Archive for the ‘The Legal Corner’ Category

ABC Supply Mechanic Liens In Pittsburgh Demonstrate Why Liens Work

On February 2, 2012

ABC Supply Co. is a wholesale distributor of roofing materials, meaning that they frequently supply roofing materials to roofing contractors who then install those materials on residential and commercial properties.
ABC Supply Mechanic Liens In Pittsburgh Demonstrate Why Liens Work I came across a new story from the CBS affiliate in Pittsburgh about a group of mechanic liens they filed against residential projects in Hempfield, PA. There’s a great video of the story available on the affiliates website (unfortunately, I could not embed here):  Hempfield Homeowners Deal With Mechanic’s Lien.  Hat Tip to @TrinaOrlando, the reporter on the story.

This news story is a great case study to material suppliers and subcontractors as to why they should preserve and enforce their mechanic lien rights.  Here’s what this news story demonstrates about the power of a mechanic’s lien:

Mechanic Liens Are Effective and Encumber Property

“If you have a lien put against your house, you cannot refinance, you cannot sell your house, and you cannot obtain a new home equity unless that lien has been satisfied.” — Barbara Lotz, Homeowner
A homeowner with a lien against her property was interviewed for the story, and her quote really sums up how effective a mechanic’s lien can be.  Barbara Lotz says, “if you have a lien put against your house, you cannot refinance, you cannot sell your house, and you cannot obtain a new home equity unless that lien has been satisfied.”

While this is demonstrative of a mechanic lien’s principal effects, it’s worse that Ms. Lotz reports, and that’s because if the lien remains unpaid, the home can be put on the auction block and sold to pay off the debt.  That’s a very powerful payment mechanism.

Mechanic Liens Create Payment Triangles That Result In Getting You Paid

If you listen to the news story, it is clear that the group of homeowners confronted with mechanic liens had hired the same Texas roofing company to install their roof (Prime Roofing) and had paid that roofing company in full. The Texas company took the money and scuttled back to their hometown, all the richer.

While really unfortunate for these particular homeowners (who should have required lien waivers before issuing the Prime Roofing any payments), the fact that the homeowner paid Prime Roofing does not excuse their liability to ABC Roofing. When mechanic lien laws are utilized, material suppliers and subcontractors recieve ultimate payment protection.  The homeowner will be required to pay a debt twice, and then be left with the burden of pursuing payment from the general contractor who didn’t properly organize payment.

This payment triangle results in getting suppliers and subcontractors paid.  When the prime contractor is still around and the property owner still owes it money, the property owner will pay off the lien and withhold that money from the prime.  When the prime is gone and already paid, the property owner will have to pay the lien (because they’ll lose in suit) and then file suit against the prime to get some money back.

In either event, the subcontractor or supplier is paid.

Mechanic Liens Can Get The Right Kind Of Attention

This story from the Pittsburgh CBS affiliate demonstrates that mechanic liens can get you the right kind of attention.

Two good things happened for ABC Supply Co. after filing this mechanic’s lien.  First, Prime Roofing is now the subject of a negative news story, which will affect their business and put pressure on them to pay ABC Supply.  Second, Prime Roofing is now evidently the subject of a government investigation for contractor fraud.  Again, this will put pressure on the company to pay ABC Supply.

“We’re just doing what we do all the time.  If we’re not paid, we have lien rights. I’m very sorry these homeowners paid their bills and did not have the contractor ultimately pay for their materials.” — Karl Leo, ABC Supply Chief Legal Officer
While ABC Supply is probably going to get a little discontent from the homeowners who are at the bad end of this deal, that is really an isolated problem for them.  Even the news story is careful to not beat up on ABC Supply. After all, ABC Supply is in the right, not the wrong. The Pittsburgh Live Tribune did an article on this situation as well, and the ABC Supply Chief Legal Officer was quoted as saying: “We’re just doing what we do all the time.  If we’re not paid, we have lien rights. I’m very sorry these homeowners paid their bills and did not have the contractor ultimately pay for their materials.”

All in all, this news story demonstrates why it’s a great idea to file a mechanic’s lien. It’s something that we’ve written about here in the past (a lot).  Take a look at our articles by reading through the “Why Lien” tag.

Posted in:     Construction News, Mechanic Liens, The Legal Corner  /  Tags: , , , , ,   /   Leave a comment

FAQ: How Do I Send Preliminary Notice to the Owner If I Don’t Know Who The Owner Is?

