Wolf Organization, Inc. v. Oles

BYRNES, Judge. In this case, we are called upon to decide whether one who executes a contract with an owner/builder to purchase real property improved by a dwelling to be constructed during the executory period is an “owner” of the property, whose equitable interest may be reached by a mechanics’ lien, under the Maryland Mechanics’ Lien Statute, Md.Code, (1976, 1996 Repl.Vol.), §§ 9-101 through 9-114 of the Real Property Article (“R.P.”). Appellant Wolf Organization, Inc., trading as “The Lumber Yard” (“Wolf’), filed a petition in the Circuit Court for Carroll County to establish and enforce a mechanics’ lien against property known as 3839 Dakota Road. The petition was filed after the property, including a newly constructed single-family residence, had been conveyed in fee simple to appellees Michael T. Oles and Kathleen C. Hilbert, who were named as defendants.

The circuit court denied Wolfs petition. On appeal, Wolf presents the following questions for review, which we have rephrased slightly: I. Whether the trial court erred in ruling that Oles and Hilbert, as contract purchasers, were not “owners” of the property, within the meaning of Section 9-101(f) of the Mechanics’ Lien Statute. ³⁶² II. Whether the trial court erred in determining that service of a notice of intention to claim mechanics’ lien upon Oles, when he was an equitable owner but not a legal owner of the property, did not comport with Section 9-104(a) of the Mechanics’ Lien Statute. We hold that the lower court correctly ruled that Oles and Hilbert were not “owners” of the property within the meaning of the Maryland Mechanics’ Lien Statute, and that their equitable interest in the property, and hence the property itself, was not subject to a mechanics’ lien.

Although the circuit court erred in determining that Wolf did not comply with the notice requirement of Section 9-104 of the Mechanics’ Lien Statute, that error was harmless, as § 9-104 did not apply to the claim before it. Accordingly, we affirm the court’s denial of the petition to establish mechanics’ lien. FACTS On June 14, 1995, Marsar Development Corporation, trading as Wyatt Homes (“Wyatt”), purchased a tract of land in Carroll County, Maryland, comprising Lots 51 through 84 of “Shiloh Run,” a planned residential housing development. On February 19, 1996, Michael T. Oles and his fiancee, Kathleen C. Hilbert, signed a contract, entitled “Builder’s Agreement,” in which Wyatt agreed to sell and Oles and Hilbert agreed to purchase the property designated 3839 Dakota Road, in Shiloh Run.

This property was identified, in the “Builder’s Agreement,” as Lot 54 of Shiloh Run, improved by a “Lauren III model” house, to be constructed by Wyatt “substantially according to plans and specifications on file with [Wyatt] and the selection sheet signed by [Oles and Hilbert].” Upon execution of the “Builder’s Agreement,” Oles and Hilbert paid a $3,200.00 deposit to Wyatt, and committed themselves to pay the balance of the $151,000.00 purchase price at closing. Paragraph 32(e) of the “Builder’s Agreement” provided: CHANGES, ALTERATIONS TO HOME: No alterations, changes, or additions shall be made in the construction of the dwelling nor shall any extra work be performed or ³⁶³ materials added by Seller unless approved by a duly authorized agent of Seller in writing and payment is made for such changes at the time requested by Buyer. It is understood that Purchaser is purchasing a completed dwelling, and that Seller is not acting as a contractor for Purchaser in the construction of the dwelling and that Purchaser shall acquire no right, title or interest in the dwelling except the right and obligation to purchase the same in accordance with the terms of this Contract upon its completion. Equitable title shall remain vested in Seller until delivery of the deed.

(italics supplied; underlining in original). After Oles and Hilbert signed the “Builder’s Agreement,” Wyatt started construction of the Lauren III model house. It contracted with Wolf to supply certain materials to be used in the construction of several dwellings at Shiloh Run. Between June 11, 1996 and June 28, 1996, Wolf delivered, to Lot 54 of Shiloh Run, building materials valued at $12,977.61, which were used by Wyatt in constructing the Lauren III model house.

