Service Area: Notice and Mechanic’s Lien Services

Can Filing Too Soon Invalidate a California Lien?

Posted on April 17, 2017 by - Mechanic's Liens & Bond Claims

Can a California Mechanic’s Lien Be Invalidated for Being Filed Too Soon?

In a recent California Court of Appeals opinion, the answer is yes! In California, the mechanic’s lien deadline, for prime contractors, is calculated based on the completion of the contract.

According to The National Lien Digest©, prime contractors should file the lien after completion of the contract, but within: 60 days from the recording of a notice of completion or cessation, or within 90 days from completion, if no notice of completion or cessation is recorded.

Over the course of the last 10+ years, the case Kaweah Construction Company v. Fox Hills Landowners Association, LLC, has taken several trips in and out of the trial and appeals courts. Unfortunately for lien claimant Kaweah Construction Company (Kaweah), the trial and appeals courts agree: the mechanic’s lien was invalid, because the lien was filed prematurely.

Case Background

Kaweah contracted with project owner, Fox Hills Landowners Association, LLC (Fox), for the construction of a water treatment plant. Construction began in April 2005. Fox neglected to pay Kaweah in a timely fashion, and in May 2006 Kaweah filed a mechanic’s lien, which it later amended in August 2006 in the amount of $6.3M. Despite the filing of its mechanic’s lien, Kaweah continued to furnish to the project until October 2006.

(As a side note, I would like to point out that the most recent appeals decision was February 22, 2017. The initial lien filing was in May 2006. This case has been running through the legal system for over 10 years, which in and of itself should remind claimants that it is imperative to follow statutory requirements!)

Court Reads Statute & Defines “Complete”

In the court opinion, the court provides context through statute citation. (Please note: the cited statute was effective in 2012, prior to the amendments to California’s mechanic’s lien laws.)

“Contractors, subcontractors and others “performing labor upon or bestowing skill or other necessary services on, or furnishing materials … to be used on or consumed in … a work of improvement shall have a lien upon the property upon which they have bestowed labor or furnished materials.” (§ 3110.) “Each original contractor, in order to enforce a lien, must record his claim of lien after he completes his contract and before the expiration of (a) 90 days after the completion of the work of improvement as defined in Section 3106 if no notice of completion or notice of cessation has been recorded, or (b) 60 days after recordation of a notice of completion or notice of cessation.” (§ 3115, italics added.) “`Original contractor’ means any contractor who has a direct contractual relationship with the owner.” (§ 3095.) There is no dispute plaintiff was an original contractor on the water treatment plant construction project, so section 3115 governed recordation of its mechanic’s lien.”

The court emphasized the lien must be filed “after he completes his contract” and then addressed how contract completion can be determined when there are disputes that could feasibly keep a contract open indefinitely.

“[T]he contractor must, in some fashion, elect to terminate the contract and discharge its further obligations under the contract in order to “complete” the contract for purposes of section 3115… we conclude that, as part of completing the contract by electing to terminate it and be discharged from further contractual obligations, the contractor must end its performance under the contract.”

Kaweah argued that section 3115 of statute does not specifically state the contractor must formally terminate its contract before filing a mechanic’s lien. Further arguing that because the owner had breached contract, it meant Kaweah was entitled to lien. But the court didn’t buy that argument:

“The language of section 3115 does not authorize the contractor to burden the owner’s property with a mechanic’s lien when the owner has breached the contract or when, due to breach, the contractor has an option to continue performing or treat the contract as breached and terminate its performance. Rather, the statute permits the contractor to record its lien only “after [the contractor] completes his contract” or, as Wright put it, when “the contractor’s obligations are fulfilled.”

The Answer is Still No

In the end, Kaweah’s lien was invalidated, because it failed to follow the statutory guidelines. If you have any doubt about statutory requirements, seek a legal opinion!

Bonding Off Mechanic’s Liens: A Comprehensive Overview

Posted on March 27, 2017 by - Mechanic's Liens & Bond Claims

In Washington, Make Sure to Include the Surety in Suit Action

You supplied materials and/or labor to a construction project in Washington, and when you weren’t paid, you filed a mechanic’s lien. Now that lien has been bonded off and you are moving forward with suit to enforce your claim. Who do you sue when a bond has replaced a mechanic’s lien? In today’s case, you would pursue the surety.

