IA Construction Corp. v. Carney

RODOWSKY, Judge. This case involves the mechanics’ lien law (the Act), Md. Code (1974, 1996 Repl.Vol.), §§ 9-101 through 9-114 of the Real Property Article. 1 In IA Construction Corp. v. Carney, 104 Md.App. 378 , 656 A.2d 369 (1995), the Court of Special Appeals held that a mortgage lender “at the time he was granted legal title ... via mortgage in 1989, was a bona fide purchaser for value, and therefore took free and clear of [the mechanic’s lien claimant’s] right to establish a mechanics’ lien when [the lender] subsequently obtained beneficial and equitable title to the subject property at the foreclosure sale.” Id. at 392 , 656 A.2d at 376 . We granted the lien claimant’s petition for certiorari, 339 Md. 445 , 663 A.2d 1271 (1995), and we shall affirm, but for reasons that differ from those of the Court of Special Appeals. The material facts of this case are undisputed.

They arise out of the attempted development by Birchwood Manor, Inc. ⁷⁰⁶ (BMI) of a residential community in Harford County. Through various conveyances BMI had assembled a tract of land that was subdivided into sixty-five residential lots. One of the conveyances into BMI was by deed dated June 28, 1989 from the respondent, Robert E. Carney, Jr. (Carney). That deed recited a consideration of $135,000.

That same day Carney took back a mortgage on the property that he had conveyed, securing $35,000, all due and payable on December 1, 1989. Both instruments were promptly and duly recorded. Three lots created out of the Carney conveyance, Nos. 59, 61, and 62, are the subject of the mechanic’s lien claimed in this case. The petitioner, IA Construction Corporation (IA), entered into contracts with BMI on July 9 and October 20, 1992 for construction and repair work on streets, curbs, and gutters.

The last of the work is alleged to have been done on November 30, 1992. BMI did not pay IA which, on May 24, 1993, petitioned to establish a mechanic’s lien in the amount of $27,269. 2 Carney, on June 22, 1993, instituted foreclosure of the mortgage from BMI to him, and provided notice thereof to IA. We were advised by IA at oral argument that BMI had curtailed the principal of the Carney mortgage by $9,000 prior to foreclosure. At the foreclosure sale, held July 9, 1993, Carney bought in the property for $26,000. “IA concedes that it appears the foreclosure proceedings were correctly instituted and finalized.” Brief for Petitioner at 13.

In the subject mechanic’s lien action the Circuit Court for Harford County on July 20, 1993 held a show cause hearing under § 9-106(a) and Maryland Rule BG73.C, concluded that IA had established probable cause, and, by an order under § 9—106(b)(3) and Rule BG73.d.2, established an interlocutory mechanic’s lien in the amount of $27,269 in favor of IA that was docketed August 10,1993. ⁷⁰⁷ The mortgage foreclosure sale to Carney was ratified September 8, 1993. 3 Rule W74.e requires an audit following mortgage foreclosure sales. Under the facts of the instant matter, the report of the auditor would have reflected that no money was available for distribution to lienors junior to Carney. Carney moved for summary judgment in the subject mechanic’s lien action after ratification of the mortgage foreclosure sale. He argued to the circuit court that, even if IA were to establish a final lien, it would not take priority over Carney’s previously recorded mortgage.

IA’s response was that, when the foreclosure sale was held on July 9, 1993, IA was merely a general creditor of BMI, that the mechanic’s lien would not be established until the entry of a “final” order, and that because IA had no interest in the property at the time, the foreclosure sale extinguished nothing. Further, IA argued that Carney could not be a bona fide purchaser within the contemplation of § 9-102(d). Because IA had instituted its mechanic’s lien action before Carney instituted his mortgage foreclosure action, IA submitted that § 9-102(e) applied to prevent Carney from becoming a bona fide purchaser. The two subsections of § 9-102 to which IA referred read as follows: “(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.” ⁷⁰⁸ Carney’s reply was that, if by operation of § 9-102(e) he was on notice as of May 24, 1993, he was still protected by § 9-102(d) because, under the title theory of mortgages, Carney had become a bona fide purchaser on June 28, 1989 when he took the mortgage from BMI.

