September 23, 2014

The Arizona Supreme Court's reversal in a case involving use of equitable subrogation in a mechanic's lien situation may embolden more primary lenders to use the tactic, at the potential peril of contractors and subcontractors. 

As covered previously in NACM Secured Transaction Services’ Lien Navigator, the Arizona Supreme Court ruled in The Weitz Company, LCC v. Nicholas Heth, et al that a lien filed by a contractor does not automatically take priority over other liens recorded before construction began on a project. Chris Ring from NACM STS, believes this rejection of a lower court ruling that upheld mechanic's lien rights will only open the door for more attempts to sidestep protections long considered to be strong and safe. Ring warned that "as a subcontractor or material supplier, be mindful that the primary lender of the developer may attempt to use subrogation as a way for the mortgage lien to trump your previously-recorded mechanic’s lien."

September 5, 2014

The Arizona Supreme Court has weighed in on the use of equitable subrogation in a mechanic’s lien case. In The Weitz Company, LCC v. Nicholas Heth, et al, the state's high court ruled that a lien filed by a contractor does not automatically take priority over other liens recorded after work has already begun.

The court held that state statute does not preclude assignment by equitable subrogation of a lien that attached before construction began on the project at issue. It continued, “additionally, although a third party generally must discharge the entire lien obligation to qualify for equitable subrogation, when a single mortgage burdens multiple parcels, a third party may be entitled to equitable subrogation when that party has paid a pro rata amount of the obligation and obtained a full release of the parcel at issue from the mortgage.”

In the case, the general contractor in a mixed-use project in Phoenix stopped paying a general contractor after many of the condominium units within the structure had been sold to consumers. A trial court previously sided with the contractor’s argument that it had lien priority and the motion to seek foreclosure.

September 5, 2014

A pair of Nevada Supreme Court decisions that intend to clarify lien law could be of help to suppliers, subcontractors and materialmen. In Byrd Underground, LLC v. Angaur LLC, the Nevada Supreme Court clarified that some pre-construction work on a structure, such as clearing and grading, could be considered a "work of improvement" under existing state mechanic’s lien statutes. The court deemed it a fact question for another court, a bankruptcy court, to consider what constitutes “work of improvement” in this specific case. Much of that comes down to whether the work is visible, said Nathan Kanute, an associate at Snell & Wilmer LLP.

Some previous rulings on lien claims on work like erecting an architect’s sign took an opposing stance regarding clearing and grading. However, “nothing in these provisions excludes preconstruction activities from the definition of ‘work of improvement,’” the Byrd ruling read. The court also found that construction contract and permit issue dates “are irrelevant” when evaluating delivery of materials, performance of work and/or visible commencement of construction, though judges noted the dates may be helpful in assisting the determination of the scope of the work performed.

September 3, 2014

The Court of Appeals for the Fifth District of Texas in Dallas recently ruled in Crawford Services, Inc. v. Skillman International Firm, LLC that a lower court erred when it denied a lienholder a judgment in a case involving a mechanic’s lien for $140,000 for work provided on an air conditioning system. The lower court came to the disputed conclusion even though it had ruled that Crawford Services was owed the money for the work. The Appeals court essentially slammed the door on allowing trial judges the discretion to deny a judgment of foreclosure and order of sale on a property subject to the perfected lien. The case was remanded on August 22 to the trial court “with instruction to render a judgment of foreclosure of Crawford’s mechanic’s lien and order of sale of the property.”

August 11, 2014

With the summer signing by Pennsylvania Gov. Tom Corbett, the mandates within the state's SB 145 will go into effect on Sept. 7 and usher in some fairly significant changes for subcontractors and material suppliers working on residential projects. NACM Secured Transaction Services’ Chris Ring and some prominent Pennsylvania attorneys characterize the new law as a lose-lose for subs and suppliers pretty much all around.

In essence, the change affects the dollar amount of the lien that a subcontractor or material supplier can file, basing it on the amount of the funds owed from the property owner to the general contractor. The subcontractor’s lien rights will now be limited to the amount still owed to the contractor, general contractor. Nicholas Krawec, Esq., of Bernstein-Burkley PC, noted that the amount could, and usually will be, less than the amount owed to the sub or supplier. He added that “it’s a big deal” for subs and suppliers. But it’s even worse if the homeowner has made full payment.

“Essentially, subcontractors and material suppliers have no lien rights if the property is or is intended to be used as the residence of the owner or subsequent to occupation by the owner or a tenant of the owner,” said Ring.

July 28, 2014

As noted by a growing number of sources, natural gas, specifically shale gas, is booming in the United States like few other industries have in some time. But as people count on future money and positive trends, seemingly all growth areas have their bumps in the road, at best, and, at worst, watch bubbles burst spectacularly. There is little historic evidence to say there won’t be problems on some projects related to gas, specifically construction-related improvements that could affect service providers and materialmen. It begs the question: will mechanic's liens play a role in future line and well improvements?