Case Background

Inland Empire Dry Wall Supply Co. (Inland) furnished drywall materials to subcontractor, Eastern Washington Drywall & Paint (Eastern). Eastern was hired by general contractor, Fowler General Construction (Fowler). Fowler paid Eastern, but Eastern never paid Inland, which lead to Inland filing a mechanic’s lien.

Fowler obtained a bond, in the amount of Inland’s lien, to free the property from encumbrances. On the bond, Inland was the obligee, Fowler was the principal and Western Surety Company (Western) was the surety. Once the bond had been issued, and the lien amount was secured by the bond, Inland proceeded with suit.

In the suit action, Inland only named one party: Western. Western sought to have Inland’s suit dismissed, because Inland failed to name Fowler as a party to the suit.

“After the lien release bond was recorded, Inland filed an action against Western, in Spokane County Superior Court, to recover on its lien. Fowler was not named a party to the suit. Western answered Inland’s complaint and raised several affirmative defenses, including the fact that by failing to name and include Fowler as a necessary and indispensable party, Inland had not satisfied the statute of limitations requirements in chapter 60.04 RCW.”

The trial court agreed with Western.

And Now, the Statutory Question

Upon appeal, the court was tasked with answering, “Who is a necessary party when a bond has been recorded to replace a construction lien?”

In its opinion, the court states that, once a lien is bonded off, the statute changes, which changes the “legal landscape.”

“Once a lien release bond is recorded, the procedural statute shifts from RCW 60.04.141 to RCW 60.04.161. This change alters the governing legal landscape. With a bond, real property is no longer encumbered.”

So, what’s the difference? Let’s take a look!

RCW 60.04.141 Lien—Duration—Procedural limitations.

“No lien created by this chapter binds the property subject to the lien for a longer period than eight calendar months after the claim of lien has been recorded unless an action is filed by the lien claimant within that time in the superior court in the county where the subject property is located to enforce the lien, and service is made upon the owner of the subject property within ninety days of the date of filing the action.”

RCW 60.04.161 Bond in lieu of claim.

“The effect of recording a bond shall be to release the real property described in the notice of claim of lien from the lien and any action brought to recover the amount claimed. Unless otherwise prohibited by law, if no action is commenced to recover on a lien within the time specified in RCW 60.04.141, the surety shall be discharged from liability under the bond. If an action is timely commenced, then on payment of any judgment entered in the action or on payment of the full amount of the bond to the holder of the judgment, whichever is less, the surety shall be discharged from liability under the bond.”

The appeals court said that RCW 60.04.141 specifically calls out the owner of the property for suit purposes, and RCW 60.04.161 only specifies one party, the surety. In other words, because RCW 60.04.161 does not specifically say the owner must be named in a suit action, the owner is not required.

“The legislature appears to have understood this terminology. Nowhere in the bond in lieu of claim statute (RCW 60.04.161) is there any indication a bond lien claimant must sue an ‘owner.’ Nor does this statute incorporate the requirement of RCW 60.04.141 that service of suit be effected on an ‘owner.’ The lien release statute only incorporates the provisions of RCW 60.04.141 as to the timing of an action. It does not incorporate the requirements of RCW 60.04.141 regarding who must be sued.”

I understand the appeals court’s logic, but I also understand why the trial court would deem the property owner as a necessary party to the suit. This appears to be a very fine difference in statute — reinforcing the school of thought that mechanic’s lien statutes can be a murky area.

The Decision

The decision hasn’t been officially made but the appeals court has spoken their piece and remanded the case back to the trial court for further proceedings. For the sake of Inland, and claimants throughout the state, I do hope the trial court agrees with the appeals court:

“By the plain terms of RCW 60.04.161, Inland was only required to name Western, as the bond surety, as a defendant to its bond foreclosure action. While Inland could have also named Fowler, as the bond principal, it was not required to do so. Inclusion of Fowler may have streamlined the case and would have obviated the need for this appeal, but it was not a statutory prerequisite. Because Inland satisfied the statute of limitations for inclusion of a necessary party under RCW 60.04.161, the trial court’s judgment in favor of Western is reversed.”

Best Practice

However, as a best practice when proceeding with suit, make sure your attorney is construction-focused and familiar with the state’s statute. And, if in doubt, it is always best to include a party in an action, rather than to neglect naming them, thereby giving rise to an argument by an opposing party.

Interested in reading the appeals opinion? Check out  Inland Empire Dry Wall Supply Co., v. Western Surety Company.

