Michigan Court of Appeals: Construction Lien Can’t Exceed Contract Value

Scott R. Murphy | Barnes & Thornburg | September 27, 2019

The Michigan Court of Appeals held that an arbitrator’s decision to award a contractor consequential damages on a construction lien claim warranted reversal even under the extremely narrow standard of review for arbitration awards. In reaching its decision, the court made the definitive ruling that a contractor may not assert a construction lien for consequential damages beyond the monetary value of the parties’ contract.

In TSP Services, Inc. v. National-Standard, LLC, the contractor’s scope of work included asbestos abatement, demolition of steel structures and disposal of scrap steel as well as other site restoration work for an abandoned industrial facility. The parties’ contract required payment in installments with an aggregate contract price of $414,950, due upon completion of the asbestos abatement. Notably, the contract did not mention the sale of scrap steel or TSP’s potential profits therefrom as compensation under the contract. This fact was significant in the eyes of the appeals court because the arbitration proceeding focused on the profits from the sale of scrap steel as a major component of the contractor’s scope of work.

Because the project experienced significant delays in permitting, the contractor was unable to begin the steel reclamation work. During the delay, the market price for steel declined dramatically and as a result, the value of the contract was diminished significantly. In response to the declining steel prices, the contractor requested an equitable adjustment to the parties’ contract. At the time the contractor requested the equitable adjustment, only 9 percent of the available steel had been removed from the project site. When the parties could not reach an agreement to adjust the contract price, the owner terminated the contractor for cause.

However, the arbitrator ultimately concluded that the owner improperly terminated the parties’ contract and committed the first material breach of the parties’ contract. The arbitrator awarded the contractor a construction lien for $782,496.05 and broke that amount out as follows:

  • $141,083 on the unpaid invoices under the contract
  • $46,557.39 for interest and unpaid invoices
  • $391,809 for lost profits on steel inventory
  • $33,793 for interest on those profits
  • $169,226 in attorneys’ fees

The arbitrator determined that the contractor’s construction lien was valid, and was enforceable against the entire award, including the award for consequential damages for lost profits on steel inventory. Notably, the arbitrator awarded the contractor the full value of all the steel even though the contractor never actually removed the steel from the project site.

Despite the extremely narrow standard of review for arbitration awards under Michigan law, the Michigan Court of Appeals reversed the arbitrator’s award of consequential damages in connection with the lien claim because the value of the lien was nearly double the value of the parties’ contract. In reaching this decision, the appeals court emphasized that under the Michigan Construction Lien Act, the amount of any construction lien cannot exceed the remaining unpaid balance under the contract. See MCL 570.1103(4).

Because the arbitrator approved a construction lien well in excess of the contract value, the award violated the Construction Lien Act. Specifically, the arbitrator approved a lien for $782,469, which is $641,386 greater than the unpaid balance under the contract. According to the appeals court, the arbitrator’s award constituted a clear legal error that would reduce the value of the lien by over $500,000.

In reversing the arbitration award, the appeals court relied upon the Michigan Supreme Court’s decision in Detroit Auto Inter-Insurance Exch v Gavin, which held that judicial interference with an arbitration award is appropriate where the arbitration award contains a clear error of law that if corrected would substantially change the award. The Michigan Court of Appeals granted interlocutory relief because further proceedings on the lien claim would have only further complicated the issues and lead to multifarious litigation.

In summary, the decision in TSP Services, Inc v National-Standard makes it clear that consequential damages are not available under the Michigan Construction Lien Act when they exceed the balance of the parties’ contract.

Alabama Supreme Court Clarifies Construction Lien Priority

Madeline Hughes and Stephen Pudner | Baker Donelson | September 17, 2019

The Alabama Supreme Court recently reinforced its policy of giving priority to construction lenders over materialmen in its holding in GHB Construction and Development Co., Inc. v. West Alabama Bank and Trust, 2019 WL 1416893 (Ala. 2019). GHB, a contractor, challenged the priority of its materialman’s lien against a future-advance mortgage under which no funds had been extended to the borrower at the time work commenced. The Court held that because the future-advance mortgage was recorded prior to GHB’s commencement of work, the future-advance mortgage is given priority over GHB’s lien regardless of whether proceeds had been disbursed prior to the commencement of work.

The Court explained that the equitable validity of a future-advance mortgage cannot be attacked by a non-party to the transaction. Because GHB could not challenge the validity of the mortgage, the Court relied on the language of Ala. Code § 35-11-211 (a), which instructs that a materialman’s lien will take priority over all other liens, mortgages, or encumbrances created subsequent to the commencement of work. Because GHB commenced work after the future-advance mortgage was recorded, its lien did not take priority over the future-advance mortgage.

This holding emphasizes Alabama’s policy of ensuring that construction projects continue to be funded. This case tells contractors that: 1) contractors should not assume their work will take priority over future-advance mortgages even when the work is performed before the loan proceeds are extended; and 2) a contractor’s commencement date is crucial and will control priority against other lenders, and therefore, it is imperative that contractors memorialize that date and that they know whether any mortgages have been entered into and recorded before that date. In Alabama, it does not seem to matter whether that mortgage is a future advance or traditional mortgage.