Sometime between June 28,1996 and August 14, 1996, Wyatt paid Wolf for the building materials by issuing checks to it. The drawee bank returned Wyatt’s checks unpaid, for insufficient funds. On August 19, 1996, Oles was served with a certified letter, return receipt requested, from Wolf, dated August 14, 1996 and captioned “NOTICE TO OWNER OR OWNER’S AGENT OF INTENTION TO CLAIM A LIEN.” In the letter, an attorney for Wolf attested, upon information and belief, that Wolf had supplied building materials that were used to construct a house on Lot 54 of Shiloh Run and that the $12,977.61 value of those materials was due and unpaid. Closing on the 3839 Dakota Road property took place on September 6, 1996.

The settlement sheet for the transaction reflected an entry captioned “Bills,” at line 1304, for which there was a separate written breakdown sheet. On that sheet were listed the names of various building contractors and others to whom monies were owed. Wolfs name was not on the list. The $24,999.30 total sum listed on the settlement ³⁶⁴ sheet as “Bills” was deducted from the monies paid to Wyatt at closing.

In addition, at the settlement table, Wyatt’s President, Vincent J. Fiocco, III, furnished Oles and Hilbert a document entitled “Final Lien Waiver,” in which he represented on Wyatt’s behalf: That all sums or obligations incurred in the performance of the Work, including labor, materials, taxes, and rental of equipment have been paid and there exist no laborers’, materialmen’s or mechanics’ lien or other liens or privileges of any kind, nor any claims for same. On October 15, 1996, Wolf filed a “Petition to Establish and Enforce Mechanics’ Lien” against 3839 Dakota Road, in the amount of $12,999.61, and an affidavit in support, in the Circuit Court for Carroll County. Wolf identified Oles and Hilbert as the owners of 3839 Dakota Road and its agent attested that Wolf had served Oles with a notice of intention to claim a lien “in compliance with Section 9-104 of the Real Property Article of the Annotated Code of Maryland.” On November 1, 1996, the circuit court issued a show cause order to Oles and Hilbert, pursuant to R.P. § 9-106(a). Oles and Hilbert responded by filing an answer and a counter-affidavit by Oles, in which he attested that, on August 19, 1996, when Wolf served him with the letter captioned “NOTICE TO OWNER OR OWNER’S AGENT OF INTENTION TO CLAIM A LIEN,” neither he nor Hilbert was an owner of 3839 Dakota Road, and that, when they did become owners of that property on September 6, 1996, they took title in good faith, as bona fide purchasers for value.

On December 12, 1996, the circuit court held a hearing on Wolfs Petition to Establish Mechanics’ Lien. Thereafter, it issued a written memorandum opinion and final order denying Wolfs petition, pursuant to R.P. § 9 — 106(b)(2). This appeal was then timely noted. DISCUSSION Standard of Review Section 9 — 106(b)(2) of the Real Property Article provides: ³⁶⁵ If the pleadings, affidavits and admissions on file and the evidence, if any, show that there is no genuine dispute as to any material fact and that the petitioner failed to establish his right to a lien as a matter of law, then a final order shall be entered denying the lien for cause shown.

Wolf does not contest the circuit court’s determination that there was no genuine dispute of material fact. As such, our task is to review purely legal questions, and we undertake an expansive review. In re Michael G., 107 Md.App. 257 , 667 A.2d 956 (1995). We may affirm the trial court’s decision on any ground adequately shown in the record.

Offutt v. Montgomery Co. Bd. Of Ed., 285 Md. 557, 563, n. 3 , 404 A.2d 281 (1979). Contentions of the Parties and Ruling of the Circuit Court Wolf contends, as it did below, that, within the meaning of the Act, Oles and Hilbert became “owners” of the Dakota Road property on February 19, 1996, by equitable conversion; that Wyatt was a “contractor” from February 19, 1996 until closing; and that, by virtue of Wolfs contract with Wyatt, Wolf was a “subcontractor.” Given those relative roles of the parties, Wolf argues it acted in accordance with § 9-104 of the Act, which conditions a subcontractor’s mechanics’ lien remedy upon the subcontractor having given advance notice of his intention to claim a lien to an owner of the property, by serving Oles with the August 14, 1996 letter. As such, Wolf maintains, the court should have granted its petition to establish and enforce a lien against the Dakota Road property.

