ALERT - Minnesota Supreme Court Decides Priority of Mortgages and Pre-Visible Improvement Mechanic’s Liens

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November 18, 2010

The Case and Holding
Riverview Muir Doran, LLC v. JADT Development Group, LLC.  The Minnesota Supreme Court held that a mortgagee who had no actual notice of unpaid pre-visible improvement services (i.e., architecture services) does not have “actual notice” of an existing lien, and therefore has priority over the lien claimant.

The Facts and Claims
An architecture firm provided pre-visible improvements for a new development, but did not file record notice of the nature of its contract for services.  Subsequently, mortgagees, aware that the architects had provided improvements, paid the architect’s outstanding invoices of which they had notice, and then filed their mortgages.  Unbeknownst to the mortgagees, they had not paid all the architect’s outstanding invoices and the architect continued to provide pre-visible improvements.  When the mortgages were foreclosed, both the architect and the mortgagees claimed priority.

The Minnesota Supreme Court held that the mortgagees had priority over the architect.  The court reasoned that “actual notice” means actual notice of an existing lien, which axiomatically requires actual notice of an unpaid debt.  Thus, because the mortgagees had no actual notice of an unpaid debt (even though there were, in fact, unpaid invoices remaining), the mortgagees had no actual notice of an existing lien. 

Mortgagees (e.g., banks) aware of (1) pre-visible improvements on property and (2) outstanding invoices for those improvements, may pay the invoices to ensure priority over lien claimants who provide subsequent pre-visible improvements.  Providers of pre-visible improvements (e.g., architects, engineers, and surveyors) need to file record notice of the nature of their contracts for services to ensure priority over subsequent mortgagees. 

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