California Subcontractor Gets a Kick in the Rear (or Perhaps the Front) for Prematurely Recorded Mechanics Lien

Garret Murai | California Construction Law Blog | September 3, 2019

California provides three statutorily recognized construction payment remedies: (1) mechanics liens; (2) stop payment notices; and (3) payment bond claims. Each is intended to provide payment protections for those who furnish labor, materials and services on a construction project. However, each is also different in important ways.

One of those differences has to do with timing. Specifically, when the statutory payment remedy may be used by a claimant. Stop payment notices can be served at any timeduring a project even before a claimant has completed its work.  However, mechanics liens may only be recorded and payment bond claims may only be made after a claimant has completed or ceased performing its work.

In Precision Framing Systems, Inc. v. Luzuriaga, Case No. E069158 (August 29, 2019), the 4th District Court of Appeal examined whether a subcontractor had prematurely recorded a mechanics lien and, thereby, was prevented from filing a lawsuit to foreclose on its mechanics lien.

Precision Framing Systems, Inc. v. Luzuriaga

Precision Framing Systems, Inc. was a framing subcontractor on a veterinary hospital project in Wildomar, California. Precision’s scope of work was to supply and install trusses on the project. Precision hired Inland Empire Truss, Inc. for the fabrication of the trusses.

In late July 2013, Precision started working on the framing. Later that month, Inland delivered the trusses to the site. And by the beginning of August Precision began installing the trusses.

Shortly after the trusses were installed, the city issued a correction notice stating that “[t]russ bearing points are not per plan.” Precision notified Inland and Inland carried out some repairs.

In early December 2013, the city issued a second correction notice. A walk through of the project was conducted between Precision and the general contractor, and the general contractor found that Precision’s work was complete and fully in compliance with the plans and specifications. The city later approved the framing work.

However, Precision never received full payment for tis work. The project owner, Deborah Luzuriaga told the president of Precision that “she was not interested in paying Precision and told [him] to sue her.” He did.

On January 2, 2014, Precision recorded a mechanics lien in the amount of $53,268.16.  That same month, the Luzuriagas changed the locks on the building, locking all contractors out. Precision later met with project architect and building inspector and, at this meeting, learned for the first time of additional correction notices.

Ms. Luzuriaga took the position that Precision’s mechanics lien was premature because it had not yet completed its scope of work and, in particular, had not corrected its work as required by the outstanding correction notices. A site inspection was conducted and, in mid-February 2014, Inland performed additional repairs. The repairs took two to three hours.

Precision later filed suit to foreclose on its mechanics lien. During pendency of the case, the Luzuriagas moved for summary judgment on the ground that Precision’s mechanics lien was prematurely recorded because it was recorded before it had ceased its work in February 2014. The trial court agreed and Precision appealed.

The Court of Appeal Decision

The Court of Appeals began by citing the mechanics lien statute, specifically, Civil Code section 8414 which provides:

A [mechanics lien] claimant other than a direct contractor may not enforce a lien unless the claimant records a claim of lien within the following times:

(a)       After the claimant ceases to provide work.

(b)       Before the earlier of the following times:

(1)      Ninety days after completion of the work of improvement.

(2)      Thirty days after the owner records a notice of completion or cessation.

The Court of Appeals, noting that Precision’s subcontract required that Precision supply and install “trusses . . . necessary to complete the . . . project,” held that the repairs performed in February 2014 were part of Precision’s “work” and that because Precision had recorded its mechanics lien in January 2014 it had done so prematurely.

The Court of Appeals also explained that the fact that the general contractor deemed Precision’s work to be complete is irrelevant, since the scope of Precision’s work was established by its contract not by “the factually unsupported legal opinion of two witnesses.”

Finally, explained the Court of Appeal, while “it may seem unfair to hold that [Precision] recorded its claim prematurely” when “it did not know that it had any work left to do” that the Court had “not found any case law suggesting that a claimant’s subjective knowledge or belief as to whether it has ceased to provide work is relevant” and further that “nothing in the Mechanic’s Lien law prohibited [Precision] from recording its claim again after the repairs were prepared.”

Conclusion

Timing issues related to mechanics liens typically arise as to whether a mechanics lien was timely recorded rather than whether a mechanics lien was prematurely recorded. Precision Framing is a cautionary tale for contractors, subcontractors, suppliers and equipment lessors that they can get caught not only by mechanics lien deadlines but also by the premature recording of a mechanics lien.

The case does give me some concerns though, as the earliest time a mechanics lien can be recorded and the deadline by which a mechanics lien can be recorded are both based on the date of completion or cessation of labor.  They are, in short, part of a larger whole, and can’t be viewed in isolation. Most lien claimants, in order to not get caught having recorded a mechanics lien past the statutory deadline, view completion as not including repair or punchlist work.