On January 20, 2012

If you’re the prime contractor and you contracted directly with the property owner, you’ll have a pretty good understand of who owns the property where work was performed. Prime contractors, however, very rarely have preliminary notice requirements.

Instead, its the subcontractors, the sub-subcontractors and material suppliers who usually have preliminary notice requirements to meet, and the exact identity of the property owner is less certain to those parties. This post explains why it’s important to know who the owner is, and how you can figure it out.

You Can’t Notify The Owner If You Don’t Know Who It Is

This post needs to begin with the obvious: knowing a property owner’s identity is important because most states require potential lien claimants to send notices to the property owner to preserve its lien rights. In fact, while this requirement is mostly referred to as a “preliminary notice” requirement, in many states they are simply referred to as “notices to owner” or “NTOs.”

We’ve written ad nauseam in the past about why it’s critical to send preliminary notices. By extension, therefore, it’s critical to know who the property owner is.

Sending notice (or filing a mechanics lien without properly identifying the true owner) can be fatal to your notice or lien claim. While there are limited exceptions, most states are not very forgiving when a notice or lien mistakenly misidentifies the property owner. The entire point of preliminary notice requirements and the filing requirement of a mechanics lien is essentially to put the property owner on notice about your claim, and its impossible to provide this notice without knowing the actual property owner.

State legislatures understand that you may not know who the property owner actually is…but, for this point, they don’t really care.  They had to draw a line, and so they placed the burden on potential lien claimants to figure out who owns the property.

You Must Know The Actual and Exact Owner

Mistaken identity of a property owner is a common mistake, and it’s a critical mistake because preliminary notice and notice to owner requirements mandate that notice be sent to the actual property owner.

There are four common errors companies make regarding property owners, and I’ll discuss each.

1)  Mistaken the tenant for the owner

Everyone theoretically understands the landlord / tenant relationship.  Sometimes, the party occupying a property may not actually be the owner of the property. You can’t forget this in the preliminary notice and mechanics lien context, which essentially means this:  Don’t assume that the property occupant is the property owner.

2) Attributing ownership to a person, when property is actually owned by a company (or vice versa)

Frequently, parties on a construction project are encountering the property owner – and that means they are encountering and working with a real live person.  They come to know this person, and when asked who owns the property, they point to this person. This is a mistake made even by those who contract directly with the property owner on a construction project.

You shouldn’t forget, however, that it is very common for individual property owners to create a limited liability company, corporation or other type of business entity to own the property.  So, while you may think John Doe owns the property, the property may actually be owned by John Doe, LLC.  While you may think this is an unimportant detail, it is not. This mistake could ruin your lien claim.

3) Not knowing about a special property holding company used by the owner

This mistake is similar to the 2nd mistake, but addresses the situation when its known that a property is owned by a corporation or LLC.  I came across this issue the other day.  A client was filing a lien on a large company’s property (we’ll call it ABC Company).  The client knew that the property was owned by ABC Company, but assumed it was that easy. However, it’s very common for companies to create property holding companies to hold its property separate from the rest of its assets.

So, in other words, while ABC Company occupied the property and owned it (in a sense), the actual property owner was “ABC Company Holdings, LLC.”  Not knowing about this tiny differences can create a large lien or notice mistake.

4) Not understanding husband and wife relationship to property, and other co-tenants

The final common mistake relates to the relationships between co-owners of properties.  Properties are not always owned by a single individual or company.  In fact, they are very commonly owned by at least two people or companies, and when working on a residential construction project, the most common co-ownership is husband and wife.

When preparing notices and liens, claimants must be careful to contemplate that role of all owners. While the requirements vary from state to state, it’s frequently required (and a good practice) to list and notify all property owners on preliminary notices and mechanic liens.  This means actually listing and notifying both the husband and the wife.

How To Research And Find The Identity Of A Property Owner

You now understand why it’s important to know the property owner’s identity, and you understand some of the mistakes people make when identifying the property owner on a mechanics lien or preliminary notice…but, you may be justifiably wondering, how do you know who owns a property?

This is the bad news.

Most states do not require that the prime contractor disclose the property owner’s identity, nor is there any requirement that the property owner disclose his identity to potential lien claimants in any way. This means that if you don’t have personal knowledge about the property owner (and confident in it!), you need to do some research.  Unfortunately, this research can be hard or expensive.

