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Winger Contracting Co. v. Cargill, Inc.

Supreme Court of Iowa

April 12, 2019


          Appeal from the Iowa District Court for Monroe County, John D. Telleen, Business Specialty Court Judge.

         Interlocutory appeal from a grant of partial summary judgment. AFFIRMED.

          Nick Critelli and Lylea D. Critelli of CritelliLaw, P.C., Des Moines, and Patrick Curran of Harrison, Moreland, Webber & Simplot, P.C., Ottumwa, for appellant Winger Contracting Company.

          Abby S. Wessel of Rickert & Wessel Law Office, P.C., Reinbeck, for appellant Peterson Contractors, Inc.

          Benjamin J. Patterson and Timothy B. Gulbranson of Lane & Waterman LLP, Davenport, for appellants American Piping Group, Inc.; Tri-City Electric Company of Iowa; and TAI Specialty Construction, Inc.

          John F. Fatino and Erik S. Fisk of Whitfield & Eddy, P.L.C., Des Moines, for appellant Tracer Construction, LLC (until withdrawal).

          Dana L. Oxley, Samuel E. Jones, and Jared S. Adam of Shuttleworth & Ingersoll, PLC, Cedar Rapids, for appellee.

          APPEL, JUSTICE

         In this case, we are called upon to decide whether mechanic's liens arising from the provision of materials and labor to a lessee attach to the property of the lessor under the facts and circumstances of this case. The case also presents the question of whether a construction mortgage lien ultimately obtained by the owner of the land on the leasehold and property of the lessee has priority over later-filed mechanic's liens.

         The proceedings below were heard in the Iowa Business Specialty Court, a district court. A number of businesses sought to foreclose mechanic's liens against the property of a lessor for work authorized by a lessee. They also asked the court to declare their liens superior to the construction mortgage lien held by the property owner. Pursuant to a case management order, the parties filed competing motions for partial summary judgment to resolve the key underlying issues related to priority of the liens.

         The district court ruled that the mechanic's liens did not attach to the property of the lessor and that the construction mortgage lien on the lessee's property had priority over the mechanic's liens. As a result, the district court denied the mechanic's lien claimants' motions for summary judgment and granted the lessor's motion for summary judgment. The mechanic's lien claimants filed a motion for expanded findings and conclusions under Iowa Rule of Civil Procedure 1.904(2). Except for refining the question of the scope of the land subject to the court's ruling, the district court denied the motion.

         The mechanic's lien claimants appealed. We granted interlocutory review. For the reasons expressed below, we affirm the ruling of the district court.

         I. Factual and Procedural Background.

         A. The Lease Between Cargill and HFCA for Construction of Chlor-Alkali Facility.

         1. General overview.

         Cargill, Incorporated entered into a fifty-year lease with HF Chlor-Alkali, LLC (HFCA) to allow HFCA to construct a chlor-alkali manufacturing facility and other improvements on land owned by Cargill in Eddyville, Iowa. The lease required HFCA to pay $12, 000 annual rent along with other consideration, including payment of property taxes, reimbursement for security services, and under some circumstances, insurance. In the lease, HFCA covenanted to Cargill that it would not use the land for anything other than a chlor-alkali facility without Cargill's approval.

         The lease provided that Cargill would continue to own the land, while HFCA would own the chlor-alkali facility. The lease stated,

All additions, alterations and improvements to the Land made from time to time over the Term, including, without limitation, the Facility, the Improvements and all of Lessee's Property located therein, shall be the property of Lessee and Lessee shall have title to all such additions, alterations and improvements, subject to the provisions of Article XIX herein.

         Article XIX, in turn, required HFCA to remove the facility from the land after the lease ends unless different arrangements are made between the parties. Specifically, Article XIX stated, in part,

Unless otherwise approved by Cargill in writing, Lessee shall have the obligation, as soon as commercially practicable after the expiration or earlier termination of this Lease, to remove any and all Improvements and Lessee's Property or other improvements of any nature and kind from the Land, and provided that the portion of the Land to which such items may have been affixed shall be restored by Lessee to substantially the condition existing on the Effective Date.

