Service Area: Notice and Mechanic’s Lien Services

Is Pay-if-Paid Enforceable in Kentucky?

Posted on February 9, 2018 by - In Other Commercial Credit News

Supreme Court in Kentucky Decides Pay-If-Paid is Enforceable

Is pay-if-paid enforceable in Kentucky? According to one recent Supreme Court decision, yes.

We’ve previously discussed pay-when-paid and pay-if-paid, otherwise known as contingent payment clauses. But, here’s a quick refresher on pay-if-paid.

Pay-if-paid is generally interpreted to mean the subcontractor will receive payment from the general contractor IF the general contractor is paid by the owner. In other words, if the owner fails to pay the general contractor, the general contractor doesn’t pay the subcontractor.

The Court Enforced the Contract

In Superior Steel, Inc. v. The Ascent at Roebling’s Bridge, LLC, the contractual provision in question lies within the contract between the subcontractor and the construction manager.

Essentially, the subcontractor furnished outside the scope of the original contract and did not execute change orders. Then, when the construction manager sought payment for the additional work from the owner, the owner refused to remit payment to the construction manager. Thus, based on the contractual terms between the construction manager and subcontractor, the construction manager did not have to pay the subcontractor.

In its decision, the court provided an example of a pay-if-paid clause:

“A typical `pay-if-paid’ clause might read: `Contractor’s receipt of payment from the owner is a condition precedent to contractor’s obligation to make payment to the subcontractor; the subcontractor expressly assumes the risk of the owner’s nonpayment and the subcontract price includes this risk.”‘

Then, the court reviewed the plain language that appears within the contract. (Keep in mind, not only has the owner failed to pay the construction manager, but the subcontractor also failed to execute change orders.)

“[n]o additional compensation shall be paid by the Contractor to the Subcontractor for any claim arising out of the performance of this Subcontract, unless the Contractor has collected corresponding additional compensation from the owner, or other party involved, or unless by written agreement from the Contractor to the Subcontractor prior to the execution of the Work performed under said claim, which agreement and work order must be signed by an officer of the Contractor.”

Unjust Enrichment – Alternative Remedy

Author, Jeffrey R. Appelbaum, reviewed this case in his article Kentucky Supreme Court Enforces Pay-if-Paid Provision. In his review, he mentions that although the court enforced the pay-if-paid provision, the subcontractor is permitted to pursue unjust enrichment against the owner.

“[T]he court also relied on the pay-if-paid provision to reinstate the unjust enrichment verdict against the owner, concluding that although the equitable remedy of unjust enrichment does not exist when there is a contractual remedy, the existence of the pay-if-paid clause in the subcontract blocked the subcontractor from pursuing a contract remedy. As such, the subcontractor was permitted to pursue its claim for unjust enrichment against the owner, and that portion of the trial court’s judgment was reinstated.”

Two Takeaways

  • Always review your contract! Even when a state’s statute implies a clause is unenforceable

Kentucky Fairness in Construction Act “371.405 (2) The following provisions in a contract for construction shall be against the public policy of this Commonwealth and shall be void and unenforceable: (b): A provision that purports to waive, release, or extinguish rights provided by KRS Chapter 376, with the exception of partial waivers of lien rights provided by the contractor or subcontractor for progress payments”

  • If performing additional work or supplying additional materials, outside the original agreed upon contract, get approval for the additional work in writing!

New York Lien Discharged by Bond

Posted on February 5, 2018 by - Mechanic's Liens & Bond Claims

In New York, a Mechanic’s Lien Discharged by a Payment Bond is Still a Lien

In New York, on private commercial projects, a mechanic’s lien must either be extended or enforced within one year from the date the lien was filed. But, what happens if a payment bond is substituted for the lien? According to one recent court opinion, lien deadlines still apply.

Mechanic’s Lien Guide for Private Commercial Projects in New York

Generally, in New York, there is no preliminary notice required, though serving a non-statutory notice is recommended.

