When Does a Mechanic’s Lien Go Into Effect?

Kent B. Scott | Babcock Scott & Babcock

The Utah Mechanic’s Liens Act needed some clarification on when exactly a mechanic’s lien goes into effect. That clarification came in February 2015 from the Court of Appeals of Utah. In the case Pentalon Construction, Inc. v. Rymark Properties, LLC the court ruled that “nearly completed excavation constitutes ‘commencement’ under the Act because the excavation was sufficient ‘to put a prudent lender on notice that lienable work was under way.”[1]

What this means for contractors is that to make sure a mechanic’s lien has priority over other liens or mortgages, they need to file their lien with the recorders office and construction needs to be underway on the jobsite to a point where a “reasonable observer” can tell that a mechanic’s lien is sure to be in effect.

The court found that there are easy ways for a jobsite to pass the “work started” test. For example having large piles of dirt from excavation activities helps people know that a construction project is under way.[2] Heavy machinery operating on the jobsite also demonstrates the beginning of a construction project.[3] Adding in construction materials to the excavated portions of the jobsite, and a nearly completed foundation are the final examples from the court that place observers on notice that work has started.[4]

Contractors need to know that two previous rulings regarding preparatory work for a jobsite is still in effect. The ruling in Ketchum, Konkel, Barrett, Nickel & Austin v. Heritage Mountain Development Co. states that architectural work and other site preparation such as surveying, staking, and soil sampling does not always put the “reasonable observer” on notice that work has started on a jobsite.[5]

Similarly, “wetlands delineations, groundwater monitoring, geotechnical testing, and irrigation work” does not place a reasonable observer on notice because the work should demonstrate “impending or ongoing work.”[6]

The important thing to remember is that the more obvious it is to a reasonable observer that construction has started on a jobsite, the more likely that a filed mechanic’s lien has taken effect. A jobsite’s almost completed foundation, large piles of dirt accompanied by heavy machinery, and construction materials onsite provides more than adequate notice of a mechanic’s lien that is in effect.


[1] Pentalon Const., Inc. v. Rymark Properties, LLC, 344 P.3d 180, 186, 2015 UT App 29, ¶ 19 (Utah App., 2015).

[2] Id. at 183.

[3] Id.

[4] Id.

[5] Ketchum, Konkel, Barrett, Nickel & Austin v. Heritage Mountain Development Co., 784 P.2d 1217, 1228 (Utah App., 1989).

[6] EDSA/Cloward, LLC v. Klibanoff, 192 P.3d 296, 300, 2008 UT App 284, ¶ 10 (Utah App., 2008).

Washington Appellate Court Reaffirms Rule That Contractors’ Defense of Deficient Plans or Specifications Must be the Sole Cause of the Breach in Order to Shield Contractors From Liability

Geoff F. Palachuk | Lane Powell

A contractor sued for breach of contract for construction defects will often assert an affirmative defense that the owner supplied deficient plans or specifications. Because that defense operates to completely shield the contractor from liability for alleged defects, Division One of the Washington Court of Appeals has reaffirmed the rule that the alleged breaches must be caused solely by the allegedly deficient plans and specifications. That rule is based on the 102-year old U.S. Supreme Court case, United States v. Spearin. The most recent expression by our court of appeals in Lake Hills Investments, LLC v. Rushforth Construction Co., Inc. illustrates how the Spearin Doctrine remains a viable defense for contractors in limited circumstances.

The Lake Hills decision, issued September 14, 2020, by the Washington State Court of Appeals, involved a development project in Bellevue. The owner (Lake Hills) sued the general contractor (AP Rushforth) for breach of contract. AP Rushforth counterclaimed, alleging that Lake Hills materially breached first, and AP Rushforth asserted multiple affirmative defenses to excuse AP Rushforth’s various breaches. The case involved tens of millions of dollars in disputed claims, including about $20M at issue during trial.

Generally, when an owner like Lake Hills provides building plans and specifications as part of a contract, the owner impliedly warrants that the plans and specifications will be workable and sufficient for the contractor to build the project. An alleged breach of that warranty can be the basis of a contractor’s affirmative defense where the owner is seeking damages from the contractor.

In the Lake Hills case, AP Rushforth alleged an affirmative defense based upon Lake Hills’ implied warranty and claimed that Lake Hills’ plans and specifications were deficient. AP Rushforth argued the allegedly defective plans and specifications caused all of the defects in AP Rushforth’s work. During the two-month jury trial in King County Superior Court, the jury returned a mixed verdict. One of the jury instructions directed the jury to consider whether “AP breached the contract by failing to construct certain areas of work in compliance with the contract documents,” and whether “Lake Hills was damaged as a result of AP Rushforth’s breach.” The jury found in favor of Lake Hills and held AP Rushforth liable for multiple breaches of contract.

