METAL SALES MANUFACTURING CORPORATION v. SHELLI NEWTON and RODNEY NEWTON d/b/a S&R POULTRY CONSTRUCTION, BOONE, SR. and RUTH BOONE; ROBERT J. BOONE, JR. and MOLLY A. BOONE; and FARMERS' BANK & TRUST COMPANY AND ROGERS MANUFACTURING CORPORATION v. ROBERT J. BOONE, SR. and RUTH BOONE; ROBERT J. BOONE, JR. and MOLLY A. BOONE; and FARMERS' BANK & TRUST COMPANY
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RENDERED: April 23, 1999; 10:00 a.m.
TO BE PUBLISHED
C ommonwealth O f K entucky
C ourt O f A ppeals
NO.
1998-CA-000204-MR
METAL SALES MANUFACTURING CORPORATION
v.
APPEAL FROM McLEAN CIRCUIT COURT
HONORABLE DAVID H. JERNIGAN, JUDGE
ACTION NO. 96-CI-000086
SHELLI NEWTON and RODNEY NEWTON
d/b/a S&R POULTRY CONSTRUCTION,
an Arkansas Partnership; ROBERT J.
BOONE, SR. and RUTH BOONE; ROBERT J.
BOONE, JR. and MOLLY A. BOONE; and
FARMERS’ BANK & TRUST COMPANY
AND
NO.
APPELLEES
1998-CA-000262-MR
ROGERS MANUFACTURING CORPORATION
v.
APPELLANT
APPELLANT
APPEAL FROM McLEAN CIRCUIT COURT
HONORABLE DAVID H. JERNIGAN, JUDGE
ACTION NO. 96-CI-000086
ROBERT J. BOONE, SR. and RUTH BOONE;
ROBERT J. BOONE, JR. and MOLLY A. BOONE;
and FARMERS’ BANK & TRUST COMPANY
APPELLEES
OPINION
REVERSING
** ** ** ** **
BEFORE:
HUDDLESTON, McANULTY AND SCHRODER, JUDGES.
McANULTY, JUDGE: This is a consolidated appeal in which we must
decide whether the trial court correctly determined that a
mortgage had priority over two materialman’s liens.
Because we
find that a part of the mortgage was not for value and that a
materialman’s lien is created when labor is performed or
materials are furnished pursuant to contract, we reverse the
decision of the trial court.
An extensive review of the facts and chronological
events is necessary.
In 1996, Appellees Robert Boone Sr., Ruth
Boone, Robert Boone, Jr. and Molly Boone (the Boones) contracted
with Shelly Newton and Rodney Newton, d/b/a S&R Poultry
Construction (S&R) to build chicken houses on their farm in
McLean County.
Appellants Metal Sales Manufacturing Corporation
(Metal Sales) and Rogers Manufacturing Corporation (Rogers)
supplied materials for the project, pursuant to contracts with
S&R.
Rogers supplied trusses, with its last delivery occurring
on July 22, 1996.
Metal Sales furnished rolled form metal from
June 25, 1996 to July 30, 1996.
The Boones obtained financing for their project from
Appellee Farmers’ Bank & Trust Company (Farmers’ Bank).
On July
25, 1996, the Boones and Farmers’ Bank entered into an agreement
in which the bank committed to loan the Boones $1,400,000.00 for
the project and a note and mortgage were executed.
The mortgage
was recorded in the county clerk’s office on July 29, 1996.
At some point the Boones became dissatisfied with S&R
and terminated the contract between them.
The Boones then
arranged for another contractor to complete the job.
Appellants
Metal Sales and Rogers never received payment for the materials
they provided.
Metal Sales and Rogers filed lien statements
which were recorded in the McLean County Clerk’s office on
September 10 and September 11, 1996, respectively.
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On October 16, 1996, Metal Sales filed an action to
enforce its materialman’s lien pursuant to KRS 376.010 and joined
the other lienholders as parties.
The trial court referred the
matter to the Master Commissioner.