The mechanic’s lien deadline varies based on project type: commercial or residential. For commercial projects, claimants should file the lien within 8 months from last furnishing materials or services. The lien should be served upon the owner, the prime contractor, and the debtor, within 5 days before or 30 days after filing the lien. And, proof of service should be filed with the County Clerk within 35 days after the lien is filed.

Words of caution:  New York is an unpaid balance lien state and the lien is enforceable only for the unpaid portion of the contract, either what is owed by the owner or what is owed to your customer.  File the lien as early as possible to ensure funds are still available.

If you remain unpaid after filing the lien, file suit to enforce the lien within 1 year from the date the lien was filed, or, within the same time period, file an extension of lien.

EZ Runer Const. Corp. v. Blue Nirvana, LLC, 2017 NY Slip Op 31663 – NY: Supreme Court 2017

Let’s review the above case. First, here’s a quick look at the relevant parties:

– Lien Claimant (plaintiff): EZ Runer Construction Corp. (EZ)

– Property Owner (defendant): Blue Nirvana, LLC (Blue)

– Surety (defendant): Suretec Insurance Company (Suretec)

EZ furnished & installed plumbing to the real property owned by Blue. When Blue failed to pay, EZ filed a mechanic’s lien on October 1, 2014, in the amount of $14,712.43.

In July 2015, Blue filed a payment bond, with Suretec as the surety, to discharge EZ’s lien. Once the bond was filed, EZ’s lien was no longer against the property, but was instead against the bond.

Per New York statute, EZ had until October 1, 2015 to file a lien extension or to proceed with suit to enforce their lien, otherwise their lien would be extinguished.

“No lien specified in this article shall be a lien for a longer period than one year after the notice of lien has been filed… or unless an extension to such lien… is filed with the county clerk of the county in which the notice of lien is filed within one year from the filing of the original notice of lien…” – New York § 17

Unfortunately, EZ failed to file an extension or to proceed with suit by the October 1, 2015 deadline. Blue petitioned the court to extinguish EZ’s lien because EZ failed to comply with statute, and the court sided with Blue.

Lien Statute Applies, even if Bond is Filed?

Yes, in New York, even if a bond is filed to discharge the lien, deadlines remain the same.

“The claimant in order to perfect his claim shall within the time prescribed in this chapter for the filing of a notice of lien, file a notice of claim in the office of the clerk of the county where such bond is filed. “- § 37 (5) Bond to discharge all liens.

Another example where the statute does not vary is New Jersey. In New Jersey, when a lien is bonded off, the deadlines associated with suit to enforce the claim do not change. Whether a claimant is enforcing a lien or a claim against the bond, the deadline for enforcement remains within 1 year from last furnishing materials or services.

There are some states where statutory guidelines shift when a bond is filed to prevent or discharge a lien. For example, in Texas, if a lien is bonded off, the deadline for suit to enforce the claim varies, depending upon when the bond was recorded:

53. Stat. Sec. 53.208. ACTION ON BOND.

(a) A claimant may sue the principal and surety on the bond…

(d) If the bond is recorded at the time the lien is filed, the claimant must sue on the bond within one year following perfection of his claim. If the bond is not recorded at the time the lien is filed, the claimant must sue on the bond within two years following perfection of his claim.

In situations where a bond or other security is substituted for a lien on real property, carefully review the state’s statute.

It’s a Warning

New York statute is concise and appears to leave little room for interpretation; perhaps a blessing and a curse for those furnishing to commercial construction projects. It is imperative that would-be claimants be familiar with and follow the statutory requirements as prescribed.

Free Forms Online – Proceed with Caution

Posted on January 26, 2018 by - In Other Commercial Credit News

Be Careful When Using Free Forms to Secure Lien & Bond Claim Rights

There are creditors who prefer to send preliminary notices & file mechanic’s liens, on their own, via free forms they retrieve online. In the digital age, there is certainly no shortage of free information. You can access a variety of free forms from a variety of sources, including county recorder sites and legal service companies.