Pennsylvania Mechanics Lien, Manner of Service

Posted on February 13, 2017 by - Mechanic's Liens & Bond Claims

Wings, Beer and the Service of a Pennsylvania Mechanic’s Lien

Wait, that’s not the slogan. There have been changes to Pennsylvania’s mechanic’s lien statute. As I’m sure you’ve heard (a lot), the state has instituted a construction notice directory, but implementing this directory does not change the requirements for service of a formal notice or mechanic’s lien.

Here’s Pennsylvania’s statute regarding the filing & notice of filing of claim (mechanic’s lien).

49 P.S. § 1502
§ 1502. Filing and notice of filing of claim
(a) Perfection of Lien. To perfect a lien, every claimant must:
(1) file a claim with the prothonotary as provided by this act within six (6) months after the completion of his work; and
(2) serve written notice of such filing upon the owner within one (1) month after filing, giving the court, term and number and date of filing of the claim. An affidavit of service of notice, or the acceptance of service, shall be filed within twenty (20) days after service setting forth the date and manner of service. Failure to serve such notice or to file the affidavit or acceptance of service within the times specified shall be sufficient ground for striking off the claim.

(b) Venue; property in more than one county. Where the improvement is located in more than one county, the claim may be filed in any one or more of said counties, but shall be effective only as to the part of the property in the county in which it has been filed.

(c) Manner of service. Service of the notice of filing of claim shall be made by an adult in the same manner as a writ of summons in assumpsit, or if service cannot be so made then by posting upon a conspicuous public part of the improvement.

Buffalo Wild Wings — Gets Saucy

In a recent appeals decision, Babich v. Wings, PA: Superior Court 2017, the subcontractor’s mechanic’s lien was invalidated because he did not substantially comply with service requirements laid out in statute.

Ted Babich (Babich) was a plumbing subcontractor hired by Horizon Retail Construction (Horizon) for the improvement to a Buffalo Wild Wings (Wings) located in Washington, Pennsylvania. In the fall of 2014, Babich filed a mechanic’s lien claim for just under $25,000.

In January 2015, Wings filed a complaint stating Babich didn’t comply with the notice/service of the lien. The court agreed and in June 2015, the court granted Babich an opportunity to amend his claim, and Babich did so in July 2015. Unfortunately, another complaint filed by Wings stated Babich still hadn’t complied with the service of the lien.

Fast forward to the Court of Appeals in January 2017. Babich argued that the trial court made a mistake when it dismissed his mechanic’s lien, claiming he substantially complied with statute and, therefore, that his lien is valid.

“Appellant claims that he properly served Appellee with effective notice of his intention to file a mechanics’ lien for the amount owed to him by Appellee. In the alternative, Appellant urges this Court to apply the doctrine of substantial compliance and to find Appellant in substantial compliance with the notice requirements of the Mechanics’ Lien Law.”

Appeals Court Examines Statute

The appeals court focused on section C of § 1502. Filing and notice of filing of claim. Statute says “service of the notice of filing of claim shall be made by an adult” which the court interprets to mean “in person by the sheriff to the extent practicable.”

The court further explained that if service by sheriff is unsuccessful, the claimant can post notification at the job site. “Once the claimant establishes that personal service has not been successfully effectuated, the statute expressly permits posting as an alternative method of service.”

I know what you are thinking: “OK, so Babich must have tried service via sheriff (or adult) and when that failed, he posted notice at the jobsite?” Nope… the first time around he sent notice via USPS first class mail. Guess what service via USPS first class mail gets you? An invalidated claim.

Babich got a second chance though! After dismissal of his initial claim, the court gave him an opportunity for a “do-over.” So, second time around, when he amended his claim, he definitely served the lien via personal service, right? Wrong.

“Thus, Appellant simply needed to instruct the Sheriff to post notice, had he attempted to obtain personal service on Appellee and failed. However, based on our review of the record, it appears that Appellant never attempted to obtain personal service on Appellee in compliance with the requirements of 49 P.S. § 1502, nor did he utilize this alternative statutory service provision. We agree with the trial court that Appellant’s efforts at service ‘were, at best, minimally compliant with statutory requirements.’”

So, once again, Babich’s lien was invalidated. Know what Babich’s next argument was? “The trial court abused its discretion by dismissing his amended complaint without leave to amend to address the purported service deficiencies.”

Babich had more than enough opportunity to adhere to statute, and the appeals court agreed.