         2. Powers and limitations on HFCA.

         The lease allowed HFCA to encumber, assign, or mortgage to a secured creditor either its leasehold estate in the land or its fee estate in the facility. Notably, however, the lease contained a provision limiting the nature of the Cargill-HFCA relationship. Specifically, section 22.14 of the lease provided that nothing in the lease should be construed "as creating a partnership, joint venture, or association" between Cargill and HFCA or "cause either party to be responsible in any way for the debts or obligations of the other party." Further, section 22.14 provided that neither the method of computing rent, nor any provision of the lease, nor any acts of the parties "shall be deemed to create any relationship" between Cargill and HFCA "other than the relationship of landlord and tenant."

         Section 23.05 of the lease related to liens. This provision stated that "Lessee shall keep the Premises free from any and all liens arising out of any work performed, materials furnished or obligations incurred due to Lessee or its Affiliates."

         3. Conditions precedent.

         The lease contained a number of conditions precedent. The lease declared that as a condition precedent, HFCA "will receive Cargill's approval of the plans and specifications for the Improvements . . . which approval Cargill shall not unreasonably withhold." Under the lease, the term "Improvements" meant "all buildings, fixtures, structures and other improvements built by Lessee on the Land."

         Another condition precedent to the lease provided that the parties would enter into six "ancillary agreements." In the first ancillary agreement, Cargill agreed to purchase and HFCA agreed to supply a "long-term stable supply of [chemicals] for use at [Cargill's] processing facilities." The second ancillary agreement provided that HFCA's affiliate would purchase from Cargill the chemicals produced by HFCA that exceeded Cargill's requirements. Like the first ancillary agreement, the second ancillary agreement included a price and an initial term of ten years. In the third and fourth ancillary agreements, Cargill agreed to process, treat, and sell water to HFCA, an essential input to HFCA's production of chlor-alkali. The fifth ancillary agreement related to security services, and the sixth ancillary agreement allowed HFCA additional access to Cargill's property. The lease agreement between Cargill and HFCA provided for termination in the event of a breach of any obligation under the ancillary agreements.

         4. Recording of memorandum of lease with county recorder.

         A memorandum of lease was filed with the Monroe County recorder. The memorandum of lease identified the lease agreement as related to the Cargill property by legal description, identified the parties, stated that the lease was for a term of fifty years, and declared that it incorporated by reference all the terms and conditions of the lease. While the public record revealed the description of the land and the incorporation of the lease by reference, the specific terms of the lease were not recorded.

         B. Financing the Construction of the Chlor-Alkali Facility.

         In order to finance construction of the chlor-alkali facility, Cargill assisted HFCA in obtaining $80 million in bond financing through the Iowa Finance Authority. As part of the financing arrangements, U.S. Bank issued a letter of credit guaranteeing payment to the bond trustee and HFCA agreed to reimburse U.S. Bank for payments made under the letter of credit. Under the agreement, HFCA covenanted to U.S. Bank that it would execute and deliver a leasehold mortgage and assignment of rents and leases. Pursuant to the leasehold mortgage, HFCA granted a first priority leasehold mortgage lien and security interest to U.S. Bank that encumbered all of HFCA's rights in the leasehold estate and the chlor-alkali facility. As a condition precedent to U.S. Bank's issuing the letter of credit guaranteeing payment to the bond trustee, Cargill agreed to purchase the rights and obligations of U.S. Bank in the event HFCA defaulted. The parties refer to this condition precedent as a "put agreement." HFCA also obtained at least $40 million in financing from a Cargill subsidiary. U.S. Bank recorded the mortgage on August 29, 2013.

         C. Mechanic's Liens, Enforcement Action, Loan Default, and Exercise of the Put.

         HFCA entered into contracts with two general contractors to construct the facilities. Either HFCA or the general contractors entered into contracts with a number of subcontractors, including Winger Contracting Company, Peterson Contractors, Inc., Tri-City Electric Company of Iowa, TAI Specialty Construction, Inc., and American Piping Group, Inc. Neither Winger nor any of the general contractors or other subcontractors entered into any contracts with Cargill regarding the construction of the facility or any improvements to Cargill's land. Unfortunately, the project fell apart, and the contractors were not paid in full for their work on the project.