Oles and Hilbert counter, as they did in the circuit court, that they did not become the “owners” of the Dakota Road property, within the meaning of the Act, until September 6, 1996, when they acquired legal title to the property. Thus, to the extent that Wolf was a subcontractor who was required to give the “owner” advance notice of its intention to claim a lien, the notice should have been given to Wyatt, not to them. Moreover, Oles and Hilbert argue, they took legal title to the property as bona fide purchasers for value, having been given ³⁶⁶ a final release waiver by Wyatt, the “owner” from whom they purchased the property. The circuit court ruled that Oles and Hilbert were not the “owners” of the Dakota Road property in August, 1996 — after they had signed the “Builder’s Agreement” but before closing — because they did not hold legal title to the property at that time.

It ruled further that, because Wyatt, not Oles and Hilbert, was the “owner” of the property, until legal title was conveyed at settlement, Wolf was a “contractor,” not a “subcontractor.” It also ruled that Wolfs notice of intention to claim a mechanics’ lien had not been in conformity with § 9-104, as it had not been served on Wyatt, the “owner.” Service on Oles, who was not the owner, was insufficient. Finally, the court adopted the uncontested assertion by Oles and Hilbert that they had acted in good faith when they settled on the property and acquired legal title on September 6,1996. Analysis i A mechanics’ lien is a statutorily created in rem remedy. As an in rem proceeding against property, an action to establish and enforce a mechanics’ lien is “effective against the owner [of the property], for [the benefit of] subcontractors who perform their contractual obligations but are not paid.” Barry Properties, Inc. v. Fick Brothers Roofing Co., 277 Md. 15, 36, n. 11 , 353 A.2d 222 (1976).

The mechanics’ lien law allows “a creditor for labor or materials to proceed in rem against improved property even though he could show no privity of contract with the owner, nor personal liability of the owner to him.” Himmighoefer v. Medallion Industries, Inc., 302 Md. 270, 277 , 487 A.2d 282 (1985), quoting, Mervin L. Blades & Son v. Lighthouse, 37 Md.App. 265, 269 , 377 A.2d 523 (1977). Without the mechanics’ lien remedy, such a creditor would have no recourse against the property or the ultimate owner of the property, even though the owner would enjoy the improvements to the property made possible by the creditor’s work and materials. Instead, the creditor’s remedy ³⁶⁷ would be limited to obtaining a judgment against the person with whom he contracted, who would likely have no interest in the property and might be without assets. Mechanics’ liens are creatures of statute.

Freeform Pools, Inc., v. Strawbridge Home for Boys, Inc., 228 Md. 297, 301 , 179 A.2d 683 (1962); F. Scott Jay & Co. v. Vargo, 112 Md.App. 354, 360 , 685 A.2d 799 (1996). As such, to be entitled to a mechanics’ lien against property in Maryland, one must satisfy the substantive and procedural criteria set forth in the Act. Section 9-102(a) of the Act provides that: [ejvery building erected ... is subject to establishment of a lien in accordance with this subtitle for the payment of all debts ... contracted for work done for or about the building and for materials furnished for or about the building.... If legal title is granted to a bona fide purchaser for value, however, the property is no longer subject to a mechanics’ lien.

R.P. § 9-102(d). The filing of a petition to establish mechanics’ lien in the circuit court in which the property is situated, under § 9-105, constitutes “notice to a purchaser of the possibility of a lien being perfected ...” R.P. § 9-102(e). A petition to establish mechanics’ lien must set forth, inter alia, the name and address of the owner of the property against which the lien is sought to be established. R.P. § 9-105(a)(l)(ii). 1 Before a subcontractor may establish a mechanics’ lien against property, he must give the owner advance notice of his intention to claim a lien, under § 9-104, and must include in his petition facts demonstrating that such notice was given.