“The trial court has already provided Appellant with ample opportunity to amend his original complaint to demonstrate compliance with the applicable service requirements, and Appellant failed to do so. Based on our review of the record, we agree with the trial court’s conclusion that there is no “reasonable possibility” that another amended pleading will resolve the service deficiencies.”

This Clean Up Requires More than a Wetnap

The first time he filed his lien, Babich did not have counsel at his side providing him guidance. The second time he filed his lien, Babich had counsel, but that counsel’s focus was not construction law and his counsel misadvised him. The third time, well, there is no third time. No lien and no recovery of monies owed, compounded by legal expenses — not good for Babich.

Always strictly adhere to statute and always seek legal guidance from an expert in mechanic’s lien filings.

Are Mechanic’s Lien Rights Available on Wind Turbines

Posted on February 6, 2017 by - Mechanic's Liens & Bond Claims

Wind Turbines: Are Mechanic’s Lien Rights Available?

A recent court of appeals decision left one Illinois subcontractor with over $3 million in unpaid claims, and the construction and alternative energy industries with immeasurable concern and doubt.

It takes multiple contractors, subcontractors & material suppliers to successfully build one energy farm: unfortunately, this also means there are multiple opportunities for payment issues. Special fabrication, change orders, construction defects, and the simple low liquidity of a company, are common factors contributing to non-payment on projects of this size.

Fortunately, in cases of energy farms, or even single standalone wind turbines, unpaid parties can reduce their risk when they take steps to secure mechanic’s lien rights. Right?

Unfortunately, No

In AUI CONSTRUCTION GROUP, LLC v. VAESSEN, 2016 IL App (2d) 160009 – Ill: Appellate Court, 2nd Dist. 2016, AUI Construction Group, LLC (“AUI”) was hired to assist with the construction of a turbine tower foundation. AUI received partial payment and when they remained unpaid for the rest of the materials and labor provided, they filed a mechanic’s lien and proceeded to foreclose.

AUI believed their lien to be valid based on the argument that the “materials, fixtures, services, and labor it furnished constituted a valuable and permanent improvement to the property,” but the circuit court invalidated AUI’s lien, stating the wind turbine is a non-lienable trade fixture and provided the following explanation:

“If AUI’s mechanic’s lien were allowed to attach to the real estate and GSG [7] (the wind energy developer) chose to terminate the easement and removed all of its property brought onto the premises as allowed by the easement agreement, the lien would remain upon the real estate after removal of the benefit upon which the lien was based. Therefore, to allow AUI’s filing of a mechanic’s lien to attach to the real estate where removal of the fixture is allowed would produce an absurd result not intended by the lien act.”

Is the Wind Turbine a Fixture?

OK, if AUI isn’t entitled to mechanic’s lien rights, because the court indicates the wind turbine is removeable, then could AUI have pursued security via Article 9 of the Uniform Commercial Code (UCC) and treat the wind turbine as though it is a fixture? After all, the court identified the wind turbine as a trade fixture!

I wasn’t the only one with the fixture thought. Unfortunately the court nixed the fixture thought, because “UCC security interests simply do not exist ‘in ordinary building materials incorporated into an improvement on land.’ As AUI built the wind structure with concrete, rebar, electrical conduit, and other ‘ordinary building materials,’ the UCC does not apply.”

So, what can a subcontractor do if they can’t secure their right to payment via mechanic’s lien statute or via the UCC?

Comments from an Expert

As this is a recent case and a landmark decision, it’s become a hotly discussed topic so we sought insight from expert Illinois construction attorney, James T. Rohlfing.

Rohlfing discussed three issues that bother him most about this case:

“First, it holds that an item can be a trade fixture in Illinois even though it is obviously not intended to be removed from the real estate. A trade fixture is not lienable, though a fixture is. The court held that the contractual provision that defines it as a trade fixture is controlling despite obvious evidence to the contrary (removal requires dynamite).”

In his second point, Rohlfing agreed with the court’s opinion that the turbine is not lienable under traditional mechanic’s lien statute.

“The court held that the work done on the wind turbine tower is not lienable because it did not enhance the value of the owner’s property.  I agree with that holding and it is consistent with existing law.  It would be unfair to make a land owner who is getting a modest yearly income from the easement rights pay for an expensive improvement which is far more expensive than the owner’s stream of income.”

Lien on Easement vs. Lien on Leasehold

Last on Rohlfing’s list? The frustrating difference between a lien on an easement and a lien on a leasehold.

