With VA Mechanic’s Liens Sometimes “Substantial Compliance” is Enough (But Don’t Count on it)

Christopher G. Hill | Construction Law Musings | September 3, 2018

Virginia mechanic’s liens are a powerful and tricky beast that in most cases require absolute precision in their preparation. However, an interesting opinion recently came out of the Virginia Supreme Court that may provide a bit of a “safe harbor” from the total form over function nature of a mechanic’s lien.

In Desai, Executrix v. A.R. Design Group Inc., the Court considered a lien memorandum that had what could be described as technical flaws in the preparation of the mechanic’s lien by A. R. Design Group. The basic facts are that A. R. Design Group used the form of lien found in Va. Code Sec. 43-5 (also found as Form CC-1512 at the Virginia Judiciary website) when it recorded two lien memoranda for two pieces of property owned by a trust. Relating to one of the two properties, the memorandum failed to identify the “Owner” as the trustee of the trust. On the memoranda relating to both properties the affidavit verifying the amounts claimed did not identify the signatory as agent for A. R. Design Group, instead listing the agent as the claimant and further failed to state a date from which interest is claimed or a date on which the debt was due.

Needless to say, the owner argued that each of these technical defects invalidated the memoranda and therefore they should have been released. Somewhat surprisingly the Fairfax, Virginia Circuit Court disagreed and held the liens to be valid. On appeal, the Virginia Supreme Court affirmed the lower court. The held that the failure to add the word “Trustee” after Ulka Desai’s name did not invalidate the lien because the trustee had all of the rights of ownership and furthermore that naming Desai in the memorandum served the purpose of putting third parties on notice of the lien.

As to the naming of a vice president of A. R. Design Group as claimant, the Court held that this was not a “substantial” defect that would cause prejudice to a party or thwart the purpose of the statute. Because the claimant was properly identified in the lien memorandum itself and it was clear that the person executing the affidavit was an agent of the company, the Court held that this defect was not substantial and held that it fell within the safe harbor of Va. Code Sec. 43-15.

Finally, and more interestingly, the Court found that failure to state a date from which interest could be claimed or a date when the amounts due are or would become payable in this case were not fatal. As to the interest, the Court stated that in the case before them no interest was being claimed so no date was necessary. As to the failure to state a date when the amounts claimed are due, the Court looked at the requirements of Va. Code Sec. 43-4 and Va. Code Sec. 43-5 and concluded that because A. R. Design Group used the form found in Section 43-5:

[t]he memoranda were substantially compliant because they closely tracked the form required by Code § 43-5, they provided sufficient notice that the owner was claiming amounts due and any defect in the memoranda would not thwart an underlying purpose of the statute, such as providing notice to third parties. Therefore, A.R. Design is entitled to the safe harbor provided by Code § 43-5.

In short, the Virginia Supreme Court looked at a lien memorandum that had a technical flaw or two and concluded that its substantial compliance with the mechanic’s lien statute and its purpose did not require its invalidation.

Does this case mean that you shouldn’t worry about title searches, proper certification of mailing, and other technical requirements of the lien statutes? Of course not. Does this mean that the assistance of a Virginia construction lawyer that is experienced with mechanic’s lien matters is now unnecessary? Nope. The Court in this case was looking at a particular set of facts and circumstances. Frankly, the lien claimant was a bit lucky in my opinion because of the particular confluence of circumstances. I would still be very careful with mechanic’s liens and would not read this one case as a thawing of the strict requirements of these powerful collection tools.

As always, I recommend that you read the case yourself and draw your own conclusions. If they are different from mine, I’d love to hear them.

Construction Law: Final Payment by Owner, Avoiding Lien Claims

Donalt J. Eglinton | Wardand Smith | September 5, 2018

A contractor has finished work on a construction project in North Carolina and submitted a written request for final payment to the owner of the real property that has been improved by the construction.

The owner is concerned about having to deal with liens from subcontractors and suppliers after final payment is made.  This article examines the circumstances under which an owner can make final payment without this concern.

The North Carolina law governing the assertion of liens by mechanics, laborers, and materialmen who furnish labor, material, or services to improve real property is complex.  It consists of a patchwork of statutes enacted and amended at different times to address particular issues.  It also involves a body of case law interpreting and applying these statutes that has developed as the statutes have been enacted and amended.  The statutes and case law are applied to determine, among other things, whether a right to assert a lien exists and, if so, the extent and priority of such lien.  Not surprisingly, this law gives owners, who want to avoid liens and a risk of having to pay twice for construction, pause when parting with their funds to pay a contractor.