Just be careful – don’t get trapped by “I saw it on the internet, so it must be true.” If you are going to secure your lien/bond claim rights, by completing online documents/free forms, please ensure the documents meet statutory format & content requirements.

Ensure Documents Meet Statutory Requirements – Including Formatting

A case in Minnesota immediately comes to mind. The lien claimant served the preliminary notice; unfortunately, the notice did not meet Minnesota’s statutory requirements. In Minnesota, the preliminary notice “…whether included in a written contract or separately given, must be in at least 10-point bold type, if printed, or in capital letters, if typewritten”. (MN 514.011 Notice)

The claimant’s notice met the font size requirement, but did not include the required bold font or capital letters. The failure to meet the requirements lead the trial court to invalidate the claimant’s lien.

You may think “Whoa, that’s a bit extreme” and I would be inclined to agree with you, but, statute = law and the law leaves very little wiggle room.

In my experience, some states are less concerned about the format of a document and, instead, focus on the content of the document. But, there are states, like Minnesota, that follow a rigid set of laws.

Another state with specific requirements? Wisconsin

In Wisconsin, statute requires the notice “…whether included in a written contract or separately given, shall be in at least 8-point bold type, if printed, or in capital letters, if typewritten.”

Be Cautious with Plug-n-Play Forms – You Get What You Put In

Aside from incorrect format, creditors may fail to complete the documents in accordance with statute. It’s not enough to meet a state’s required formatting – if you fail to identify a party, you could jeopardize your rights.

Author John R. Lockard has noticed the same pitfalls. In his article, The Perils of Online Mechanic’s Lien Services, he discusses reviewing a lien prepared by an online provider. These are the issues he uncovered when reviewing a Virginia memorandum for mechanic’s lien:

“- It did not conform to the format included in the Code of Virginia;

– It failed to identify the general contractor or the subcontractor for the project as required by the Code of Virginia; and

– It failed to identify the correct address or parcel of property upon which the work was performed.”

Obviously, and as Lockard further discusses, failing to correctly identify the property to be liened is significant. If the address is incorrect, the validity of the lien is questionable at best.

Choose Carefully

Whether you secure your rights on your own or with the assistance of a service provider, choose carefully. Vet the source and if concerned, seek a legal opinion.

Ensuring payment in the construction industry is already a challenge, don’t jeopardize your rights because you failed to adhere to statutory requirements.

Prompt Payment: Which Applies, State or Federal Statute?

Posted on January 19, 2018 by - In Other Commercial Credit News

Prompt Payment: Which Applies, State or Federal Statute?

In Arizona, prompt payment statute generally dictates that a project owner should remit payment to the General Contractor within seven days after the approved billing cycle. The General Contractor should, in turn, pay its subcontractors/suppliers within seven days of receipt of the owner’s payment.

Here’s an excerpt from Arizona’s statute (Ariz. Rev. Stat. Ann. 32-1129 et seq.):

32-1129.01. A. Progress payments by owner; conditions; interest

…Except as provided in subsection C of this section, the owner shall make progress payments to the contractor within seven days after the date the billing or estimate is certified and approved pursuant to subsection D of this section…

32-1129.02. B. Performance and payment by contractor, subcontractor or material supplier; conditions; interest

…[T]he contractor shall pay to its subcontractors or material suppliers and each subcontractor shall pay to its subcontractors or material suppliers, within seven days of receipt by the contractor or subcontractor of each progress payment, retention release or final payment, the full amount received…

This Statute Doesn’t Apply to Subcontractors Furnishing to Federal Projects – Unfortunately

Keep in mind, the information provided above is Arizona’s statute, not the Federal Government’s statute.

Prompt pay statutes differ, much like securing bond claim rights on a public project may differ from securing bond claim rights on a federal project.

The Project: Provide & Install Road Signs at Grand Canyon National Park

In short, the owner hired a contractor to provide materials & installation services. The contractor hired a subcontractor to furnish the materials.

The contractor received its payment from the owner, but withheld some funds from the subcontractor due to performance issues. The subcontractor proceeded with a suit action, claiming the contractor violated the prompt pay statute.