“Thirdly, the court holds that a mechanics lien can never be imposed on an easement right, even if it the right is more akin to a leasehold interest.  I am troubled by the distinction between liens on easements and liens on leasehold interests.  The authority relied on by the court to reach that conclusion is distinguishable from this case.  The court could have treated the easement rights similar to a lease and permitted a mechanics lien on the leasehold interest but not the fee simple owner.  This would have protected the lien claimant and it would have been a fair result consistent with case law.  There was a traditional easement to allow access to and from the wind turbine, but the land on which the turbine is situated has more lease-like characteristics.  For its authority, the court cites to a case which considers a more typical easement.

The problem is that typical leaseholds might now be converted to easements to avoid mechanics liens.

Further, fixtures that are clearly not intended to be removed from the property might be adjudicated to be trade fixtures and, thus, not lienable. These two developments might weaken mechanics lien rights in Illinois.”

What’s a Subcontractor to Do & What’s Next in Legal Action?

Rohlfing commented that this case could head to the Supreme Court, who may in turn handle some of these issues. There is also the possibility that some construction associations may collaborate and propose a bill. For now, the most pressing question is how to protect claimants whose mechanic’s lien rights may be undercut by this decision.

While this is uncharted territory, Rohlfing has two suggestions for potential claimants.

“1) determine whether a UCC article 9 security interest might be available in the trade fixtures under these circumstances; and 2) have the turbine supplier require the easement holder to execute a collateral assignment of easement rights to be triggered in the event of non-payment.”

It’s Certainly Not Over

This case will undoubtedly spur continued debate, and could even result in new legislation. Stay tuned to the NCS blog, as we follow this and other relevant cases.

If you are furnishing to a project and are unsure whether mechanic’s lien rights or UCC rights would apply, contact NCS or seek a legal opinion.

A special thank you to James T. Rohlfing, Attorney at Law with ARNSTEIN & LEHR LLP for his insight on this case and his continued dedication to the construction community!

You Can’t File a Mechanic’s Lien Against a Bridge

Posted on January 24, 2017 by - Mechanic's Liens & Bond Claims

Burn ‘Em, Cry a River & Build a Bridge to Get Over It, Sing Songs About Bridges Falling – Just Don’t Lien ‘Em!

You can burn bridges, you can cry a river and build a bridge to get over it, you can even sing songs about bridges falling. But, as one misinformed subcontractor discovered, you can’t place a construction lien on a bridge when that bridge is owned by a public agency.

In Certification Coating Specialists Inc. v. Halifax-Dartmouth Bridge Commission, 2016 NSSC 250, the bankrupt subcontractor, Certification Coating Specialists (“CSS”), had its construction lien invalidated because the bridge is public land and per the Builders’ Lien Act, liens on public property are a no-go.

Backstory: The Big Lift

The MacDonald Bridge is a suspension toll bridge spanning the Halifax Harbour in Nova Scotia, and is currently undergoing significant repair known as “The Big Lift.”

According to the Halifax Harbour Bridges website, “The Big Lift” includes “replacing the road deck, floor beams, stiffening trusses and suspender ropes on the suspended spans of the Macdonald Bridge.”

The owner/operator of the MacDonald Bridge, Halifax-Dartmouth Bridge Commission (“Commission”), hired American Bridge as prime contractor. American Bridge hired Cherubini Metal Works Limited (“Cherubini”) to furnish road deck panels and Cherubini, in turn, hired CSS to paint the panels.

With only a third of the panels painted, CSS filed for bankruptcy protection, and the bankruptcy trustee, Bowra Group Inc. (“Bowra”) filed the lien on several parcels owned by Commission.

Conflict: None Shall Pass

Cherubini contested the construction lien based on the argument that MacDonald Bridge is public property.

“The applicant Cherubini says the MacDonald bridge is a public street or highway and as a result the Builders’ Lien Act has no application. They rely on s. 3(1) of the Act which provides: Nothing in this Act extends to any public street or highway or to any work or improvement done or caused to be done thereon.” Source: Certification Coating Specialists Inc. v. Halifax-Dartmouth, 2016 NSSC 250 (CanLII), par. 10, <http://canlii.ca/t/gtvcs#par10>, retrieved on 2016-12-12.

Per the court opinion, both the Commission and Attorney General of Nova Scotia agreed with Cherubini’s complaint. However, Bowra argued the Commission was not a public agency, which would make the bridge private property and liens would be applicable.