Reminder About the Upcoming Mechanic’s Lien Form Change

Christopher G. Hill | Construction Law Musings | June 14, 2019

As July 1, 2019 approaches with its inevitable changes to the Virginia Code, I wanted to remind you once again that the statutory form for a Virginia mechanic’s lien will change as of that date.

HB2409 passed both houses of the General Assembly and has been signed by the Governor.  This bill reconciled the language found in Virginia Code Sec. 43-4 with the various forms for general contractor, subcontractor and sub-subcontractor/supplier forms found in later sections of the code.  As you will see if you download the .pdf of the bill as signed, this involved some tweaks to 43-4 and some updates to the mechanic’s lien forms that are in the code.  The recent Desai case from the Virginia Supreme Court made it clear that such action was necessary.

Of particular note is an addition of a specific section of the form spelling out which portion if any are claimed but not due (for instance retention or money subject to pay if paid clauses) as of the date of the recording of the memorandum of lien.  Failing to spell this out on your memorandum of lien could potentially cost you a valid lien given the picky nature of these powerful but finicky beasts.  Another minor change was an amendment to 43-4 to require a statement of a date from which interest was claimed.  This last was part of the form to begin with so this won’t affect your form.

As always, be sure to work with an experienced Virginia construction attorney when calculating deadlines and populating this new form.

New Construction Lien Legislation In Tennessee

Kathryn K. Van Namen | Butler Snow | August 26, 2019

Changes to Remedies in Lien Enforcement Actions

New legislation in Tennessee has limited the recovery of attorney’s fees, expenses, and actual and liquidated damages in instances where a real property owner seeks to enforce a lien. Public Chapter 142, signed by Governor Lee and effective as of April 5, 2019, repealed Tennessee Code Annotated § 66-21-108. Section 108 provided that an owner who prevailed in an action challenging the validity of a lien was entitled to recover reasonable attorney’s fees, costs incurred by the owner to challenge the validity of the lien, liquidated damages in an amount equal to ten percent of the fair market value of the property, but not to exceed $100,000, and any actual damages incurred by the owner.

The construction industry in Tennessee expressed serious concern based on the risk of liability for general contractors and their subcontractors in the case of any invalid mechanic’s or materialmen’s liens and lobbied for change. The Tennessee Bar Association also previously proposed an amendment to Section 108 to remove the threat of penalizing legitimate lienors for simply pursing their valid lien rights, but the legislation was Section was repealed completely.

Residential Contractors New Continuing Education Requirements

The General Assembly also created new legislation addressing contractor licensing classifications and requiring continuing education for residential contractors, which will be effective as of January 1, 2020. The new provisions to Tennessee Code Annotated § 62-6-112 require all general contractors engaged in residential construction who were licensed on or after January 1, 2009, to complete eight hours of continuing education every two years. The Tennessee Board for Licensing Contractors must approve the continuing education and offer both online and in person options. However, membership in certain trade associations can constitute four hours of continuing education annually.

Changes to Time for Notices of Nonpayment, Rights to Payment, and Retainage

Another critical construction bill to watch during the next legislative session is SB324. As introduced in January 2019, the bill seeks to amend multiple provisions of the Tennessee Code.

First, the bill seeks to amend Tennessee Code Annotated § 66-11-112(a) by increasing the time for “remote contractors” or subcontractors or others who furnish material, services, equipment or machinery on a project to record and enforce mechanic’s and materialmen’s liens from 90 days on the date the improvement is complete to no later than 12 months. The bill also seeks to increase the same length of time for “remote contractors” to serve notices of nonpayment on the owner and prime contractor. Rather than requiring a notice of nonpayment within 90 days of the last day of each month within which the work or labor was provided or supplies, materials, equipment, or machinery furnished, the proposed amendment seeks to allow the remote contractor a full twelve months from the last day of each month the work was performed to provide the requisite notice.

The bill also seeks to amend Tennessee Code § 66-34-103(b) which addresses retainage and would reduce the time owners have to release and pay all retainage for work completed from 90 days to 30 days after the owner receives the certificate of occupancy or the work is substantially complete. It would maintain the language requiring prime contractors to pay all retainage to any subcontractors within 10 days of receipt from the owner.

No More Pay-if-Paid Provisions?

Most importantly, SB324 seeks to prevent the commonly used “pay-if-paid” provisions in contracts between general contractors and their subcontractors. The proposed addition of a new section, Tennessee Code § 66-34-305, would effectively prohibit any condition precedent for payment clauses commonly used to require payment from the prime contractor to its subcontractors only if the prime contractor receives payment from the owner. It would also add Tennessee Code § 66-34-306 which would allow prime contractors and remote subcontractors to suspend performance of the work on a project without penalty until payment is received and entitle the contractor or subcontractor to its pro rata share of any interest provided for in Section 66-34-601. This language would only be applicable to contracts entered into after the effective date. This will be one to watch during the 2020 legislative session.