After a hearing and briefs
submitted by the parties, the Commissioner issued her report,
finding that prior to the execution of the $1,400,000.00 note
Farmers’ Bank made three “bridge” loans which were “rolled over”
and repaid to the bank when the note and mortgage were executed
on July 25, 1996.
The Commissioner further found that this
amount of the mortgage, a sum of $186,000, was not “for value”
according to KRS 376.010 and could not have priority over the
materialman’s liens.
The parties filed exceptions to the Report of the
Master Commissioner and the trial court held a hearing.
The
trial court entered an order denying all exceptions, save that of
Farmers’ Bank regarding the issue of the bridge loans and whether
that amount was “for value”.
The trial court held that the
entire mortgage was in fact “for value”, therefore Farmers Bank
had priority.
In so concluding, the trial court distinguished
Cardinal Kitchens, Inc. v. Home Supply Co., Ky., 467 S.W.2d 775
(1971) from the case sub judice.
The trial court further
concluded that KRS 382.520 applied to give the mortgage priority
because materialman’s liens are deemed “created” when they are
filed.
This appeal followed.
Appellants assert that the trial court erred in
determining that their materialman’s liens were inferior to the
mortgage of Farmers’ Bank.
They argue first that the trial court
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improperly concluded that the mortgage was given “for value” and
“without notice” of the materialman’s liens pursuant to KRS
376.010.
They next contend that KRS 382.520 does not apply
because the trial court improperly concluded that a materialman’s
lien is not “created” until it is filed.
We first address the “for value” argument.
KRS 376.010
states that a provider of labor or materials for construction
shall have a lien on the land on which the improvements are made.
KRS 376.010(1).
The statute further provides that the lien on
the land shall be superior to any mortgage or encumbrances
created subsequent to the beginning of the labor or furnishing of
the materials and the lien shall relate back to the time of the
commencement of the labor or the furnishing of the materials.
KRS 376.010(1).
However, an exception is listed in subsection
(2), which states:
The lien shall not take precedence over a
mortgage or other contract lien or bona fide
conveyance for value without notice, duly
recorded or lodged for record according to
law, unless the person claiming the prior
lien shall, before the recording of the
mortgage or other contract lien or
conveyance, file in the office of the county
clerk of the county wherein he has furnished
or expects to furnish labor or materials, a
statement showing that he has furnished or
expects to furnish labor or materials, and
the amount in full thereof.
There is no question that the Appellants failed to file such a
statement before the mortgage was recorded.
Therefore, in order
to determine whether the trial court erred in finding that the
mortgage of Farmers’ Bank had priority over the materialman’s
liens, we must determine whether the mortgage was given “for
-4-
value” and “without notice” of the materialman’s liens.
Appellants rely, as they did in the lower court, on Cardinal
Kitchens, Inc. v. Home Supply Co., Ky., 467 S.W.2d 775 (1971).
This case involved the determination of priority between a
materialman’s lien and a mortgage taken by a different supplier
of materials.
The appellant held a mortgage on two tracts of
land in the amount of $7,502.53.
The consideration for the note
had been materials supplied to the owner-builder of fifteen
separate construction projects on the lots in question, as well
as on other lots, before the mortgage was taken.
The lower court
had held that appellant’s mortgage was superior to the appellee’s
materialman’s lien, to the extent of the materials furnished by
the appellant for the project on the lots encumbered by the
mortgage but not for materials provided to the remaining
projects.
The former Court of Appeals held that:
On the dates appellant’s mortgages were
obtained and recorded the value of materials
furnished for the Lot No. 1 project was as
much a preexisting debt as were any of the
other obligations owed for the other fourteen
projects. If any of these transactions were
preexisting debts, all were preexisting
debts. It follows, therefore, that the
entire mortgage was not “for value” and that
it may not be a basis for priority over the
appellee’s materialman’s lien.
Id. at 777.
In other words, the court based its decision on the
fact that the mortgage was supported by preexisting debt rather
than present consideration and that this was true as to the
entire mortgage and not only to that amount which covered
materials provided to the project in question.
-5-
The trial court in the case sub judice held that the
Master Commissioner and the Appellants improperly relied on
Cardinal Kitchens, supra.
