IA Construction Corp. v. Carney

HARRELL, Judge. Appellant, IA Construction Corporation, appeals from a summary judgment entered in the Circuit Court for Harford County (Whitfill, J.) in favor of appellee, Robert E. Carney, Jr., dismissing appellant’s action to establish and enforce a mechanics’ lien against property purchased by appellee under ³⁸¹ a power of sale in the mortgage. Appellant noted a timely appeal to this Court. ISSUES 1 I. Whether the circuit court erred as a matter of law in granting summary judgment in favor of Carney.

A. Whether a mortgage foreclosure sale and purchase held after a period in which lienable work was performed and after the date a mechanics’ lien petition was filed, but before the establishment of a final lien, pursuant to the Maryland Mechanics’ Lien Law, extinguishes a lien claimant’s right to establish and enforce a lien upon the foreclosed property when the lien claimant has alleged in the action that the foreclosing purchaser mortgagee also owned or controlled the prior mortgagor owner and knew of the mortgagor owner’s inability to pay for the lienable work when the contracts for the work were made between the mortgagor owner and the lien claimant. B. Whether a foreclosing mortgagee purchaser at a foreclosure sale cannot be a bona fide purchaser for value under any circumstances, pursuant to the Maryland Mechanics’ Lien Law, when the purchase is made after a petition to establish and enforce a mechanics’ lien has been filed concerning the property foreclosed and naming the mortgagee purchaser as a respondent in the action. C. Whether a foreclosing mortgagee purchaser is a bona fide purchaser for value of residential lots sought to be liened, pursuant to the Maryland Mechanics’ Lien Law, when the lien claimant has alleged in a mechanics’ lien petition filed prior to the purchase by the mortgagee at the foreclosure sale that the mortgagee purchaser owned or controlled the prior mortgagor owner of the lots and knew of the mortgagor owner’s inability to pay ³⁸² for the lienable work when the contracts for the work were made by the mortgagor owner with the lien claimant.

II

Whether the filing of a mechanics’ lien action constitutes lis pendens with respect to the property sought to be liened and foreclosed, upon subsequent to the filing of the action by a mortgagee who was a named party to the > action. FACTS Birchwood Manor is a residential subdivision development in Harford County, Maryland, containing sixty-five residential lots on what was two tracts of land. The first tract (the “large tract”), contains lots designated numerically as Lots 1 through 58. The second tract (the “small tract”) contains lots designated numerically as Lots 59 through 65.

The large tract was apparently purchased outright from third parties, although in smaller parcels, by Birchwood Manor, Inc. (Birchwood). The small tract was purchased by appellee from third parties and subsequently transferred by deed to Birchwood, whereupon Birchwood granted appellee a mortgage, which was duly recorded on 28 June 1989. 2 Three of the seven lots on the small tract (specifically Lots 59, 61, and 62) are the subject of this appeal. In 1992, appellant entered into two construction contracts with Birchwood, dated 9 July 1992 and 20 October 1992 respectively, to repair preexisting subdivision streets with bituminous concrete and to install new curbs and gutters. Appellant, with the aid of a subcontractor, commenced work in October 1992, and completed the work under both contracts on 30 November 1992.

When appellant failed to receive payment from Birchwood in the amount of $27,269 for the work performed, it filed a Petition to Establish and Enforce Mechanics’ ³⁸³ Lien in the Circuit Court for Harford County on 24 May 1993. 3 Appellee was listed as a respondent in this action. He was served with process on 14 June 1993. On 22 June 1993, appellee declared Birchwood in default of both the first and second mortgages and, pursuant to the power of sale contained therein, initiated foreclosure proceedings in the circuit court. Notice of the foreclosure sale was sent to appellant on 28 June 1993 pursuant to Md.Rule W74a2(c).

Meanwhile, in the mechanics’ lien matter, appellee filed an Answer on 16 July. No mention was made in his Answer of the foreclosure suit that he had filed on 22 June 1993. A foreclosure sale was held on 9 July 1993 for Lots 59, 61, and 62. Appellee bid in $26,000 and became the contract purchaser of the subject properties.