See, the Builder’s Lien Act doesn’t actually define “any public street or highway,” although the definition seems obvious. So Bowra argued that “public” simply means anyone can use the bridge, not that the bridge is owned by a public agency.

If you follow our blog, I hope you see the flaw in this argument. The ability to file a mechanic’s lien/construction lien stems from the property ownership, not from who can use the bridge.

Consider the Bridge Crossed

Ultimately the court needed to determine whether the bridge is publicly or privately owned property. First, the court reviewed the use of the bridge, noting that, despite applicable tolls, anyone can use the bridge. Next, the court looked to the formation of the Commission.

In theory, if the Commission is deemed to be a private entity, it could be further argued that the bridge is private. Unfortunately for Bowra, the Commission has its own Act, which states that it is a public agency.

  • “It is a public utility within the meaning of the Public Utilities Act (s. 19).
  • All members of the commission are appointed by either the Province of Nova Scotia or Halifax Regional Municipality (s. 3).
  • It has the power to expropriate land for purposes of the bridges (s. 12).
  • It has the authority to construct, maintain, and operate transportation projects across Halifax harbour which includes a bridge, tunnel, fixed crossing or similar structure (s. 27(1)).”

With that said, the court comfortably granted Cherubini’s request to vacate the CSS/Bowra construction liens.

What Could CSS/Bowra Have Done Differently?

Although there is no payment bond requirement in Nova Scotia, had a bond been issued for the project, CSS/Bowra could have pursued a bond claim.

Three yellow icons are shown: an envelope, a municipal building, and a judge's gavel. Beneath the envelope are the words: Obtain copy of payment bond. Notice - non-statutory recommended. Beneath the municipal building are the words: Bond claim - see bond for terms; frequently, within 120 days from last furnishing. Release - satisfied bond claim promptly. Beneath the judge's gavel are the words: Suit - wee bond for termsl frequently, within 1 year from last furnishing. Release - satisfied bond claim promptly.

There is a public improvement lien available for projects owned by the Crown, and based on the formation of the Commission, it’s possible Bowra could have argued the bridge is owned by the Crown and therefor subject to the public improvement lien. But, that may be a bit of a stretch.

Three yellow icons are shown: an envelope, a municipal building, and a judge's gavel. Beneath the envelope are the words: Notice - non-statutory recommended OR serve request for information (optional). Beneath the municipal building are the words: Lien - as soon as possible to trap funds. Release - satisfied lien promptly. Beneath the judge's gavel are the words: Suit - serve notice of suit at least 30 days prior to filing suit. Release - satisfied lien promptly.

Lastly, CSS/Bowra could have pursued their debtor directly, which is likely to happen now that CSS/Bowra’s liens have been invalidated.

Securing your right to be paid can be a tricky business and I strongly recommend you seek a legal opinion!

3 in 3 Mechanic’s Lien Rights on Leasehold Interest

Posted on January 17, 2017 by - Mechanic's Liens & Bond Claims

Today’s 3-in-3 Topic is Mechanic’s Lien Rights on Leasehold Interest

Today’s 3-in-3 features Notice & Lien Specialist, Keely Bindas. Read on to learn more about mechanic’s lien rights on leaseholds.

“What is a lien on leasehold interest and how does it differ from a mechanic’s lien on real property?”

Keely: When a lessee/tenant contracts for an improvement on real property, the mechanic’s lien may be available against the property, the leasehold interest of the lessee/tenant, or both.  When contracting with the fee simple owner of the real property, the mechanic’s lien attaches to the property itself.

“How would I know if my project is a leasehold situation? And, what if I’m in a situation where I file my mechanics lien and I don’t necessarily know that it is a leasehold situation. How would that impact my lien?”

Keely: For example, a big box retail store may sometimes own the property that the store sits on. In other cases, they may have a lease with the actual property owner.  So, if you can obtain a copy of the lease or the general contract, it would help in moving forward to protect your rights.

In some states, you can simply file your lien against the property and it will filter down to any leasehold interest that may exist if the fee owner isn’t responsible for the improvements.

However, there may be other factors that come into play, so it is important to know up front if there’s a lease situation.  For example, a separate lien filing may be required when there is a leasehold interest.

So, it may be necessary to pull a copy of that lease to obtain the tenant information as well as to obtain a copy of the agreement between the fee owner and the tenant to know who’s responsible for the improvements.