Notwithstanding the complexity of the law, there is a circumstance under which an owner can safely make final payment to a contractor (who, for the purposes of North Carolina law and this article, is any contractor who contracts directly with the owner and is commonly referred to as a “general contractor,” as opposed to a subcontractor who contracts only with a contractor) without concern for potential lien claims from subcontractors or suppliers.  If the owner makes final payment to a contractor (and the payment is accepted by the contractor as final payment) at a time when the owner does not have proper written notice of any lien claim from a subcontractor or supplier who dealt with that contractor, the making of the final payment will protect the owner from the assertion of any valid lien claim made by any such subcontractor or supplier after final payment was made.

This simple, bright-line rule makes sense.  Generally, two kinds of liens arising out of construction projects are recognized in North Carolina:

  • The contractor may assert a lien against the owner’s improved real property (if this right exists, it can be exercised through subrogation by some subcontractors or suppliers under certain circumstances); and,
  • Some subcontractors or suppliers may assert a lien against any funds owed by an owner or a higher tiered contractor, subcontractor, or supplier.

These liens secure the right to be paid for work performed to improve the owner’s real property.  When an owner makes final payment to a contractor and the contractor accepts final payment, there are no more funds owned to the contractor.  If no funds are owned to the contractor, then:

  • The contractor has no right to assert any lien against the owner’s improved real property;
  • No subcontractor or supplier has any right to assert a lien on funds owed by the owner to the contractor; and,
  • No subcontractor or supplier has the ability, through subrogation, to assert a contractor’s lien against an owner’s improved real property because the contractor no longer has such a lien.

A comment and a caveat must be added:

Comment: Although the making of final payment effectively cuts off lien rights, it is well-advised for an owner to require any contractor to provide a comprehensive final lien release, commonly called a “lien waiver,” at or before the time final payment is made.

Caveat: If an owner has proper written notice of a lien claim from a subcontractor, then the owner is obligated by law to withhold from payment to the contractor an amount sufficient to satisfy and pay the subcontractor’s lien claim, and final payment, therefore, should not be made by the owner until the subcontractor releases, or “waives,” the noticed lien claim.  If the owner does not require this and the subcontractor is not paid by the contractor, the subcontractor’s lien on funds will become the even more problematic direct lien on the owner’s improved real property.  If this occurs and the owner cannot get the paid contractor to “refund” the erroneously paid funds to the owner (or to do the right thing and pay the subcontractor), the owner may well have to make a “double payment” (that is to pay the amount that is the subject of the subcontractor’s lien claim twice) in order to clear title to the improved real property.

Protect Your Lien Rights Before the Project Begins

Daniel M. Murdock | Bradley Arant Boult Cummingss LLP | August 15, 2018

Claims of lien are common issues in any construction dispute. Filing claims of lien can often be complicated and sometimes tricky, especially for contractors and subcontractors performing work in multiple states. Although lien law greatly varies from state to state, several states in the Southeast have specified certain steps that parties must take, before the project begins or soon after starting work, to protect the project from liens of unknown sub-subcontractors or to protect their lien rights.

For prime contractors, they can often take certain steps, such as filing a notice of commencement, to protect the Project from liens of unknown sub-subcontractors. Also, subcontractors or sub-subcontractors’ right to a claim of lien can often be affected by whether or not that party sent or filed a notice after starting work on the project.

For example, in Georgia, a prime contractor, or the owner, may file a Notice of Commencement in the county property records within 15 days after the contractor commences work on the project. The prime contractor, or the owner, must also post a copy of the Notice of Commencement at the project site and send a copy of the Notice of Commencement to any subcontractor that requests a copy of such notice within 10 days after receiving the subcontractor’s request. Even if a Notice of Commencement is filed, the sub-subcontractor can still preserve its lien rights by sending a Notice to Contractor within 30 days of beginning work. If the prime contractor, or the owner, correctly follows the steps to perfect the Notice of Commencement and a sub subcontractor does not timely provide a Notice to Contractor, then any lien filed by such sub-subcontractor is invalid. Although the procedures are different, North Carolina and South Carolina have notice of commencement and notice to contractor concepts that are relatively similar to Georgia.

In Florida, a subcontractor must serve the owner with a Notice to Owner, which is a statutory form, within 45 days of commencing work on the project. A sub-subcontractor must adhere to a similar notice procedure. If a subcontractor or sub-contractor does not correctly provide the Notice to Owner, then any lien filed by that subcontractor or sub-subcontractor is invalid.

This article serves as a reminder that prime contractors and subcontractors must verify and follow the particular procedures required for the particular state in which the project is located before beginning work on the project. To wait longer risks losing your lien rights. As the old axiom goes, “an ounce of prevention is worth a pound of cure.” This is especially true when dealing with liens.