"I certainly would not tell a client that it is not an option. I think there is an argument that you can, in fact, file a mechanic’s lien on such a project," said Kit Pettit, a senior associate with the Pennsylvania firm Bernstein-Burkley PC. "Yes, there is a certainly a lot of money in the industry right now and typically there is plenty of cash flow to pay vendors and contractors performing well. At the same time, there are a number of new entities or startups looking to get work. You may very well have companies that fail to perform properly. You may have companies that don’t know what they’re doing or perhaps expanded too quickly or don’t have employees with enough skill or training."

Mechanic's liens vary greatly from state to state, even among high-production states, according to Chris Ring, of NACM’s Secured Transaction Services. For example, the lien laws of Pennsylvania seem significantly more vague than those of Texas or Oklahoma (all three are among the top five in US states producing natural gas). As noted by Pettit, there still exists sparse case law available on the topic that is applicable to the current situation, in part because the boom conditions mean there have been few problems to date.

June 30, 2014

Missouri will have a new retainage statute starting in August after Governor Jay Nixon signed SCS SB 529 into law last week. Under current law contractors in Missouri must pay subcontractors and suppliers when they receive payment on a public project less any retention not exceeding 10% of the value. SB 529 lowers that retention threshold to 5%. It also provides that a public owner may retain up to 10% if the contractor is not required to obtain a surety bond on the project, which is to say if the value of the project is $50,000 or less. The new statute also provides that if a public owner determines that certain aspects of a public project are not substantially or satisfactorily completed, the owner must provide a written explanation within 14 calendar days to the contractor, which must then inform any subcontractor or supplier that might be held responsible. Failing to provide this notice means the public body must pay at least 98% of the retainage within 30 calendar days.

June 6, 2014

In Pennsylvania, there is legislation advancing in both the House and the Senate related to lien law. In the House, Rep. Thomas Killion is pushing revamped legislation to amend the state's 20-year-old Contractor and Subcontractor Payment law. The Republican lawmaker argues there are too many elements in the current statute that actually impede the ability of subcontractors to collect money owed to them by problem property owners or developers. A previous effort (HB 1602) spearheaded by Killion seeking to help subcontractors with payment on private construction projects passed the House by a 190-8 margin, yet it was not picked up for action by the Senate prior to the 2013-2014 Pennsylvania General Assembly session.

This time, there seems to be renewed interest in his HB 473. Among interesting new provisions and/or clarifications of old ones are:

• Owners or their agents must "conspicuously" post a copy of a Notice of Commencement at a project site before physical work commences on a property.
• Subcontractors must file a Notice of Furnishing with the directory within 20 days after the first performing work or services or provision of materials.
• Notices of Commencement must, if applicable, must include the full name, address and email of a surety for the performance and payment bonds and all bond numbers.

June 6, 2014

In West Virginia, June 6 marks the effective date of change to the 1931 Code of West Virginia in which it becomes a full-price lien state, instead of an unpaid balance state, for commercial and certain residential projects. Residential owners will not be indebted to a contractor when the property is an existing single-family home, if the residence in question is a new owner's primary residence or if the property is an owner-occupied single-family dwelling. According to the statute, "This subdivision does not apply to a developer or builder of multiple residences except for the residence that is occupied as the primary residence of the developer or builder."

June 4, 2014

Using the doctrine of “equitable subrogation” to establish lender priority over mechanic’s liens would “completely defeat” the legislative intent behind mechanic’s liens statutes and “improperly shift the known and assumed risks” from construction project owners and lenders to contractors and subcontractors, the American Subcontractors Association (ASA) and ASA of Arizona told the Supreme Court of Arizona.

In the associations’ amicus brief in The Weitz Company, LLC, Plaintiff-Appellee, v. Nicholas Heth, et al., Defendants-Appellants, ASA and ASA of Arizona urged the state Supreme Court to affirm a court of appeals decision, saying, “The mechanic’s lien statutes are one part of the intricate statutory framework adopted by the legislature to protect subcontractors and ensure that laborers and materialmen are paid for their work All 50 states have some form of mechanic’s lien statutes. The language and details of the statutes vary widely, as does the jurisprudence. However, the basic premise of all is that those whose labor or materials go into improving real estate should be permitted, in fairness, to satisfy their unpaid bills out of that real estate.”

“Those involved in construction depend on their mechanic’s lien rights as security for payment for the work they perform,” said Matthew B. Meaker, attorney, Sacks Tierney P.A., Scottsdale, Ariz. Sacks Tierney prepared the ASA brief in this case. “Affirming the Court of Appeals decision regarding equitable subrogation results in a bright line rule that all stakeholders can rely upon.”