IA rejoined by arguing that the statutory construction advocated by Carney gave no protection to mechanics who worked on property that was subject to a mortgage and would destroy the purpose of the Act. The basis of the circuit court’s grant of summary judgment for Carney is encapsulated in the following statement: “It’s undisputed that a valid foreclosure has taken place, and in my mind, as a matter of law, that defeats the Plaintiffs claim for a Mechanics Lien for work performed on the property prior to the foreclosure proceedings.” 4 In the circuit court’s view it made no difference whether the mechanic’s lien claim was “perfected” or “unperfected.” The dispute as to whether Carney had actual knowledge that IA had not been paid by BMI was not considered to be a dispute of a material fact. IA appealed to the Court of Special Appeals. In its brief to that court IA submitted that, contrary to the circuit court’s holding, the mortgage foreclosure had not extinguished the mechanic’s lien claim because nothing in the Act effected that result.

In apparent anticipation of arguments by Carney, IA also contended that Carney was not a bona fide purchaser for a number of reasons, including lis pendens. ⁷⁰⁹ In his four page brief to the Court of Special Appeals, Carney rested exclusively on extinguishment of the mechanic’s lien by the ratification of the foreclosure sale, citing § 7-105(a) and Southern Maryland Oil, Inc. v. Kaminetz, 260 Md. 443 , 272 A.2d 641 (1971). Section 7-105(a) provides that a mortgage foreclosure sale “after final ratification by the court and grant of the property to the purchaser on payment of the purchase money ... operates to pass all the title which the borrower had in the property at the time of the recording of the mortgage or deed of trust.” Southern Maryland Oil held, inter alia, that a lease of realty that was subject to a mortgage was extinguished when the mortgage was later foreclosed. 260 Md. at 449-50, 457 , 272 A.2d at 644-45, 649 . The Court of Special Appeals affirmed. IA Constr.

Corp., 104 Md.App. at 393 , 656 A.2d at 377 . It collapsed IA’s noextinguishment argument into IA’s no-bona fide purchaser argument. Id. at 384-85 , 656 A.2d at 372-73 . The court considered the amount available from the mortgage foreclosure sale for distribution to junior lienors to be irrelevant, because it viewed IA’s contention to be that “its right to establish a mechanics’ lien against the foreclosed property has continued vitality after the foreclosure sale.” Id. at 385 n. 4, 656 A.2d at 372 n. 4.

The court also rejected Carney’s argument that the mortgage foreclosure had extinguished IA’s claimed lien. Id. at 388-89 , 656 A.2d at 374 . Because Southern Maryland Oil involved the extinguishment of an estate by a mortgage foreclosure, the court construed § 7-105(a) to distinguish between estates on the one hand, and liens and encumbrances on the other. Id.

From this the court concluded that, in the operation of § 7-105(a), the extinguishment of interests junior to a foreclosed mortgage was limited to later estates. Id. Consequently, the court held that § 7-105(a) “does not operate to extinguish liens and encumbrances incurred subsequent to the ⁷¹⁰ mortgage.” 104 Md.App. at 388 , 656 A.2d at 374 . 5 The Court of Special Appeals then addressed the bona fide purchaser protection provisions of § 9-102(d). The court said that Carney had acquired legal title to the property when the mortgage was made in 1989, and equitable title when the mortgage was foreclosed.

Id. at 390, 656 A.2d at 375 . Thus, reasoned the court, if Carney were a bona fide purchaser when he acquired legal title, he would be protected by § 9-102(d). Id. IA submitted that Carney could not be a bona fide purchaser because he was on notice of a possible lien (1) by the filing of the petition to establish the mechanic’s lien, and (2) by his knowledge, at least as alleged by IA, that BMI had not paid IA.

Id. at 390-91, 656 A.2d at 375 . Because both of these contentions involved events that “occurred subsequent to the passage of legal title to [Carney] via mortgage in 1989,” the events “have no effect on [Carney’s] status as a bona fide purchaser for value.” Id. at 391 , 656 A.2d at 376 . The same analysis also disposed of IA’s lis pendens contention. Id. at 393 , 656 A.2d at 376-77 .

We granted IA’s petition for certiorari. In this Court, IA advances the arguments it made to the Court of Special Appeals. In addition, IA argues that “the appealed decision can be taken to the logical conclusion that mortgaged property in Maryland can never be subjected to a mechanics’ lien for work performed subsequent to the granting of the mortgage, although under contract with the record owner, since legal title passed by such granting and the mortgagee ‘purchased’ the property in good faith at that time.” Brief for Petitioner at 8. Carney reads the opinion of the Court of Special Appeals in the same way as IA.