R.P. § 9-105. Upon receipt of a notice by a subcontractor of intention to claim a mechanics’ lien, the owner of the property may withhold payment, from sums due to the general ³⁶⁸ contractor, of the amount due to the subcontractor. R.P. § 9-104(f). ■ ii A bona fide executory contract for the sale of real property vests equitable ownership of the property in the contract purchaser. During the executory period, the purchaser owns equitable title to the property and the seller retains bare legal title, which it owns in trust for the purchaser, as security for payment of the purchase money.

DeShields v. Broadwater, 338 Md. 422, 437-48 , 659 A.2d 300 (1995); Caltrider v. Caples, 160 Md. 392, 396 , 153 A. 445 (1931). “Equitable conversion” is the legal doctrine that explains the changes in ownership interests brought about by the execution of a contract for the sale of land: [W]hen the vendee contracts to buy and the vendor to sell, though legal title has not yet passed, in equity the vendee becomes the owner of the land, the vendor of the purchase money. In equity the vendee has a real interest and the vendor a personal interest. Equity treats the executory contract as a conversion, whereby an equitable interest in the land is secured to the purchaser for whom the vendor holds the legal title in trust. This is the doctrine of equitable conversion.

Himmighoefer v. Medallion Industries, supra, at 278, 487 A.2d 282 , quoting, 8A Thompson, R.P. § 4447 (Grimes Repl. Vol. (1963)). Generally, a judgment is a lien only against whatever interest and estate a debtor has in land when the judgment is obtained and recorded.

Knell v. Green Street Bldg. Ass’n., 34 Md. 67, 70-72 (1871); Md.Code Ann, (1995 Repl.Vol.), § 11-402. of the Cts. & Jud. Proc. Article.

A judgment debtor’s equitable interest in real property may be subject to a judgment lien: “[E]quitable interests in lands are bound by judgments against the party having the equity.” Hollida v. Shoop, 4 Md. 465, 475, 59 Am. Dec. 88 (1853); McMechen v. Marman, 8 Gill & J. 57 (1836). As such, a judgment against the purchaser of land is a lien on the purchaser’s equitable ³⁶⁹ interest in the land. Coombs v. Jordan, 3 Bland 284 , 22 Am.

Dec. 236 (1831). A judgment creditor’s lien will not attach to the judgment debtor’s bare legal title in property, held as security for a debt. Galeano v. Galeano, 21 Md.App. 208, 211 , 319 A.2d 129 (1974); In re Urban Dev. Co. & Assocs., 452 F.Supp. 902, 906 (D.Md.1978).

In that circumstance, the legal title is a technicality. Of course, a judgment creditor of a debtor holding bare legal title to property cannot attach the equitable interest in the property, as it is vested in another. Until 1976, when the Court of Appeals ruled Maryland’s Mechanics’ Lien Statute unconstitutional in part, see Barry Properties v. Fick, supra, a mechanics’ lien took priority over any mortgage, judgment, lien, or encumbrance attaching to improved property after commencement of construction and before establishment of the mechanics’ lien. Md.Code, (1974, 1975 Cum.Supp.), § 9-107(b) of the Real Property Article.

That priority was ruled “null and void,” in Barry Properties, as it operated to deprive owners of significant property interests, without notice, a prior opportunity to be heard, or other procedural safeguards compatible with the due process clauses of the Fourteenth Amendment and Article 23 of the Maryland Declaration of Rights. In Himmighoefer v. Medallion Industries, Inc., supra, the Court of Appeals determined, under the Act, post-Barry Properties, the effect of a contract of sale for value of property on a subcontractor’s mechanics’ lien remedy against the property. There, a subcontractor performed work and furnished materials for the construction of two houses, under a contract with the builder of a residential housing development who did not own the properties. Subsequently, the owner of the properties executed contracts to sell them to two purchasers.

During the executory period, the subcontractor filed petitions to establish mechanics’ liens against the properties, naming the owner/seller as the