AP Rushforth asserted an affirmative defense, however, claiming that Lake Hills’ defective plans and specifications caused the construction breaches and should shield AP Rushforth from liability or damages. An affirmative defense is an absolute bar to liability, even where a plaintiff establishes its prima facie case. A successful affirmative defense denies the plaintiff’s right to recover, even if all the allegations against the defendant are proven true. During trial, AP Rushforth carried the burden of proof to establish that its various construction breaches were a result of the allegedly deficient plans and specifications.

On appeal, Lake Hills argued the trial court erred as a matter of law because AP Rushforth’s burden of proof should have been that the construction breaches resulted solely from the defective or insufficient plans or specifications. The trial judge did not include the word “solely” in the jury instructions, which permitted AP Rushforth to argue that any alleged defect in the plans and specifications, regardless of how minor, served as an absolute bar to AP Rushforth’s contractual liability. Lake Hills argued that jury instruction was a misstatement of law. The Court of Appeals agreed, reversed, and remanded for a new trial.

Synthesizing several prior decisions, the Court of Appeals held that a contractor can be relieved from liability only by proving the alternate proximate cause of the allegedly defective plans and specifications solely caused the contractor’s breach. AP Rushforth’s affirmative defense rested on the theory that Lake Hills’ allegedly defective plans and specifications caused AP Rushforth’s various construction defects and the damages to Lake Hills. The court held: “To be relieved of all liability for its breaches, AP Rushforth had to prove Lake Hills’ defective designs ‘solely’ caused the plaintiff’s damages.” The court found that this holding most closely aligned with Washington case law and the standards acknowledged by commentators on construction law.

Owners and developers for both public and private projects should be aware of the issues highlighted in this case. Designs and specifications must be workable and sufficient, but the standard is not perfection. Contractors often try to claim that a defect in the designs or specifications serves as a complete defense to their potential liability. Our courts disagree, and Lake Hills reaffirmed the long-standing rule: It remains the law that a contractor may be shielded from liability only by proving that an alleged defect in the plans and specifications was the sole cause of the contractor’s construction breaches.

Finally, the court also denied AP Rushforth’s cross-appeal and vacated the trial court’s award of nearly $6M of attorneys’ fees in favor of AP Rushforth. Lake Hills contended that it should have been awarded attorneys’ fees for the issues upon which it prevailed at trial under the apportionment rule stated in Marassai v. Lau, 71 Wn. App. 912, 859 P.2d 605 (1993), abrogated on other grounds by Wachovia SBA Lending, Inc. v. Kraft, 165 Wn.2d 481, 200 P.3d 683 (2009). After trial, the court awarded AP Rushforth essentially all of its requested attorneys’ fees, expert fees, and litigation costs, despite the fact that Lake Hills had prevailed on many of the contractual issues. The court of appeals declined to rule on the merits of Lake Hills’ argument. Instead, the court vacated the award of attorneys’ fees consistent with its reversal and instructed the trial court to determine “the ultimate prevailing party or appropriate proportional amount of attorney fees.”

An Equitable Exception To the Four Corners Rule: The Eleventh Circuit Looks Beyond Operative Complaint To Find No Duty To Defend

Amanda Proctor | PropertyCasualtyFocus

Under Florida law, similar to that of other states, an insurer’s duty to defend is generally determined solely by the allegations found within the four corners of the complaint. Florida courts, however, recognize an exception to that general rule and will allow for the consideration of extrinsic undisputed facts, which, if pled, would place the claim outside the scope of coverage. The Eleventh Circuit recently applied this exception in BBG Design Build, LLC v. Southern Owners Insurance Company, No. 19-14508 (11th Cir. July 23, 2020).

In BBG, Southern Owners issued a commercial general liability policy to BBG, which had a pollution exclusion that excluded coverage for “‘[b]odily injury’ … which would not have occurred in whole or part but for the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of ‘pollutants’ at any time.” As defined by the policy, “pollutants” include “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed.”

BBG worked as a general contractor on a renovation project at a domestic violence resource center. An employee of the resource center filed suit against BBG for bodily injury she sustained from construction debris at the site, claiming BBG negligently failed to manage the construction site. The operative pleading in that case—the first amended complaint—did not define “construction debris,” nor did it describe the alleged bodily injury. Southern Owners denied coverage based on the pollution exclusion, and BBG filed suit for breach of contract.