The superior court agreed with the subcontractor, but the appeals court reversed the superior court ruling, based on how statute defines a project owner.

“The Court of Appeals reasoned that an “owner,” as defined in the Act, does not include the federal government or its agencies, and thus found the Act inapplicable when the contract at issue is a federal work project.” – quote from  Arizona Prompt Pay Act Held Inapplicable to Federal Construction Project, authors P. Douglas Folk & Zara Torosyan

The Lesson

Don’t assume anything. Recognize that statutes vary by state and project type. If you have concerns about which statutes apply to a project, contact us!

Residential Projects & Mechanic’s Lien Rights

Posted on January 8, 2018 by - Mechanic's Liens & Bond Claims, Preliminary Notices & Construction Credit

Secure Mechanic’s Lien Rights on Residential Projects

If you are furnishing to a residential project, review preliminary notice & mechanic’s lien requirements carefully.

First: Define Residential

Each state may define residential differently. Here are a few examples:

Idaho defines residential as an “owner or nonowner occupied dwelling of 1-4 units”

45-525. (b) “Residential real property” shall include owner and nonowner occupied real property consisting of not less than one (1) nor more than four (4) dwelling units.

Illinois defines residential is an “owner-occupied single-family residence” and in New York, residential is a “single family dwelling.”

Generally, state statutes do not consider apartments to be residential, but Nevada statute specifically identifies apartments as residential.

NRS 108.226-6. Except as otherwise provided in subsection 7, if a work of improvement involves the construction, alteration or repair of multifamily or single-family residences, including, without limitation, apartment houses…

Ohio’s residential statute includes condominiums, plus it identifies various improvements to property “adjacent” to the residential dwellings.

1311.011 – (1) …[F]or the improvement of any single- or double-family dwelling or portion of the dwelling or a residential unit of any condominium property that has been submitted to the provisions of Chapter 5311. of the Revised Code; an addition to any land; or the improvement of driveways, sidewalks, swimming pools, porches, garages, carports, landscaping, fences, fallout shelters, siding, roofing, storm windows, awnings, and other improvements that are adjacent to single- or double-family dwellings or upon lands that are adjacent to single- or double-family dwellings or residential units of condominium property, if the dwelling, residential unit of condominium property, or land is used or is intended to be used as a personal residence by the owner, part owner, or lessee.

This leads us to the next question: Are Apartments & Condominiums Residential?

Unfortunately, there is no blanket rule on what is or isn’t residential. Of the 5 states mentioned above, 1 specifically mentions condos & 1 specifically mentions residential — and yet all 5 are still different!

As a best practice, carefully review statute to see whether apartments and/or condominiums are considered residential. It’s also important to confirm if you are furnishing to one building or multiple buildings, and whether furnishing to common area or individual units. And, if furnishing to individual units, who contracted for the improvement – the homeowner’s association or the individual owner?  Of course, when in doubt, seek a legal opinion.

If Furnishing to Condos, Be Prepared

If you are furnishing to condominiums, there are additional variables to consider. As I just mentioned, it’s important to know whether you furnished to individual units and/or common areas.

If any of the various lots/units are sold to an individual owner prior to filing a lien, more than one lien could be necessary. The lien may have to be served on multiple owners and multiple liens may be required if work was done in individual units.

Multiple liens + multiple units + multiple owners = the lien may be more expensive due to extensive title work and service upon multiple parties, etc.

45 States Require a Preliminary Notice or Notice of Non-Payment on Commercial and/or Residential Projects

Of those 45 states, 17 states have separate requirements specific to residential projects. The differing requirements could vary from a type of preliminary notice, a shortened deadline, or even limited rights based on who you sold to.

Which states Have a Notice Requirement Specific to Residential Projects?

The following states have a notice requirement specific to residential projects: Arkansas, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Maine, Mississippi, Missouri, Montana, Nebraska, Nevada, New Jersey, Texas, Virginia, Washington & Wisconsin.

