Is Iowa’s Mechanics Lien Law Broken?

I think the honest answer to the question of whether Iowa’s mechanics lien law is broken is “yes.” Reading chapter 572 of the Iowa Code is (at best) an adventure or (at worst) a nightmare. If experienced, practicing lawyers have a difficult time explaining or applying it, good luck to the general public.

Iowa Title Guaranty has been a lead sponsor for two or three legislative sessions of a bill to modify how mechanics liens are created and indexed. Presently, that legislation is embodied in HF 633.

Iowa Title Guaranty, which is a division of the Iowa Finance Authority, is a quasi-governmental agency that issues a form of insurance on the title to real estate. As an insurer, therefore, it has plenty of skin in the game. Under Iowa’s title system, Title Guaranty has recourse to the attorneys and settlement agents who examine title and “field issue” these policies for Title Guaranty, so plenty of attorneys and settlement agents have skin in the game, too.

For the uninitiated and in the simplest terms, a “mechanics lien” is the lien that a the laborers and materials suppliers get on real estate that is being modified by some kind of construction. The law currently provides that these “mechanics” get their liens established through filings in the offices of the clerk of court in the county where the real estate sits.

The legislative subcommittee of the Iowa State Bar Association’s Real Estate Section has looked this legislation over several times and generally has been supportive. The reasons that this subcommittee has been supportive are many. Some, but not necessarily all, of these reasons are summarized as follows:

• The existing law is difficult to understand and apply. The lag times and the required notices are difficult to deal with.
• The Real Estate Section has been an ally of Title Guaranty and their needs. Without speaking for Title Guaranty, it is clear that they think that the system needs to be improved. While their claim experience apparently has been relatively low (the “real estate bubble” notwithstanding), these liens and potential liens are problematic.
• Mechanics liens can present a real difficulty for closing agents as well. When a closing agent settles a real estate transaction, he or she has no clue who is actually out there doing the work. While they may do their best to collect lien waivers before closing, it is nearly impossible to know from whom a waiver must be collected. The bill proposed would create a system that would allow closing agents (at least in theory) easily to check for liens from their desks right before closing a loan.
• It has been our understanding that the clerks of court generally would rather not have to deal with and index legal descriptions for real estate.
• The county recorders probably could easily assume the current filings required under chapter 572, but they are currently have no mechanism that is similar to that in this particular bill.

The legislative proposals have evolved over the past couple of years. Title Guaranty was originally to be the administrator of the database. On evaluating the potential liability issues and the necessity for litigation reserves, Title Guaranty thought it better to put the responsibility in the Secretary of State’s office. The Iowa Secretary of State already administers a number of electronic databases.

The construction industry had been lukewarm to downright sour on the idea for the first couple of iterations. After meeting with the Bar and Title Guaranty representatives, Title Guaranty came up with the current bill. Title Guaranty has been responsive to construction industry concerns and done a fair job at proposing a system that would be relatively user-friendly. Since then, the construction and materials folks came around to being lukewarm to almost supportive.

This has been kind of a hot issue among real estate attorneys for a couple of weeks now. Some attorneys are also abstractors or have an interest in abstracting companies, which perform searches on real estate. These folks are concerned about whether and how they are going to have to certify searches on a centralized state database. Many attorneys are simply concerned about centralization, which, they worry, makes it difficult or impossible to deal with these records in the same way attorneys have dealt with their local clerks of court. Others worry about the actual “mechanics” of filing and searching. Some have noted that real estate records have always been local, and the existence of a lien through a state registry is unprecedented.

On the other hand, some attorneys noted that this system would be good for certain contractors. In particular, flooring and landscaping folks are the last ones on the job. Several attorneys mentioned that these late contractors are missed (or worse) when the general contractor gets paid.

To the worries, I guess my thought is that, frankly, things change. The system proposed in HF 633 may not be perfect. In this world, few things are perfect. Anyone who has ever closed a real estate transaction knows that you can run into the craziest problems before, during, and after a closing. Iowa lawyers are resourceful, and the problems almost always get solved. The benefits of this type of centralized reporting and indexing system, it seems to me, outweigh the costs.

As a Ways and Means Committee bill, HF 633 remains alive in this legislative session. Whether it will survive the session is difficult to say, but it has evoked an interesting discussion about local control, use of technology, and a pretty arcane part of Iowa law.

Ames City Council Meeting Recap

An account of the city council meeting appears at AmesNewsOnline.com. The rule relating to city authority is stated (somewhat ironically) in James Enterprises, Inc. v. City of Ames, 661 N.W.2d 150, 153 (Iowa 2003), in which the Iowa Supreme Court ruled that the city had, in fact, enacted an ordinance beyond the scope of its authority:

In interpreting cities’ home rule power, the court has recognized that cities have “the authority to act unless a particular power has been denied them by statute.” Crippen v. City of Cedar Rapids, 618 N.W.2d 562, 568 (Iowa 2000) (quoting City of Des Moines v. Master Builders of Iowa, 498 N.W.2d 702, 703-04 (Iowa 1993)).