California Contractor Spills Coffee on Himself by Failing to Stay Mechanics Lien Action While Pursuing Arbitration

Garret Murai | California Construction Law Blog | July 26, 2018

It bugs the Mrs. that I have a habit of reading the directions. “Just plug the darn thing in!” said the Mrs. when we got a new coffee maker to replace our old one which we’ve had since I think before we were married (Life Lesson No. 347: Get a coffee maker you really, really like because they last forever). “But . . . the directions?,” I said.

By the time I had finished reading the instruction manual I could smell the coffee brewing in the kitchen. Granted, the Mrs. is more practical than I am in many ways (e.g., “You know, you didn’t need to buy 10 cans of corn to get the 10 for $10 discount. I guess you’re going to be eating a lot of corn”). But still. What might have happened if there was a serious coffee mishap?

And worrier as I may be mishaps can happen if you don’t read the directions. James Zenovic didn’t read the directions, and here’s his story . . .

Von Becelaere Ventures, LLC v. Zenovic

In Von Becelaere Ventures, LLC v. Zenovic, Case No. D072620 (June 6, 2018), James Zeonovic doing business as James Zeonovic Construction entered into a construction contract to build a single-family house for Von Becelaere Ventures, LLC in Laguna Beach, California. The construction contract included an arbitration provision that stated:

If any dispute arises concerning this Contract or the interpretation thereof, of concerning construction of the Improvements, or the Limited Warranty, customer service, defects, damages, or obligations therewith (a “Construction Dispute”), such Construction Dispute will be settled by binding arbitration.

As sometimes happens on a construction project, a dispute arose. The result, was that Mr. Zenovic recorded a mechanics lien asserting that Von Becleare Ventures owed him nearly $450,000 on the project.  Mr. Zenovic recorded his mechanics lien on March 20, 2017. As also sometimes happens on a construction project, Von Becleare Ventures filed a complaint against Mr. Zenovic alleging a host of claims relating to the work performed by Mr. Zenovic on the project. Von Becleare’s complaint was filed on April 3, 2017. On April 7, 2017, Mr. Zenovic filed a complaint against Von Becleare Ventures foreclosing on his mechanics lien.

About a month later, Mr. Zenovic file a motion to compel arbitration to stay the actions while the parties arbitrated their dispute pursuant to the arbitration provision of the contract. However, the trial court denied Mr. Zenovic’s motion finding that he had waived his right to arbitration because he failed to (read and) comply with Code of Civil Procedure section 1281.5 which provides in pertinent part:

(a) Any person who proceeds to record and enforce a [mechanics’] lien . . . does not thereby waive any right of arbitration the person may have pursuant to a written agreement to arbitrate, if, in filing an action to enforce the claim of lien, the claimant does either of the following:

(1) Includes an allegation in the complaint that the claimant does not intend to waive any right of arbitration, and intends to move the court, within 30 days after service of the summons and complaint, for an order to stay further proceedings in the action.

(2) At the same time that the complaint is filed, the claimant files an application that the action be stayed pending the arbitration of any issue, question, or dispute that is claimed to be arbitrable under the agreement and that is relevant to the action to enforce the claim of lien.

(b) Within 30 days after service of the summons and complaint, the claimant shall file and serve a motion and notice of motion pursuant to Section 1281.4 to stay the action pending the arbitration of any issue, question, or dispute that is claimed to be arbitrable under the agreement and that is relevant to the action to enforce the claim of lien. The failure of a claimant to comply with this subdivision is a waiver of the claimant’s right to compel arbitration.

(c) The failure of a defendant to file a petition pursuant to Section 1281.2 at or before the time the defendant answers the complaint filed pursuant to subdivision (a) is a waiver of the defendant s right to compel arbitration.

The Court ruled that because Mr. Zenovic had not: (1) included an allegation in his complaint to foreclose on his mechanics lien that he did not intend to waive his right to arbitration and within 30 days of service of his complaint would seek a stay of the action while he pursued arbitration; or (2) did not file an application to stay the action at the time he filed his complaint to foreclose on his mechanics lien, he had waived his right to arbitration pursuant to Section 1281.5.

Mr. Zenovic appealed.

The Court of Appeal Decision

On appeal, Mr. Zenovic contended that Code of Civil Procedure section 1281.5 only applied to his complaint to foreclose on his mechanics lien but did not apply to Von Becleare Ventures’ claims against him.