Unpaid Balance Lien State vs. Full Balance Lien State

Another big difference on residential projects is that the lien may be limited to the unpaid balance being held by the homeowner, even though a full balance lien may be available on commercial projects. Always check statute & consider filing your lien sooner rather than later.

Substantial Compliance with Florida Lien Law

Posted on November 17, 2017 by - In Other Commercial Credit News

Substantial Compliance with Florida Lien Law & Unfortunate Irony

I know the saying is “Don’t mess with Texas.” But, would-be mechanic’s lien claimants shouldn’t mess with Florida! Florida statute is concise and there is little room for error. For example, the Notice to Owner must be received within 45 days from first furnishing — not mailed within 45 days, received.

Fortunately, however, one subcontractor prevailed based on the court’s decision that the subcontractor substantially complied with statute.

The Case of the Notice of Commencement Mix-Up

According to the court decision, the project owner hired two General Contractors for improvements to the same property. One GC (GC-1) was renovating lodges & the other GC (GC-2) was renovating the clubhouse.

As you know, Florida requires Notices of Commencement for construction projects. In this case, the project owner filed two Notices of Commencement – one for the lodges & one for the clubhouse.

The subcontractor went to the job site to obtain the Notice of Commencement from the owner. Then, once it had the Notice of Commencement, the subcontractor served a timely Notice to Owner upon all parties identified within the Notice of Commencement.

It was later discovered, by GC-2 (the subcontractor’s customer), the owner had provided the subcontractor with the wrong Notice of Commencement. The subcontractor was notified of the error and said it would amend its Notice to Owner to include the correct GC. But, the subcontractor failed to serve an amended Notice to Owner.

Owner Argued the Notice to Owner was Invalid

The subcontractor filed a mechanic’s lien for an unpaid balance of $32,535.87 and subsequently sought to enforce its lien. The owner argued the subcontractor’s lien was invalid, because the subcontractor did not serve the Notice to Owner on the correct parties.

Fortunately for the subcontractor, the court determined the subcontractor substantially complied with statute.

In When Substantial Compliance ‘Trumps’ Strict Construction of Florida Lien Laws, author Amandeep Kahlon explains 4 key points the court used to determine that the subcontractor substantially complied with statute.

“(1) The defect in the NTO resulted from the owner’s providing the subcontractor with a notice of commencement that listed the wrong general contractor;

(2) the correct general contractor, designated by the owner for receipt of the NTO, received actual and timely notice that the subcontractor was supplying materials to the project;

(3) the general contractor treated the subcontractor as a potential lienor during the performance of the work by having the subcontractor attend meetings and sign partial lien waivers in requesting payments; and,

(4) the owner could not demonstrate any adverse impact caused by the error on the NTO.”

Unfortunate Irony

Do you know what the unfortunate irony is? As a best practice, the subcontractor goes to jobsites to obtain Notices of Commencement, directly from the owner, to ensure it has the correct Notice of Commencement for completing its Notice to Owner.

Take It Easy Florida

Florida is strict with statute compliance, however, as Kahlon says, “Florida courts may go to great lengths to preserve a subcontractor’s lien rights.” But don’t bank on Florida’s flexibility; familiarize yourself with and adhere to the statutory requirements.

The Critical Role of Furnishing Dates in Lien Rights

Posted on November 10, 2017 by - In Other Commercial Credit News

The Critical Role of Furnishing Dates and Your Lien Rights

A key to properly calculating mechanic’s lien and bond claim deadlines is knowing your first & last furnishing dates. Simple; date is a date, right? Oddly, determining your last furnishing date may sometimes be more difficult than it should be.

What is “Last Furnishing”

Generally, your last furnishing date is the date on which you last substantially furnish materials or perform services on a project. When clients ask how to determine their first & last furnishing dates, it frequently seems easier to explain what doesn’t count as a last furnishing. Typically, punch list work, warranty, or remediation will not extend your last furnishing date.

Can Last Furnishing Include Off-Site Work?

In some cases, yes, according to a recent legal decision reviewed by lawyer Chad Kopach.

