish[] a system of statutory priorities” for
encumbrances affecting the real property.[42]
As a written instrument that
affects real estate, a purchase-money deed of trust has historically fell under
the requirements of the Missouri recording statutes.[43] Traditionally, a deed of trust is a form of
mortgage; however, to qualify as a purchase-money
deed of trust, when the property is conveyed, the buyer must execute the deed
in favor of the seller to secure the unpaid balance of the purchase price of
the property.[44] In contrast to a
purchase-money deed of trust, mechanic’s liens are not governed by Missouri’s
recording statutes because they arise by operation of statute.[45]
According to section
429.010, a mechanic’s lien arises after a person perform works on land, and the
lien attaches to any building, erection, or improvement upon the land in order
to secure payment from the owner of the land for the person’s completed work or
labor.[46] Once a mechanic’s lien arises
under section 429.010, it must be properly filed with the appropriate county
circuit clerk for it to be enforceable.[47]
However, unlike the requirements articulated in the Missouri recording
statutes for instruments, the timing related to filing a mechanic’s lien is
irrelevant for the purpose of determining “first-in-time” priority between
competing encumbrances on real property.[48]
In fact, two statutory provisions govern the priority of a mechanic’s
lien against other encumbrances on real property.[49]
For encumbrances on the
land, the “first-spade rule,” stated in section 429.060, gives the mechanic’s
lien relation-back priority to when work commenced on the land.[50] Therefore, if a valid mechanic’s lien arises
on the land when work begins, and the lien is filed with the county clerk at
some point later in time, the lien will have priority over any third-party
encumbrance attached after the date
work began.[51] In contrast, a
mechanic’s lien may also attach to a structure and section 429.050 gives liens
of this type priority over all other encumbrances.[52] As a result, under these provisions, the
priority of a mechanic’s lien will vary based on the type of property, i.e., a
mechanic’s lien on land will be given relation-back priority under section
429.060, whereas a mechanic’s lien on a building, erection or improvement will
be given complete priority under section 429.050.[53]
In the context of priority
issues between purchase-money deeds of trust and mechanic’s liens, the
Restatement exception will apply if a mechanic’s lien attaches, i.e., work is
commenced, on a buyer-mortgagor’s property prior to the buyer acquiring “legal
title” to the land.[54] In that
scenario, Missouri courts have held that the mechanic’s lien only attaches to
“equitable title” in the property, as opposed to “legal title,” because the
lien cannot attach to a greater interest than that held by the buyer.[55] As a result, the purchase-money deed of trust
is superior to the mechanic’s lien, even though the purchase-money deed of
trust attached after the commencement of work on the property and was
unrecorded at that time.[56]
In Missouri, given that
complete priority is granted to mechanic’s liens attached to structures,
erections or improvements, priority controversies have traditionally arisen
between deeds of trust and mechanics’ liens that are attached to the same land.[57] As a result, the determination of priority
between these two encumbrances has required the application of the recording
statutes for deeds of trust and the “first-spade” rule for mechanic’s liens.[58] According to the majority of established
Missouri case law, these rules apply to provide that a deed of trust recorded
after the commencement of work on the land is inferior to any mechanic’s liens
arising on the land from that work.[59]
Therefore, in such a situation, a mechanic’s lien will have priority.[60]
However, Missouri courts
have applied a narrow exception to the recording statutes governing deeds of
trust in situations where the buyer-mortgagor subjects the relevant property to
an encumbrance prior to receiving title to the property under a contract of
sale that is financed by a purchase-money mortgage.[61] Under this circumstance, courts have applied
section 7.2(b) of the Restatement (Third) of Property (Mortgages) or the
“common legal learning” exception.[62]
The exception has been imposed to protect the purchase-money mortgage
from preexisting liens or claims against the mortgagor/buyer that attach
simultaneously to the newly acquired real estate and would otherwise be
entitled to priority.[63]
IV. Comment
The Supreme Court of
Missouri’s decision in DeGeorge was
consistent with the Missouri recording and mechanic’s lien statutes, as well as
established case law regarding priority interests between mechanic’s lien and
unrecorded purchase-money deeds.
When analyzing the merits of
Hawthorn Bank’s priority claim, the Court correctly noted that the Missouri
recording statue, section 442.400, explicitly states those instruments like
purchase money deeds are not valid against third party liens on the same
property until they are recorded. As to DeGeorge and KD Christian’s priority
argument, the Court properly looked to the explicit language of Missouri’s
mechanic’s lien statute and “first-spade” rule.
Additionally, the Supreme Court of Missouri noted that prior decisions
have traditionally held that a mechanic’s lien that attaches to a debtor’s
property will take priority over a creditor’s purchase-money deed of trust on
the same property, if the creditor fails to properly record the deed before the
mechanic’s lien attaches. Therefore, the
Court appropriately concluded that DeGeorge and KD Christian, as contractors,
were entitled to priority under both Missouri statutory and common law.