The court distinguished that case by
the fact that only part of the mortgage was for materials
provided to the project at issue whereas in the present case, the
“bridge” loans were made entirely for the benefit of the chicken
house construction project.
We see the distinction made by the
trial court but conclude that it is immaterial in the application
of the law.
A preexisting obligation is preexisting regardless
of the purpose for which it was incurred.
The fact that the
preexisting debt was incurred on the construction project at
issue does not magically transform it into present consideration;
it remains a preexisting obligation and is therefore not
considered “for value” under KRS 376.010(2).
Because we find
that the trial court erred in determining that the entire
mortgage was given “for value”, it is unnecessary to address
whether the mortgage was given “without notice”.
The Court now turns to the application of KRS 382.520.
This statute provides that a construction mortgage, as is present
in this case, “shall be superior to any liens or encumbrances of
any kind created after recordation of such mortgage, even to the
extent of sums advanced by a lender with actual or constructive
notice of a subsequently created lien.”
KRS 382.520(2).
As
previously stated, the trial court held that materialman’s liens
are not “created” until they are filed.
Therefore, because the
liens were filed in September and the mortgage was recorded in
July, the trial court determined that the mortgage is superior.
-6-
The issue of when a materialman’s lien is “created”
pursuant to KRS 382.520 is one of first impression.
Appellants
urge us to hold that a materialman’s lien is created upon the
delivery of labor or materials and is perfected upon the filing
of a lien statement.
We must agree for several reasons.
Firstly, the plain language of KRS 376.010 supports our
decision.
This statute provides that a person who performs labor
or furnishes materials “shall have” a lien on the land and
improvements.
The language does not state that the person has a
right to obtain or create such a lien, but that the person shall
have a lien.
Moreover, subsection (2) indicates that the lien
“shall not take precedence over” a mortgage, other contract lien
or conveyance for value without notice when a statement regarding
the lien is filed with the county clerk’s office prior to the
subsequent mortgage, lien or conveyance.
KRS 376.010(2).
In
other words, the lien exists but in order to perfect the lien and
provide notice, a statement must be filed.
Secondly, the language in KRS 376.080 evidences that a
lien is created before it is filed.
This statute dictates that a
lien provided for in KRS 376.010 shall be dissolved unless the
claimant files a lien statement within six months after the
claimant ceases to perform labor or furnish materials.
As Rogers
correctly argues, a lien cannot be dissolved before it is
created.
Therefore, according to KRS 376.080, a lien is created
before a statement is filed.
Filing the statement serves to
perfect a lien that has already been created when the labor or
materials were first provided.
-7-
In this case, had the legislature used the term
“recorded” rather than “created” in KRS 382.520, the mortgage
would be superior to Appellants liens.
However, we find that the
terms “recorded” and “created” are not interchangeable as
Appellees suggest.
Accordingly, we hold that for the purposes of
KRS 382.520 a materialman’s lien is “created” once labor is
performed or materials are furnished pursuant to a contract or
written consent as required in KRS 376.010.
Because both
Appellants had begun furnishing materials before the Farmers’
Bank recorded the mortgage, the mortgage is not superior to the
materialman’s liens as they were created before the mortgage was
recorded.
The McLean Circuit Court judgment is vacated and this
case is remanded for a new judgment to be entered consistent with
this opinion.
ALL CONCUR.
BRIEF FOR APPELLANT METAL
MANUFACTURING CORPORATION:
BRIEF FOR APPELLEE ROBERT J.
BOONE, SR., RUTH BOONE, ROBERT
J. BOONE, JR. AND MOLLY A.
BOONE:
R. Michael Sullivan
Owensboro, Ky
William G. Craig, Jr.
Owensboro, KY
BRIEF FOR APPELLANT ROGERS
MANUFACTURING CORPORATION:
BRIEF FOR APPELLEE FARMERS’
BANK & TRUST COMPANY:
Edwin A. Jones
Elizabeth F. Bird
Henderson, KY
J. Christopher Hopgood
Henderson, KY
No brief filed for Appellees
Shelli Newton and Rodney
Newton d/b/a S&R Poultry
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