         The contractors filed mechanic's liens based upon their work on the facility in 2015 and early 2016. They sought to foreclose their mechanic's liens against Cargill's fee interest in the real property on which the facility is located. Two foreclosure actions were filed in district court, one in September 2015 and another in May 2016.

         In July 2016, U.S. Bank declared a default after HFCA failed to reimburse U.S. Bank for a bond interest payment and failed to pay quarterly fees to U.S. Bank. The default caused the bond trustee to declare the total amount of about $80 million under the bond financing due immediately. U.S. Bank paid off the bond pursuant to the letter of credit. U.S. Bank then exercised its put, leading Cargill to pay U.S. Bank approximately $80 million. Pursuant to the put, U.S. Bank assigned and transferred to Cargill all of its right, title, and interest in and to, among other things, its construction mortgage related to HFCA's property.

         D. Proceedings in District Court.

         After the mechanic's lien claimants filed actions to foreclose mechanic's liens against Cargill, the district court entered a case management order. The district court recognized that the mechanic's lienholders' priority in relation to any claimed mortgage or security interest held by Cargill was a core issue in the litigation. As a result, the district court directed Winger and another contractor to move for partial summary judgment on the question of priority of the mechanic's liens in relation to the collateral held by Cargill.

         Winger filed a motion for partial summary judgment.[1] Winger advanced what amounted to a joint venture theory. Winger claimed that Cargill and HFCA did not have a simple lessor-lessee relationship but were engaged in an ongoing and continuing business relationship combining their property, effort, money, skill, and knowledge for their mutual benefit. This relationship, according to Winger, resulted in a business enterprise, joint venture, and/or a joint adventure under Brewer v. Central Construction Co., 241 Iowa 799, 806, 43 N.W.2d 131, 136 (1950), and Denniston & Partridge Co. v. Romp, 244 Iowa 204, 208-09, 56 N.W.2d 601, 604 (1953).

         Winger also advanced an agency theory. Winger claimed that the Cargill-HFCA lease conferred benefits on Cargill that could only arise from constructing the facility. Winger noted that the parties recognized that a substantial amount of the money guaranteed by Cargill would be used to construct the facility. As a result, Winger claimed that HFCA was Cargill's agent when contracting for the services of the contractors, subjecting Cargill's property to the asserted mechanic's liens. In support of its agency theory, Winger cited Stroh Corp. v. K & S Development Corp., 247 N.W.2d 750, 752 (Iowa 1976).

         Additionally, Winger asserted that finding that Cargill could avoid liability on the mechanic's liens would result in "the ultimate in unjust enrichment." According to Winger, allowing Cargill to purchase the lease mortgage on its own property ten months after the filing of mechanic's liens and claim that its newly acquired rights in the property are superior to the mechanic's liens would be "the ultimate in absurdity and artifice for fraud." Winger argued that equity requires substance and intent, rather than form, should govern to prevent injustice. See Veale Lumber Co. v. Brown, 197 Iowa 240, 244, 195 N.W. 248, 250 (1923).

         Winger also asserted the mechanic's liens that unquestionably did attach to the property of HFCA were superior to the construction mortgage lien asserted by Cargill. Winger contended the mortgage in this case amounted to an artifice to deprive the mechanic's lienholders of their just compensation. In support of its argument, Winger cited Veale, 197 Iowa at 244, 195 N.W. at 250.

