Sub-subcontractor Loses Mechanic's Lien Rights

A recent decision from the Iowa Court of Appeals highlights a significant trap for contractors working on commercial construction. LM Construction, Inc. vs. HGIK Hospitality, LLC, began when property owner HGIK Hospitality (HGIK) hired general contractor DDG Construction (DDG) to build a commercial hotel in Ames. DDG hired subcontractor ESC, LLC (ESC) to perform work on the project, and ESC hired sub-subcontractor LM Construction (LM) to install drywall.

Under Iowa Code § 572.33, LM had to provide written notice to DDG within 30 days of starting work on the project if LM wanted to protect its right to file a mechanic's lien. The notice had to include LM's name, address, phone number, and ESC's name. LM mailed a notice, but sent it to HGIK, not DDG.

At some point, ESC was terminated from the project, and DDG contacted LM about finishing the work on the project. LM agreed to do so, but DDG refused to pay approximately $100,000 to LM after the work was completed. LM then filed a mechanic's lien, and filed a lawsuit to foreclose the lien.

The Iowa Court of Appeals ruled that LM was not entitled to a lien because LM failed to send the notice required by Iowa Code § 572.33 to DDG. The Court was unpersuaded by LM's argument that it sent a notice to HGIK because the statute is clear that the notice must be sent to the general contractor.

This case highlights the risks that contractors face when hired to work on commercial construction projects. The contract between ESC and LM identified ESC as the "general contractor." That definition was misleading because for purposes of Iowa mechanic's lien law, ESC was not a "general contractor."

Contractors should take time at the beginning of a project to identify the hierarchy between contractors and identify the contractor with a contract directly with the property owner. This due diligence will reveal the identities of the parties who need to receive notice to protect a contractor's mechanic's lien rights.

In the absence of a mechanic's lien, contractors can file claims for breach of contract. However, these cases are often less desirable because many construction contracts do not allow subcontractors to recover attorneys' fees from the general contractor or property owner. If contractors want to protect their mechanic's lien rights and right to attorneys' fees, then they should conduct due diligence at the beginning of a project to determine who needs to receive notice.

Contractors should also keep in mind that the mechanic's lien law is full of traps for the unwary. Articles and blogs about the law are no substitute for consulting with a knowledgeable attorney because the circumstances of your situation may have a slight difference that has important consequences for your mechanic's lien rights. You should always consult with an attorney about mechanic's lien questions.

John Lande is a shareholder with a civil litigation practice at the Dickinson Law Firm in Des Moines. He has experience with matters involving banking and financial regulation, cybersecurity, construction and real estate litigation, and bankruptcy and collections. Lande regularly works with clients already involved in litigation and clients who are trying to avoid future litigation.

To view the article in its entirety, go to the Dickinson Law Firm website.

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Tuesday, 16 July 2019

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