In this Court Carney “asserts that the status of the Mortgagee as a bona fide purchaser pursuant to 9-102(d) of the [Act] is not ⁷¹¹ the test upon which the case should be resolved.” Brief for Appellee at 5. I The interlocutory lien in favor of IA in this case was not established until after the property had been sold at foreclosure sale. “[T]he sale of the mortgaged premises ... virtually foreclose^] the mortgage and divest[s] all rights of redemption which had remained in the mortgagor until the sale.” Union Trust Co. v. Biggs, 153 Md. 50, 55 , 137 A. 509, 512 (1927). “After the foreclosure sale the purchaser had the equitable interest in the land commensurate with that conveyed by the mortgage deed, and [the purchaser] was entitled to the legal title upon the final ratification of the sale by the court and the payment of the purchase money.” Id. “[A]fter the sale, equity regard[s] the property in the land as in the buyer.” Id. at 56 , 137 A. at 512 . “The day of sale ... [marks] the close of the period in which any creditor could acquire a lien upon the mortgagor’s interest in the mortgaged land or equity of redemption by simply obtaining a judgment against the mortgagor, since a judgment lien upon real estate or an equitable interest in land only exists because it gives the judgment creditor the right to make his debt out of the land or equitable interest in land of the judgment debtor, with the correlative liability of such property of the debtor to be sold by way of execution for that purpose.” Id. See also Pagenhardt v. Walsh, 250 Md. 333 , 243 A.2d 494 (1968); Waring v. Guy, 248 Md. 544 , 237 A.2d 763 (1968); Butler v. Daum, 245 Md. 447 , 226 A.2d 261 (1967); Wethered v. Alban Tractor Co., 224 Md. 408 , 168 A.2d 358 , cert. denied 368 U.S. 830 , 82 S.Ct. 53 , 7 L.Ed.2d 33 (1961); Billingsley v. Lawson, 43 Md.App. 713 , 406 A.2d 946 , cert. denied, 286 Md. 743 (1979), and cert. denied, 446 U.S. 919 , 100 S.Ct. 1853 , 64 L.Ed.2d 273 (1980); In re De Souza, 135 B.R. 793 (Bankr. D.Md.1991); In re Wallace, 31 B.R. 64 (Bankr.D.Md.1983).

This rule of law is similar to the rule under which a judgment against the vendor of realty, docketed after an equitable ⁷¹² conversion has occurred as the result of the contract of sale, does not effect a lien on the realty. See Caltrider v. Caples, 160 Md. 392 , 153 A. 445 (1931). In York Roofing, Inc. v. Adcock, 333 Md, 158, 634 A.2d 39 (1993), and in Himmighoefer v. Medallion Indus., Inc., 302 Md. 270 , 487 A.2d 282 (1985), we analogized to the lien of judgments in holding that the mechanics’ liens sought in those cases did not attach to the property. In Himmighoefer we considered that a petition for a mechanic’s lien, filed after the contract of sale, could give no greater rights to the lien claimant than would a judgment against the owner-vendor entered after the contract of sale.

Id. at 278-81 , 487 A.2d at 286-88 . In York Roofing the lien claimants argued that the purchasers knew that the lien claimants had not been paid for work that was done after the contract of sale had been effected and before the deed had been delivered. Id. at 169, 634 A.2d at 44 . We held that “that knowledge, without more, would be insufficient to expose [the purchasers] to a lien established after equitable title to the property had passed to them.” Id.

If the analogy to judgments applies under the facts of the instant matter, then the interlocutory lien did not attach to the property after Carney had purchased at the foreclosure sale. The instant matter, however, is factually distinguishable from York Roofing and Himmighoefer . In the former case the petition to establish a mechanic’s lien was filed after the contract of sale had been formed and the deed was delivered, York Roofing, 333 Md. at 161 , 634 A.2d at 40 , and in the latter, the petition to establish a mechanic’s lien was filed after the contract of sale was formed, Himmighoefer, 302 Md. at 271 , 487 A.2d at 282-83 . In the matter now before us, the petition to establish the mechanic’s lien antedated the