In Timeliness of the Lien – Rethinking the “Date of Last Supply,” Kopach reviews a recent Ontario court decision, where the court determined the subcontractor’s lien was timely, even though the lien deadline was calculated based on an off-site  last furnishing, and not the last date the subcontractor was physically on the job.

According to Kopach, parties on the ladder of supply often look to time sheets to determine the date of last furnishing.

“When determining if they still have time to lien, most subcontractors look to their time sheets to find out when their workers were last on site, thinking that they are out of time to lien if the last timesheet is dated more than 45 days ago.

Similarly, the owner and general contractor will often rely on site records (including log books and time sheets) to determine what subcontractors still have lien rights based on who was on site within the last 45 days.”

How will the court determine a claimant’s last furnishing? Kopach states a court may review the subcontract to determine whether off-site work would qualify as furnishing. At least, that’s where the court looked in this case.

Within the subcontract, the subcontractor was to provide additional “design and other preparatory work” during a scheduled shutdown. Thus, the court determined the last furnishing date used by the claimant was sufficient.

“Supply” Doesn’t Always Mean “Physically Supply”

Kopach reminds readers, the definition of “supply” may vary.

“…services and materials supplied to an improvement are supplied physically. Accordingly, in many cases a subcontractor’s date of last supply is the same day that the subcontractor was last physically on site.

However, the Act does not limit “supply” to mean only physical supply, and defines the supply of services as including “any work done or service performed upon or in respect of an improvement” (emphasis added).”

Be Conservative

Although this case appears to be more “exception” & less “rule” it’s important to remember that a last furnishing date may not be the last date you were physically at the job site. Just be careful when determining your last furnishing date – always make sure it is substantial. And, of course, use the most conservative last furnishing date possible when calculating your deadlines.  When in doubt, seek a legal opinion.

Who Owns the Improved Upon Property?

Posted on November 3, 2017 by - In Other Commercial Credit News

Who Owns the Improved Upon Property?

In Owner Roulette: Avoid Construction Lien Headaches, authors Roy E. Wagner & Christopher T. Koehnke (“authors”) reviewed a recent Wisconsin court decision where the lien claimant “incorrectly” identified the owner within its lien. At least, that was the owner’s attempted defense.

The Case in a Nutshell

Here’s a quick look at the case:

“Bayland Buildings (“Bayland”) filed a construction lien against Siren Saukville, LLC (“Siren”), the party that Bayland believed to be the owner of the project under the terms of its construction contract. However, Siren had in fact been bought out by Spirit Master Funding VIII, LLC (“Spirit”), and Spirit was then the actual owner of the project at the time Bayland filed its construction lien.”

Ultimately, Spirit argued Bayland’s lien was invalid, because the lien identified the incorrect owner. Fortunately, the Court of Appeals determined Bayland’s lien was valid and enforceable, because Bayland did not receive constructive notice that the property ownership had changed.

How to Identify Property Owner

The case is interesting, but what I found to be of greater interest are the authors’ suggestions on how to ensure the property owner is properly identified.

The authors suggest claimants could confirm property ownership via the Register of Deeds or obtain a title report letter from the title company. I will add, ownership information may also be obtained from the County Assessor, and many counties make searchable data available online.

What other suggestions do the authors provide? Check the municipal tax records. “While this may be a less reliable way to get information regarding real estate ownership, checking the most recent municipal tax bill records will at least provide a contractor with ownership information as of the end of the most recent tax year.”

Plus, monitor all communication including change orders.

“Obviously change orders can vastly change the scope or price of any construction project. However, they may also provide a contractor with constructive notice of a change in ownership or even impact lien rights. To the extent that change orders are issued and a contractor is asked to sign a “Partial Waiver of Construction Lien,” a contractor needs to be aware that signing such a waiver may impact the ability to foreclose on a lien and obtain a monetary judgment for the full amount that is owed, or even provide constructive notice regarding a change in ownership.”

Best Practice

Don’t guess! Take the time to confirm property ownership, and if applicable, serve the registered agent for the owner.