Generally speaking, it is best to have a lien against the real property, but a lien on an active lease can also prompt payment.

“What if I’m told on a project that the owner is a private entity but I think it is a public entity. Does this leasehold impact that?”

Keely: It can. We’ve seen many projects where the city, county or state owns the land, but they’ve provided a lease to a third party who happens to be a private entity. So, although a lien against the property isn’t available on public land, a lien against leasehold interest may be something that we can look at when the private entity contracts for the improvement.

3-in-3 Takeaway

  • Lease information may not be in public record. At the start of every project, complete a project information sheet so you know the key players and request a copy of the lease.
  • Know the state, as there may be varying requirements on what you must do to protect your rights in a leasehold situation.
  • Be prepared for the possibility that multiple liens may be required or that the tenant may need to be served with the preliminary notice.

Owner Failed to Pay the Contractor

Posted on January 11, 2017 by - Mechanic's Liens & Bond Claims

Fireworks Flew When the Owner Failed to Pay the Contractor: Explosive Mechanic’s Lien Claim

It’s an explosive case of an unpaid contractor! No, it really is explosive.

In Tennessee, a project owner appealed a trial court’s decision, which awarded claims, interest and attorney fees to the general contractor.

There are several issues addressed in the case of Beacon4, LLC v. I & L Investments, LLC, but the two issues we review are counts V. and VII.: “Willful and Gross Exaggeration of Lien Claim” and “Prompt Pay Act of 1991.”

Backstory

Beacon4, LLC (“Beacon4”) was one of several parties hired by I & L Investments, LLC (“I & L”) for the construction of a retail store, Fireworks Over America, located in Tennessee.

This project was divided into two separate contracts: site contract & building contract; Beacon4 was the general contractor for both. The site contract was executed February 7, 2011 and on May 17, 2011, the certificate of occupancy was granted.

Per the court of appeals opinion, Beacon4 was unpaid for a portion of work supplied under the site contract and subsequently filed a mechanic’s lien for $212,856.02, which leads us to count five of the opinion, where I & L argued that Beacon4 exaggerated its claim amount.

Count V: Willful and Gross Exaggeration of Lien Claim

I & L argued that Beacon4’s lien should be invalidated based on an inaccurate claim amount. Apparently, Beacon4 had added $45,000 to their unpaid claim because Beacon4 believed this $45k would compensate them for “the amount of time and effort that [he] had put into this project, over and above execution of the project.” (There were a lot of changes to the project’s scope, some were in the form of approved change orders & some were not.)

Per Tennessee Code Annotated § 66-11-120, the claim amount in the lien should not exceed the amount of the contract.

“The claims secured by lien for work, labor, materials, equipment, services, machinery, overhead and profit, shall not exceed the contract price and extras in the contract between the owner and the prime contractor.” – Tenn. Code Ann. § 66-11-120

And, per Tennessee Code Annotated § 66-11-139, it’s up to the court to determine whether a claimant, who has exaggerated its claim, is permitted to recover monies.

“If, in any action to enforce the lien provided by this chapter, the court finds that any lienor has willfully and grossly exaggerated the amount for which that person claims a lien, as stated in that person’s notice of lien or pleading filed, in the discretion of the court, no recovery may be allowed thereon, and the lienor may be liable for any actual expenses incurred by the injured party, including attorneys’ fees, as a result of the lienor’s exaggeration.” – Tenn. Code Ann. § 66-11-13

During trial, Beacon4 voluntarily amended their lien claim down to $167,026.15, which was the amount supported by evidence. It was up to I & L to prove that Beacon4, in bad faith, inflated their claim and that the inflated amount brought harm to I & L. I & L did not meet the burden of proof.

“As to I & L’s asserted defense that Beacon4 had willfully and grossly exaggerated its lien claim, the court found that Beacon4, through Mr. Russell, had “reasonably believed” that certain consequential damages could be included in the lien claim and that Beacon4 subsequently had appropriately moved to amend its complaint to reduce the lien claim by $45,000.00 to conform to the evidence. The court therefore determined that Beacon4 had not willfully and grossly exaggerated its lien claim.”

Therefore, the appeals court upheld the trial court’s decision to permit Beacon4’s lien and deny I & L’s motion to dismiss the lien.

Count VII: Prompt Pay Act of 1991

During the initial trial, the court found that I & L, in bad faith, had violated the Prompt Pay Act. I & L was withholding retainage, in the amount of $46,942.75, and claimed it held the retainage in compliance with statute. Unfortunately, I & L didn’t closely review statute:

66-34-204.  Payment of retainage by owner.