Furthermore, the Supreme
Court of Missouri properly rejected Hawthorn Bank’s argument that
purchase-money deeds of trust should be given priority over all other prior
mechanic’s liens on a property, regardless if the deed is recorded or not.[64] Hawthorne’s misguided argument was based on
the broad language of the Supreme Court of Missouri‘s1977 holding in Westinghouse Electric Co. v. Vann Realty Co..[65] Despite this generous language, the DeGeorge court correctly recognized that a strict
application of that broad statement would be contrary to well-established law
and inconsistent with the plain language of the Missouri recording statutes.[66]
The Court also noted the facts of Westinghouse were incompatible with the facts in DeGeorge because in Westinghouse
the purchase-money deed found to have priority was recorded prior to
commencement of work by the general contractor, and thus, was consistent with
the general application of Missouri’s recording statute.
Ultimately, the Court’s
holding was straight cash-money.
- Haden Crumpton
[1] No. SC91897
(Mo. Sept. 11, 2012) (en banc), available at
http://www.courts.mo.gov/file.jsp?id=56681. The West reporter citation is Bob
DeGeorge Assoc., Inc. v. Hawthorn Bank, 377 S.W.3d 592 (Mo. 2012) (en banc).
[2] Id. at 1.
[3] See id. at
7.
[4] See id. at
10.
[5] See id. at
12.
[6] Id. at 2
[7] Id.
[8] Id.
[9] Id. at
2.
[10] Id.
[11] Id.
[12] Id. at 3.
[13] Id.
[14] Id.
[15] Id.
[16] Id.
[17] Id.
[18] Id.
[19] Id. at
3-4.
[20] Id. at
4.
[21] Id.
[22] Id.
[23] Id. at 5;
see also Godwin v. Gerling, 239 S.W.2d 352, 360 (Mo. 1951).
[24] DeGeorge,
No. SC91897, slip op. at 6.
[25] Id. at 7.
[26] See id. at
8.
[27] See id.
[28] See id. at
9-10.
[29] See id. at
10.
[30] See id.
[31] 568 S.W.2d
777 (Mo. banc 1978).
[32] DeGeorge,
No. SC91897, slip op. at 10.
[33] Id.
(quoting Westinghouse Electric Co. v. Vann Realty Co., 568 S.W.2d 777, 781 (Mo.
banc 1978)).
[34] Id. at 11.
[35] Id. at 16.
[36] Id.
[37] Id.
[38] See id. at
5.
[39] Id.; see
also Godwin v. Gerling, 239 S.W.2d 352, 360 (Mo. 1951).
[40] DeGeorge,
No. SC91897, slip op. at 5.
[41] Id. at
5-6; see also Smith v. Equitable Life Assur. Soc. of U.S., 448 S.W.2d 588,
594-95 (Mo. 1970).
[42] DeGeorge, No. SC91897, slip op. at 6; see also
Dreckshage v. Cmty. Fed. Sav. & Loan Ass’n, 555 S.W.2d 314, 319 (Mo. banc
1977).
[43] DeGeorge,
No. SC91897, slip op. at 6.
[44] Id.
[45] Id.
[46] Id. at
7
[47] See §
429.080, RSMo Supp. 2011; see also Sears, Roebuck & Co. v. Seven Palms
Motor Inn, Inc., 530 S.W.2d 695, 698 (Mo. banc 1975).
[48] See
DeGeorge, No. SC91897, slip op. at 7.
[49] Id. at
8.
[50] Id.
[51] See id.
[52] See
id.
[53] Id.
[54] See id.
[55] Russell v.
Grant, 26 S.W. 958, 961 (Mo. 1894).
[56] Schroeter
Bros. Hardware Co. v. Croatian “Sokol” Gymnastic Ass’n, 58 S.W.3d 995, 1007
(Mo. 1932).
[57] DeGeorge,
No. SC91897, slip op. at 9.
[58] Id.
[59] Id.; see
also H.B. Deal Const. Co. v. Labor Disc. Center, Inc., 418 S.W.2d 940, 952 (Mo.
1967); Riverside Lumber Co. v. Schafer, 158 S.W. 340, 342-43 (Mo. 1913); Dave
Kolb Grading, Inc. v. Lieberman Corp, 837 S.W.2d 924, 934 (Mo. App. 1992)
[60] See DeGeorge.,
No. SC91897, slip op. at 12.
[61] See id.
[62] See id. at
12-13.
[63] Id. at
13.
[64] See id.
[65] See Westinghouse, 568 S.W.2d at 781 (Mo. banc
1977).
[66] See DeGeorge, No. SC91897, slip op. at 11.