On 21 July 1993, the circuit court held a show cause hearing on appellant’s petition to establish a mechanics’ lien, at which appellant was ordered by the court to add another party (who is not a party to the instant case) to the petition. On 9 August 1993, after an amended petition was filed, the circuit court granted an interlocutory lien on the small tract. The foreclosure sale was ratified by the circuit court on 8 September 1993. On 14 September 1993 appellee filed a motion for summary judgment, claiming that, because the foreclosure sale was ratified by the circuit court, appellant’s petition to establish a mechanics’ lien, as well as the interlocutory lien, must be dismissed.

Appellant filed an opposition to appellee’s summary judgment motion as well as a cross-motion for summary judgment, arguing that appellee was not a bona fide purchaser for value at the foreclosure sale and therefore the subject lots are lienable. ³⁸⁴ After a hearing on the summary judgment motions on 13 October 1993, the circuit court granted appellee’s summary judgment and struck the interlocutory lien. The court found: 1) appellee’s knowledge as a lender was not a relevant factor; 2) appellee was entitled to foreclose if Birchwood was in default; 3) the foreclosure was conceded to be valid; 4) the foreclosure occurred after all the work had been completed by appellant; and 5) the foreclosure extinguished appellant’s right to establish a mechanics’ lien. STANDARD OF REVIEW The standard of appellate review of a trial court’s grant of a motion for summary judgment is whether the trial court was “legally correct.” Heat & Power Corp. v. Air Prods. & Chems., Inc., 320 Md. 584, 591 , 578 A.2d 1202 (1990). When making a determination on summary judgment, a trial court makes no findings of fact.

King v. Bankerd, 303 Md. 98, 111 , 492 A.2d 608 (1985). Rather, the court decides whether a genuine issue of material fact exists to prevent the entry of summary judgment. Beatty v. Trailmaster Prods., Inc., 330 Md. 726, 737 , 625 A.2d 1005 (1993); see also Bond v. NIBCO, Inc., 96 Md.App. 127, 135 , 623 A.2d 731 (1993); Md.Rule 2-501(e). Under this standard, therefore, we review the trial court’s ruling as a matter of law.

Beatty, 330 Md. at 737 , 625 A.2d 1005 . DISCUSSION I. A, B & C As sub-issues A, B, and C concern appellee’s status as a bona fide purchaser for value at the foreclosure sale, we shall address them together to facilitate our discussion. Appellant contends that a mortgage foreclosure sale held after a period in which lienable work was performed, and after a petition to establish a mechanics’ lien has been filed, but before the establishment of a final lien, does not extin ³⁸⁵ guish the lien claimant’s right to establish and enforce a mechanics’ lien on the foreclosed property. 4 Specifically, appellant argues that appellee, the mortgagee/purchaser at the foreclosure sale, was not a bona fide purchaser for value and therefore takes the property subject to the outcome of appellant’s mechanics’ lien action. Section 9—102(b) of Maryland’s Real Property Article, the pertinent section of the mechanics’ lien statute, provides, in relevant part, that “[i]f the owner of land or the owner’s agent contracts for the installation of ... storm drains ... or streets to service all lots in a development of the owner’s land, each lot and its improvements, if any, are subject, on a basis pro rata to the number of lots being developed, to the establishment of a lien ... for all debts for work and material in connection with the installation.” 5 Md.Code Ann., Real Prop. § 9-102(b) (1988 Replacement Volume).

Subsections 9-102(d) and 9-102(e) of the Real Property Article provide: (d) Exemptions.—However, a building or the land on which the building is erected may not be subjected to a lien under this subtitle if, prior to the establishment of a lien in accordance with this subtitle, legal title has been granted to a bona fide purchaser for value. (e) Filing of petition constitutes notice to purchaser.— The filing of a petition under § 9-105 shall constitute notice to a purchaser of the possibility of a lien being perfected under this subtitle. ³⁸⁶ Id. § 9—102(d), (e). Appellant suggests that these two subsections, read in pari materia, “logically imply” that appellee, as mortgagee/purchaser at the foreclosure sale, must have been a bona fide purchaser for value in order to take title to the property free and clear of the mechanics’ lien action. Id. § 9-102(d).