The home rule scheme envisions the possibility that state and local governments will regulate the same areas:

A city may not set standards and requirements which are lower or less stringent than those imposed by state law, but may set standards and requirements which are higher or more stringent than those imposed by state law, unless a state law provides otherwise.

Iowa Code § 364.3(3) (emphasis added).

Notably, the grant of authority to local government to establish stricter standards by ordinance than those provided in state statutes dealing with the same subject is expressly curtailed if a state law provides otherwise.

There is also a fairly recent discussion of “the doctrine of preemption” in City of Davenport v. Seymour, 755 NW 2d 533, 538-39 (Iowa 2008). The Iowa Supreme Court has recognized express preemption and two forms of implied preemption. The Ames ordinances are an example of the latter.

The problem, of course, is deciding whether the state has “occupied the field” and thereby prohibited a city from acting. My assertion is simply that the city has acted ultra vires in an area of law occupied by the State in chapter 364 of the Code of Iowa.

Regardless, the ordinances enacted by the city last fall relating to the plat of survey were and always will be a solution in search of a problem that effectively double the cost of a procedure that should otherwise be simple with no benefit to the city or the owner.

Update on 2010-04-22 13:30 – There is an account of the City Council meeting in the Iowa State Daily and in the Ames Tribune.

Memo to the Ames City Council

On April 20, 2010, the Ames City Council is hosting a round-table event and has invited developers and other stakeholders to address the city development process. My thoughts for the city are described in this short memo.

My background. I have been a city attorney and involved in development matters for 19 years. I have worked for smaller cities that do not have the development issues that Ames has. Nevertheless, I have served with city engineers as the ad hoc planning staff. I appreciate a good, well-thought-out development plan. I understand both the desire and need for professional studies and advice. I understand that the development process seems to the lay person like something that ought to be simple, but that it is, in fact, composed of numerous, complex issues. How these issues are addressed affects everything from how the potties flush to fire protection to economic development to transportation.

Problems. These are the main problems I see in my practice and from conversations with other attorneys:

• Subdivision ordinance.
  • Every division of land treated as a “subdivision plat.” The City treats every division of land as a “subdivision” requiring all of the formalities of the state subdivision law and the city ordinance. This more or less doubles the cost and difficulty of land division over the simpler “plat of survey” process. Not every division of land requires that there be a full-blown subdivision plat, and a waiver of application of the subdivision ordinance — a perfectly ordinary municipal exercise everywhere but Ames — appears to be viewed by the staff as inappropriate under all but extreme circumstances.
  • Plat of survey ordinance is illegal. Section 354.4 of the Iowa Code was designed to permit easy division of land. The creation of a plat of survey is a lawful and appropriate way to both divide land and combine tracts of land. This code section was designed to make the jobs of lawyers, assessors, recorders, and auditors simpler by the creation of plats that use a short legal description. Where the state has occupied the field, as it clearly has in the area of land division, a city is not allowed to make more onerous rules. Unfortunately, I believe that the city staff has sold the council on an ordinance that makes every division of land into a subdivision plat and disallows good common sense uses of the plat of survey.
• The Land Use Policy Plan (LUPP).
  • LUPP as holy writ. The LUPP is what the state law calls a “comprehensive plan.” My understanding is that the comprehensive plan is supposed to be a helpful reference for the orderly development of a city. The City of Ames, however, treats the LUPP as a holy writ that must be changed with the same painstaking effort that must be applied to changing the zoning code and the subdivision code.
  • LUPP as Zoning tool. The LUPP is used in a way that simulates zoning in fringe areas of the city. While it is illegal for the city to pass a zoning law, the city applies the LUPP in the same way as a zoning code to prohibit development in the two-mile area surrounding the city.
• The planning staff’s authority is generally too limited. While I do not know whether this statement is actually true, my observation is that the staff believes it is true. My observation further is that virtually every development matter that does not fit within the tight confines of what one might call a “plain vanilla” subdivision plat requires a process that involves multiple council actions. Sometimes, it looks something like this: (a) submission of proposal; (b) review by staff of proposal; (c) development review committee meeting wherein roadblocks are outlined; (d) letter to owner outlining problems; (e) discussion between owner and staff of problems and solutions; (f) a letter to the council begging referral to staff for study of possible solution, waiver, etc.; (g) extensive study and report back to council by staff; (h) referral back to staff for development of an actual plan; and (i) report back to city council for a decision.
• The City and the County need a defined process for fringe development. Anyone who wants to develop property lying in the Ames Urban Fringe has to satisfy two different planning staffs, planning committees, and governing bodies. Without a joint process, a property owner is nothing more than a ping pong ball who can be batted back and forth between the two bureaucracies.

Professional Staff. I have the highest regard for the city staff. Although we do not always agree, I find them to be courteous and helpful. I believe that they have the best interests of the city at heart.