In the coverage action, the parties crossed moved for summary judgment on the issue of whether the pollution exclusion applied to bar a duty to defend under the policy. Southern Owners argued that the court should invoke the exception to the four corners rule and consider facts outside of the operative complaint—namely, a pre-suit demand letter and the original complaint—in determining whether the pollution exclusion applied to bar coverage. The court agreed and considered the contents of both the demand letter and the original complaint.

In the pre-suit demand letter, the resource center employee represented that she had been injured after being “exposed to hazardous fumes and dust” emanating from the renovation activities. The demand also referenced medical records in which the employee reported exposure to fiberglass at the construction site and contracted bronchitis as a result. The court held that these uncontroverted facts fell within the scope of the pollution exclusion.

The court buttressed its decision to apply the exception to the four corners rule by looking at the original complaint filed in the underlying action. The original complaint, like the pre-suit demand, pled that significant amounts of “dust and airborne fiberglass” escaped into the air, and those factors caused the employee’s respiratory illness. The court noted that the lack of similar allegations in the operative amended complaint was an attempt to “plead into coverage” by not specifying the type of “construction debris” at issue. Because the type of construction debris alleged in the original complaint clearly fell within the scope of the pollution exclusion, the court held that no duty to defend existed under the terms of the policy.

The BBG decision highlights the equitable nature of the exception to the four corners rule. That is, where clear undisputed facts are known to the parties and relevant to the issue of coverage, the court should be permitted, as a matter of fairness, to consider those facts even if those facts are not alleged within the four corners of the complaint, especially where the complaint was found to be amended in an attempt to “plead into coverage” facts that would clearly fall outside the grant of insurance afforded by the policy.

Court of Appeals Confirms One-Year Statute of Limitations for Disgorgement Claims that is not Subject to the Discovery Rule

Timothy L. Pierce, Hector H. Espinosa and Samira F. Torshizi | K&L Gates

In a recently published case dealing with issues of first impression, the California Court of Appeal Second Appellate District in Los Angeles held that the disgorgement penalty under Business and Profession Code § 7031(b) must be made within one year of completion or cessation of the performance of the project, and that time is not extended by the discovery rule.  Eisenberg Village of the Los Angeles Jewish Home for the Aging v. Suffolk Construction Company, Inc., 2020 WL 5035826 (Cal. Ct. App., Aug. 26, 2020).  BPC § 7031(b) permits a party who uses the services of an unlicensed contractor to recover any and all money paid to the contractor for its work—regardless of the quality of the work (indeed, even if the construction was flawless).  The purpose of this harsh forfeiture provision is to deter unlicensed contractors from performing construction.

The case arises from the construction of a 108-unit assisted living facility in Reseda, California.  In 2007, Eisenberg Village of the Los Angeles Jewish Home for the Aging (“Eisenberg”) engaged Suffolk Construction Company, Inc. (“Suffolk”) as the contractor to build the project, which was completed in 2010.  Eisenberg initially filed a complaint alleging defects at the project.  In 2015, Eisenberg amended its complaint to assert an entirely new cause of action under BPC § 7031(b) against Suffolk for disgorgement of every penny of the more than $49 million it was paid to construct the project.  The trial court granted summary adjudication of the disgorgement claim and that ruling was the subject of the appeal.

The factual circumstances of the case are interesting in that Suffolk held a valid California contractor’s license at all relevant times.  Eisenberg nonetheless pursued its disgorgement claim by seeking to retroactively strip Suffolk of its contractor’s license.  Eisenberg alleged that the full-time employee whom Suffolk had designated as the “responsible managing employee” or “RME” did not adequately perform his oversight duties under BPC § 7068.1 simply because he had relocated to Suffolk’s Boston office during the term of the project.  Eisenberg also argued that it could not have known the RME allegedly fell short of its BPC § 7068.1 duties during construction and that it first discovered potential issues regarding the status of Suffolk’s RME in 2015.  The court of appeal affirmed the trial court’s holding that Eisenberg’s claims were time-barred and did not address whether a BPC § 7031(b) claim provides an automatic suspension of a contractor’s license for a violation of section 7068.1.

The appellate court held the applicable limitation statute to be one-year under CCP § 340(a) given that the disgorgement remedy provided by BPC § 7031(b) represents a “penalty” and a “forfeiture.”  The court reasoned that BPC § 7031(b) “provides a windfall to the plaintiff, at the expense of the unlicensed contractor, since the plaintiff also retains the work completed by the contractor.”  The court held:

When viewed in this context, it is clear that the disgorgement provided in section 7031(b) is a penalty. It deprives the contractor of any compensation for labor and materials used in the construction while allowing the plaintiff to retain the benefits of that construction. And, because the plaintiff may bring a section 7031(b) disgorgement action regardless of any fault in the construction by the unlicensed contractor, it falls within the Supreme Court’s definition of a penalty: ‘a recovery without reference to the actual damage sustained.’

