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Langford Tool & Drill Co. v. Phenix Biocomposites

September 09, 2003


Blue Earth County District Court File No. 07-CX-99-001502

Considered and decided by Schumacher, Presiding Judge, Randall, Judge, and Kalitowski, Judge.


1. Where there is an abandonment of a project and a subsequent recommencement of work, mechanic's liens arising from the new work do not relate back to the original start of construction.

2. The physical, visible condition of property, to be determined from an inspection of the premises, is an essential element of whether a project has been abandoned.

The opinion of the court was delivered by: Randall, Judge



On appeal from the district court's order granting respondent's mortgage priority over appellant's mechanic's lien, appellant argues (1) the project was not abandoned in April 1997, thus giving appellant's mechanic's lien priority; (2) appellant did not release its liens by signing the sworn construction statement; and (3) a new trial is warranted because the district court improperly admitted and relied on hearsay evidence.

Respondents also filed a notice of review of the order denying their motion for partial summary judgment. On appeal, respondents argue the district court erred by finding (1) that the project consisted of a single improvement to the real estate rather than multiple improvements; and (2) Phenix and PBL are separate entities. Because we find that the project was abandoned in April 1997, we affirm the district court's order granting respondent's mortgage priority, and because we find no error, we affirm the district court's denial of respondent's motion for partial summary judgment.


Prior to 1994, Phenix Biocomposites, LLC (Phenix) secured the rights to an industrial process for turning agricultural waste into various particleboard products. This process required custom-made equipment and a building to house that equipment. Phenix located and chose a site in Mankato, Minnesota as the location for the manufacturing plant. The plant was specifically designed to meet the needs of the production equipment, and construction began in December 1996. This plant in Mankato is the subject of this litigation.

In the spring of 1997, Phenix ran into financial problems, and by April, construction of the manufacturing facility virtually halted. Although various projects were completed after April 1997, such as projects to secure the building from the elements and to ensure that work already accomplished was not damaged, the projects were relatively minor, and were substantially completed by May or June of 1997. In the meantime, Phenix sought additional financing for the project.

A few months after Phenix ran out of capital, Phenix began negotiating with respondent Rabobank, a Dutch-owned bank, for a loan. The negotiations considered a condition that required Rabobank to receive from appellant, Schwickert, sworn construction statements containing Schwickert's representations regarding the amount of work it had yet to do on its contracts for the project, and concerning the total amounts of money due on its contracts. The statements, dated February 6, 1998, contained the following language:

In the event of any such increase, no orders or claims will be made to said company until such deposits shall have been completed; that the purpose of said statement is to induce said company to pay out the proceeds of a loan of the amount to be determined accrued by a mortgage on said property; and that upon payment of the specific unpaid items listed herein, the undersigned contractor agrees to waive all claims of priority to said mortgage and both parties herein will hold such company harmless as to any other claims of priority of lien for any labor or material, furnished or to be furnished, for completion of construction.

The Rabobank mortgage closed on April 17, 1998, and was filed on April 20, 1998. In December 1997, additional financing was also obtained from respondent, Dougherty Funding. The financing enabled construction to resume on the project.

By early 1999, Phenix was in default on its repayment obligations to Rabobank. Phenix was unable to pay the contractors and the contractors subsequently filed liens to protect their interests. Shortly thereafter, one of the lienholders initiated this action against Phenix to enforce its lien. Rather than simply relying on its mechanic's lien rights, Central Mechanical also pursued a money judgment against Phenix. On February 11, 2000, Central Mechanical obtained a money judgment against Phenix Entities in the amount of $686,105.66. Soon thereafter, Central Mechanical threatened to pursue collection remedies, including levying on Phenix's bank accounts.

On February 18, 2000, Phenix entered into a forbearance agreement with Central Mechanical. The agreement provided that Central Mechanical would refrain from exercising its collection remedies against Phenix until June 30, 2000, in exchange for Phenix's promise to pay the judgment by that time. The agreement was secured by the personal guarantees of eleven individuals, each of whom had some personal stake in the success of the business of the Phenix Entities.

On July 1, 2000, the day after the expiration of the payment deadline under the forbearance agreement, the guarantors entered into an "Investment Partnership Agreement" under which PBL Investments LLP (PBL) was formed. On July 31, 2000, Central Mechanical executed assignments of the mechanic's lien statement and amended mechanic's lien statement in favor of PBL. These assignments were given pursuant to an assignment agreement dated July 28, 2000, between Central Mechanical, PBL and the Guarantors. Under the terms of the agreement, Central Mechanical in no way represented, warranted, or covenanted ...

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