When an owner:

(1) Has received a use and/or occupancy permit for an improvement from a governmental agency lawfully issuing such permit;

(2) Has received a certificate of substantial completion from an architect charged with supervision of the construction of an improvement; or

(3) Begins to use or could have begun to use an improvement; – Tenn. Code Ann. § 66-34-204

the owner shall, after any such event and pursuant to the terms of the written contract, pay to the contractor all retainage the owner may have withheld pursuant to the written contract, except any sum which the owner may reasonably withhold in accordance with the written contract between the owner and the contractor; provided, however, that the retainage must be paid within ninety (90) days after the date of the occurrence of an event included in subdivision (1), (2) or (3).

Based on the date the certificate of occupancy was issued, May 17, 2011, I & L was required to pay the retainage by August 17, 2011 and they did not.

Prompt Pay Talk Snowballed

The issue of Prompt Pay then snowballed into a lengthy discussion regarding what constitutes completion; based on various work performed under the two contracts, I & L argued that it complied accordingly. Ultimately, the appeals court sided with Beacon4, and agreed with the trial court: I & L did violate the prompt pay act.

“The trial court further found that through Mr. Butler’s actions, I & L had acted in bad faith and with ’reckless disregard of Beacon4’s contractual rights.’ Upon this finding of bad faith, the court awarded reasonable attorney’s fees to Beacon4 pursuant to the PPA. See Tenn. Code Ann. § 66-34-602(b) (providing that ‘[r]easonable attorney’s fees may be awarded against the nonprevailing party; provided, that such nonprevailing party has acted in bad faith.’).”

Warning: Explosive

This post is just a glimpse at the issues raised in this case. Among the addressed issues, make sure you have documentation to support your claim amount and follow prompt pay guidelines with the strictest of interpretations.

Proofs of Delivery and Bills of Lading

Posted on January 3, 2017 by - Mechanic's Liens & Bond Claims, Preliminary Notices & Construction Credit

The Importance of Proofs of Delivery and Bills of Lading

You take great strides to secure your mechanic’s lien rights, then, when you go to enforce the lien, the validity of the lien is questioned. What?! I did everything right! Except you failed to obtain and/or save copies of bills of lading and proofs of delivery. I recently read an article where the author described a bill of lading as “one of the most important documents in the shipping industry.”  Distributors and suppliers should also realize its importance.

What Is the Difference Between a Bill of Lading and Proof of Delivery?

First, both documents are of equal importance. A Bill of Lading is a written receipt from a carrier for the transportation of materials, whereas the proof of delivery is a receipt signed by the party receiving the materials.

Why Are They So Important?

Bills of lading and proofs of delivery can be critical in supporting your mechanic’s lien claim. If you can’t support your claim through proof that your materials made it to your customer and to the jobsite, a judge could invalidate your claim or your debtor could use the lack of proof as leverage in settlement negotiations.

It’s Just a Piece of Paper, Right? Wrong!

It is critical that material suppliers properly draft, execute & countersign Proofs of Delivery and/or Bills of Lading for every shipment or delivery to support potential claims.

Every Bill of Lading or Proof of delivery should include:

  • your company’s information,
  • your customer’s information,
  • the contents of the order/delivery,
  • the project/jobsite location information and
  • the proper dates & signatures (signed and countersigned).

And don’t forget to include acknowledgement language: “I acknowledge and swear that these materials are to be used at (project name) located at (project address).”

When Should I Use a Bill of Lading vs. Proof of Delivery?

Here are some examples of when a proof of delivery or bill of lading should be used. If your customer:

  • has your materials shipped to their own place of business, ensure a proof of delivery is signed by your customer.,
  • has your materials shipped directly to the jobsite/project location, ensure a proof of delivery is signed by someone at the jobsite or
  • picks up the materials (or sends a carrier to pick it up) from your location, ensure a bill of lading is signed.

Once you can prove that your materials were either delivered to the jobsite or released to your customer for a specific project, it can generally be assumed that your materials were incorporated into the project. Based on that assumption, your customer (or any other disputing party) is now saddled with the burden of proof…they must prove that your materials weren’t incorporated into a project and a judge is more likely to rule for a settlement in your favor.

Best Practice

Execute a Bill of Lading or Proof of Delivery for every shipment–even for seemingly minor change orders.