The Court of Appeals for the 4th District disagreed holding that, under a plain reading of the statute, Section 1281.5 applies not only to actions to foreclose on a mechanics lien, but also to any arbitrable claim relevant to an action to enforce a mechanics lien:

Section 1281.5, subdivision (a), contemplates a mechanics lien action will be separate from an action to resolve otherwise arbitrable disputes. It makes no difference if the arbitration action is initiated in a different venue or which party initiates the arbitration action. By its plain terms, the statute permits a contractor to take advantage of the statutory mechanics lien process while preserving the contractual right to arbitrate disputes as provided in the arbitration agreement. The purpose of the alternative stay procedures articulated in section 1281.5, subdivision (a), is to hold the mechanics lien process in abeyance “pending the arbitration of any issue, question, or dispute that is claimed to be arbitrable under the agreement and that is relevant to the action to enforce the claim of lien.” However, a party who commences a mechanics lien action without complying with either of the stay provisions waives any such right to arbitration.

(emphasis in original).

And, here, held the Court of Appeals, Von Becleare Ventures’ claims against Mr. Zenovic were arbitrable claims under the arbitration provision of the parties’ agreement, but Mr. Zenovic failed to preserve his right to arbitration by failing to comply with Code of Civil Procedure section 1281.5 when filing his action to foreclose on his mechanics lien.

Conclusion

So there you have it. Read the directions, or, in this case, the statutes, to avoid the risk of spilling coffee all over yourself.

Enforcing A Mechanic’s Lien In California? Don’t Waive Your Right To Arbitrate The Dispute

Jeffrey N. Brown | Thompson Coburn LLP | June 13, 2018

On June 6, 2018, the California Court of Appeal held that a contractor waived its right to arbitrate disputes because it recorded a mechanic’s lien and then didn’t follow California Code of Civil Procedure Section 1281.5 in its subsequent lawsuit to foreclose on the lien. In Von Becelaere Ventures, LLC v. Zenovic, the parties entered into a construction contract for a single-family residence in Laguna Beach, California. The contract had an arbitration provision as follows:

If any dispute arises concerning this Contract or the interpretation thereof, or concerning construction of the Improvements, or the Limited Warranty, customer service, defects, damages, or obligations therewith (a “Construction Dispute”), such Construction Dispute will be settled by binding arbitration.

After a dispute arose, Zenovic, the contractor, recorded a mechanic’s lien in the amount of almost $450,000, and Von Becelaere Ventures, the owner, filed a construction defect lawsuit, alleging that Zenovic breached the construction contract by

“(a) failing to properly perform and construct the Work;

(b) failing to hire properly licensed and insured subcontractors;

(c) failing to comply with proper license and insurance requirements;

(d) failing to obtain written subcontract agreements;

(e) failing to properly supervise the Work;

(f) failing to maintain and provide upon request proper accounting records;

(g) failing to properly manage expenses and allowing gross overages;

(h) failing to comply with requirements regarding change orders, improperly billing for extra work and improperly categorizing work as extra work which should have been covered under the contract as included work; and

(i) improperly filing and asserting an untimely mechanics lien and threatening to file suit to foreclose on the improper lien.”

Shortly after being served with the Von Becelaere Ventures lawsuit, Zenovic filed his own lawsuit, asserting causes of action for breach of contract, reasonable value, account stated, open book account, abuse of process, breach of the covenant of good faith and fair dealing, and foreclosure on mechanic’s lien.

Not long after, Zenovic filed a motion seeking to compel arbitration under the arbitration provision of the construction contract. The trial court denied that motion. On appeal, the Court of Appeal affirmed the trial court’s decision that Zenovic waived his right to compel arbitration because he didn’t comply with Section 1281.5, which provides:

Any person who proceeds to record and enforce a claim of lien by commencement of an action pursuant to Chapter 4 (commencing with Section 8400) of Title 2 of Part 6 of Division 4 of the Civil Code, does not thereby waive any right of arbitration the person may have pursuant to a written agreement to arbitrate, if, in filing an action to enforce the claim of lien, the claimant does either of the following: (1)Includes an allegation in the complaint that the claimant does not intend to waive any right of arbitration, and intends to move the court, within 30 days after service of the summons and complaint, for an order to stay further proceedings in the action. (2) At the same time that the complaint is filed, the claimantfiles an application that the action be stayed pending the arbitration of any issue, question, or dispute that is claimed to be arbitrable under the agreement and that is relevant to the action to enforce the claim of lien.

Here, Zenovic “neither included an allegation in the complaint filed in the [mechanics lien] action stating he did not intend to waive any right of arbitration and intended to seek a stay of the [mechanics lien] action (§ 1281.5, subd. (a)(1)), nor filed an application for stay at the time he filed the complaint in the [mechanics lien] action (§ 1281.5, subd. (a)(2)).” As a result, the Court of Appeal held that he waived his right to compel arbitration of the owner’s construction defect claims. The Court held that Section 1281.5 “means what it says,” and that Zenovic’s failure to comply “waived the right to arbitrate construction disputes under the terms of the construction contract.”