Having determined the one-year statute of limitations applied, the appellate court next addressed the accrual date.  In light of the equitable basis for the discovery rule, the appellate court held the discovery rule does not apply because “the disgorgement mandated by section 7031(b) is not designed to compensate the plaintiff for any harm, but instead is intended to punish the unlicensed contractor.”  The court did observe that “[t]o the extent a plaintiff does suffer any injury caused by an unlicensed contractor that is not easily or immediately discoverable, the discovery rule would continue to apply to other claims seeking recovery for any damages the plaintiff suffered.”

The court also highlighted the rather absurd possible application of a discovery rule to a disgorgement claim that can arise ten years after completion, with no other basis for a claim against the contractor.  That is, a plaintiff, who after ten years randomly “discovers” that the license had lapsed, could bring a section 7031(b) claim and get back all the compensation paid for the construction of a building the plaintiff has used without any problems for ten years. “An absurd result, to be sure, but there would be no principled way to avoid it under the discovery rule[.]” As such, the appellate court held “[t]o avoid such absurd results, and because there is no reason in equity to apply it, we hold that the discovery rule of accrual does not apply to section 7031(b) claims.”  The cause of action is complete when an unlicensed contractor completes or ceases performance of the act or contract at issue.

The published opinion is instructive regarding at least two matters of first impression in California.  It is now clear that the time limitation for a BPC § 7031(b) disgorgement claim is one year from completion of the project or cessation of the performance.

Alleging Property Damage in Construction Defect Lawsuit

David Adelstein | Florida Construction Legal Updates

When there is a construction defect lawsuit, there is an insurance coverage issue or consideration.  As I have said repeatedly in other articles, it is all about maximizing insurance coverage regardless of whether you are the plaintiff prosecuting the construction defect claim or the contractor(s) alleged to have committed the construction defect and property damage.  It is about triggering first, the insurer’s duty to defend, and second, the insurer’s duty to indemnify its insured for the property damage.   

The construction defect claim and lawsuit begins with how the claim and, then, lawsuit is couched knowing that the duty to defend is triggered by allegations in the lawsuit (complaint).  Thus, preparing the lawsuit (complaint) is vital to maximize the insurer’s duty to defend its insured.

In a recent opinion out of the Eleventh Circuit, Southern-Owners Ins. Co. v. MAC Contractors of Florida, LLC, 2020 WL 4345199 (11th Cir. 2020), a general contractor was sued for construction defects in the construction of a custom home.  A dispute arose pre-completion and the owner hired another contractor to complete the house and remediate construction defects.   The contractor’s CGL insurer originally provided a defense to the general contractor but then withdrew the defense and filed an action for declaratory relief asking for the declaration that it had no duty to defend the contractor because the underlying lawsuit did NOT allege property damage.  The trial court agreed with the contractor and granted summary judgment in its favor finding that the underlying complaint did not allege property damage beyond defective work.  But, on appeal, the Eleventh Circuit reversed.

Among other allegations, the owner’s underlying complaint against the contractor asserted that the contractor committed defects through chipped pavers in the driveways and walkways, inconsistent paint finish, marks on ceilings, damage to exterior doors, damage to the top stair tread, damage to hardwood floors, metal roof dents, scratches in granite, holes in ceilings, etc.  The owner sought its costs to repair and remediate the defects and damage from the contractor.  In looking at whether the  contractor’s CGL insurer had a duty to defend the contractor–the insured–the Eleventh Circuit (focusing on precedent out of the Eleventh Circuit) stated:

The operative amended complaint alleged that [the contractor] used subcontractors for work on the residence and that the residence was “replete with construction defects” and various damage. It did not further allege which subcontractors performed which work or how the damage occurred. Given these ambiguities, the complaint’s allegations are broad enough to allow [the contractor] to prove that one subcontractor negligently damaged nondefective work performed by another subcontractor.  If [the contractxor] could establish that at least some of the damage arose in this way, there would be “damage apart from the defective work itself” and therefore “property damage.”

***

For these reasons, we conclude that the underlying operative complaint can fairly be construed to allege “property damage” within the meaning of the CGL policy and Florida law. Accordingly, the district court erred in granting summary judgment to [the CLG insurer] on this basis.

MAC Contractors of Florida, 2020 WL at *4 (internal citations omitted).