Appellee, on the other hand, argues that section 7-105(a) of the Real Property Article is dispositive of this issue. Id. § 7-105(a). That section provides: A provision may be inserted in a mortgage or deed of trust authorizing any natural person named in the instrument, including the secured party, to sell the property or declaring the borrower’s assent to the passing of a decree for the sale of the property, on default in a condition on which the mortgage or deed of trust provides that a sale may be made. A sale made pursuant to this section or to the Maryland Rules, after final ratification by the court and grant of the property to the purchaser on payment of the purchase money, has the same effect as if the sale and grant were made under decree between the proper parties in relation to the mortgage or deed of trust and in the usual course of the court, and operates to pass all title which the borrower had in the property at the time of the recording of the mortgage or deed of trust.

Id. Relying on Southern Md. Oil, Inc. v. Kaminetz, 260 Md. 443 , 272 A.2d 641 (1971), appellee suggests that section 7-105(a) operates to extinguish appellant’s right to establish a mechanics’ lien after final ratification of a foreclosure sale to the mortgagee. In Southern Md. Oil, Southern Maryland Oil, Inc. (Southern) entered into a Lease and Agreement dated 23 March 1963 with Harry S. Lancaster and Mary A. Lancaster (Lancasters) which provided, inter alia, that Southern “shall have the first right of refusal to purchase [the demised premises] at the price and on the terms and conditions which the lessors have elected to sell.” Id. at 446 , 272 A.2d 641 . On the same day that the Lancasters entered into the Lease and Agree ³⁸⁷ ment, they had acquired the subject property from Frances L. Hardin.

The deed consummating the sale was recorded on 27 March 1963. A mortgage securing a loan of $15,080 from the Lancasters to The Augusta Building and Loan Association, Inc. (Augusta) was recorded later on the same day. 6 The Lease and Agreement was also recorded on 27 March 1963, but subsequent to the recordation of the mortgage. Notwithstanding Southern’s right of first refusal, the Lancasters, by a duly recorded deed dated 5 February 1968, conveyed to J. Lawrence Millison the reversionary interest in the subject property as well as an adjacent parcel of property. Millison subsequently defaulted on the mortgage agreement and foreclosure proceedings were instituted.

At the foreclosure sale, the subject property was bid in at $35,000 by the mortgagee by assignment, Ralph Chesser. Southern filed exceptions to the foreclosure sale. Chesser filed a demurrer to the exceptions on several grounds including, inter alia, 1) there was no allegation that the lease is a prior lien to the mortgage and in fact the lease is subordinate to the mortgage, and 2) there was no allegation that Southern had any interest in the proceeds of the sale and, therefore, no standing to file exceptions to the foreclosure proceeding. The lower court ruled that inasmuch as the lease was subordinate to the mortgage, the demurrer should be sustained.

Id. at 448-49 , 272 A.2d 641 . The sale was finally ratified on 25 March 1970. On appeal, the Court of Appeals held that Southern did have standing to file the exceptions because, as tenant under the recorded lease, Southern had an interest in the mortgaged property that would be adversely affected if the foreclosure sale was finally ratified. Id. at 449 , 272 A.2d 641 .

The Court further explained that the priority between the mortgage and the lease is not the controlling issue on the demurrer inasmuch as it is well established that it is the final ratification of the foreclosure ³⁸⁸ sale and conveyance to the purchaser after payment of the purchase price, which eliminates estates in the mortgaged premises created by the mortgagor subsequent to the mortgage. Id. at 451-52 , 272 A.2d 641 (citing Md.Code Ann., Art. 66, § 5(b) (1968 Replacement Volume (now codified at Md.Code Ann., Real Prop. § 7-105(a)) (emphasis in the original). In other words, any estate, e.g., leasehold, life estate, fee, conveyed by a mortgagor subsequent to the mortgage is eliminated by the final ratification of a foreclosure sale. Accord Smith v. Pritchett, 168 Md. 347 , 178 A. 113 (1935) (tenancy from year to year extinguished by foreclosure sale); Russum v. Wanser, 53 Md. 92 (1880) (three-year lease extinguished by