         Cargill resisted and filed a cross-motion for partial summary judgment. Cargill asserted that amendments to the mechanic's lien statute enacted in 2007 make it clear that a mechanic's lien arises only out of a contract with the owner and not a contract with the owner's agent. 2007 Iowa Acts ch. 83, § 3 (codified at Iowa Code § 572.2 (Supp. 2007)). Thus, according to Cargill, the mechanic's liens in this case attached only to a building, improvement, or land belonging to HFCA, the owner with whom the mechanic's lien claimants entered into contract. Further, Cargill argued that in 2012, the legislature narrowed the definition of owner in the mechanic's lien statute by eliminating from the definition "every person for whose use or benefit any building, erection, or other improvement is made." 2012 Iowa Acts ch. 1105, § 2 (codified at Iowa Code § 572.1(8) (2013)). As a result of the 2012 deletion, Cargill noted, the term "owner" is now limited to "the legal or equitable titleholder of record." Iowa Code § 572.1(8) (2015).[2] Cargill argued that it was not the legal or equitable titleholder of the improvements. According to Cargill, HFCA owned the property.

         Aside from its statutory argument, Cargill argued that the undisputed facts did not provide a basis for attachment of mechanic's liens to Cargill's land. According to Cargill, the relationship with Cargill and HFCA did not establish an agency. Cargill argued applicable caselaw holds that whether a lessee became an agent of the lessor depended upon three factors: (1) whether the buildings or improvements become property of the lessor within a comparatively short period of time, (2) whether the additions were permanent and beneficial to the real property and so contemplated by the parties at the time of the lease, and (3) whether the lease payments reflected the additional value created by the improvements. See Ringland-Johnson-Crowley Co. v. First Cent. Serv. Corp., 255 N.W.2d 149, 151 (Iowa 1977). According to Cargill, these criteria for an implied agency were not met here because the lease term was for fifty years, the facility and improvements remained the property of HFCA during that term and afterwards, HFCA had the obligation to maintain the premises excepted for ordinary wear and tear, HFCA had the obligation at the end of the term to remove the facility, and the fixed fifty-year annual rent for the leasehold interest was $12, 000. Further, the lease agreement itself, Cargill noted, expressly stated that the relationship between Cargill and HFCA was limited to a landlord-tenant relationship.

         Cargill also resisted the claim that it was a joint venturer with HFCA. Cargill emphasized that under the lease, there was no "right to share in the profits" or "duty to share the losses." Brewer, 241 Iowa at 806, 43 N.W.2d at 136. Further, under the lease agreement, HFCA owned the facility, and as a result, there was no "joint proprietary interest."

         On the issue of lien superiority, Cargill argued that it was the assignee of a construction mortgage lien originally filed by U.S. Bank on August 29, 2013. Cargill asserted that a construction mortgage lien takes priority over "all mechanics' liens of claimants who commenced their particular work or improvement subsequent to the date of the recording of the construction mortgage lien." Iowa Code § 572.18(2).

         The district court denied Winger's motion for partial summary judgment and granted Cargill's cross-motion for partial summary judgment. The district court observed that, ordinarily, lienholders contracting with lessees cannot acquire greater interest in real estate than the interests owned by the lessees. See Queal Lumber Co. v. Lipman, 200 Iowa 1376, 1378, 206 N.W. 627, 628 (1925). The district court then determined that, in light of the recent legislative changes to Iowa Code chapter 572, a mechanic's lienholder could no longer reach the property of a lessor by claiming a contract with a lessee as agent of the owner. See 2012 Iowa Acts ch. 1105, § 2 (codified at Iowa Code § 572.1(8) (2013)); 2007 Iowa Acts ch. 83, § 3 (codified at Iowa Code § 572.2 (Supp. 2007)). As a result, the district court concluded that Romp, 244 Iowa at 208-09, 56 N.W.2d at 604, and Stroh, 247 N.W.2d at 752, were no longer good law.

         In the alternative, the district court held that Romp and Stroh were distinguishable from the present case. The district court stated that this case is unlike Stroh because the lease agreement here, which expressly disavowed partnership or joint venture and disavowed HFCA authority to permit mechanic's liens, was recorded.[3] Further, the district court noted that the improvements on the land became property of the landlord at the end of the lease term in both Romp and Stroh.

         Finally, the district court also held that while Winger could place a mechanic's lien on HFCA's property (the facility and its leasehold interest), Cargill's mortgage lien had priority because U.S. Bank recorded its mortgage before the mechanic's liens were filed. The district court found ...

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