To determine who owns a property, you can go to the mortgage or recording office where the property is located and research their records for the current owner. Some of these recording offices have an online presence with access to their records, but really, these are still in the minority.  Another online source for finding property owners is accessor websites, which have online access a bit more frequently than the court and recorder offices.  Try searching for these offices in the applicable county and examine their online offerings. You can even call these offices and ask the employees there whether off-site research of any sort is possible

There are also some online property record services that will allow you to research property records nationwide.  Examples of these services are DocEdge and PropertyShark.

Another thing to consider is using a preliminary notice and mechanics lien service like Zlien. When your company orders a notice to owner from Zlien or files a mechanics lien with Zlien, researching the property owner and legal property description is included in the price.  It’s another reason why it’s Smart to Outsource Your Preliminary Notice (and Lien) Work.

Posted in:     FAQs, Preliminary Notices, The Legal Corner  /  Tags: , , ,   /   Leave a comment

Question for Attorneys: Any Exceptions to Delivery Presumption for Material Suppliers?

On January 19, 2012

Yesterday I published an article title “How Material Suppliers Prove Its Materials Were Incorporated Into the Property When Filing A Mechanics Lien.”  Those lawyers out there, and especially construction lawyers, probably immediately know the answer here, and that’s the presumption created by most state laws.  The presumption is this: If the building material supplier can prove delivery of the materials to the improvement, the courts will presume those materials were incorporated.

Now, I say “most states” because it’s impossible to talk about mechanic lien laws and say something that uniformly applies across the country.

I’m aware of at least one exception to the presumption rule.  In California, the lien claimant has the burden of establishing the validity of the lien, including that the labor, materials or services were actually used in construction. Basic Modular Facilities v. Ehsanipour, 70 Cal. App. 1480, 1485 (1999).

Other than this California example, however, I don’t know of any exceptions to this presumption.  Any construction attorneys out there know of a state law that treats this issue differently than I’ve explained?  Please comment!

As always, I appreciate your help.

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How Material Suppliers Prove Its Materials Were Incorporated Into The Property When Filing A Mechanics Lien

On January 18, 2012

While mechanic lien laws are different from state-to-state, one constant among the laws is that a mechanic lien right only arises if your materials are incorporated into the property being liened.

I’ve talked about this in the past in some Scenario posts.  Some of these posts address whether cleaning services, landscaping services, furniture installers, etc. have any mechanic lien rights.  When push comes to shove, it isn’t the type of work involved that necessarily decides the question – it’s whether the work was integrated into the property. When materials or labor results in an incorporated improvement to the property, there are usually lien rights.  When there isn’t any incorporation, there aren’t any lien rights.

Why Material Suppliers Need To Worry About “Incorporation” of Materials

This is an important concept for material suppliers. When materials are on a truck, or in a warehouse, or at the job site but stacked on a slab…there is no right to file a mechanics lien.  The right to file the mechanic lien only arises when the materials are physically incorporated into the project’s property.

An image may best explain this.  Here is a photo I found of a residential construction site. You can see that there is some lumber laying around the site waiting to be used, and other lumber already incorporated into the structure.  The material supplier may have delivered this lumber to the jobsite and have absolutely no idea as to the percentage of its lumber incorporated into the structure, but nevertheless, may feel like it already has valid lien rights. The supplier, however, would be wrong.

In the scenario presented by the below photograph, the material supplier would only have the right to file a mechanics lien on the lumber used in the building.  Insofar as the lumber not yet used and sitting on the ground, there is usually no mechanic lien right on this lumber whatsoever. Further, if the job stalled at this point, the parties went bankrupt, construction was terminated, or something went awry with the installation of the wood, the material supplier would never get a mechanic lien right for this wood.

How Material Suppliers Prove Its Materials Were Incorporated Into The Property When Filing A Mechanics Lien

The lumber shown in this image already incorporated into the building can be liened by the material supplier. However, the material supplier cannot file a mechanics lien for the lumber sitting on the ground.

There are a lot of possible scenarios whereby a suppliers materials are not actually incorporated into the building at the time of a mechanic lien’s filing.  Since a supplier’s lien rights depend on incorporation, knowing the fate of supplied building materials is worthwhile.  Of course, this can be a tall order, and one would hope that the law creates some logical way for material suppliers to handle this issue.  In most states, the law does.

How To Prove Your Materials Were Incorporated Into The Project’s Property

The issue here boils down to how a material supplier can prove (in court) that its materials were actually used in the property.  The vast majority of states give material suppliers a pass here, and create a presumption in their favor so long as the material supplier can prove the building materials were delivered to the job site.

In plain English, the presumption works like this: If the building material supplier can prove that its materials were delivered to the jobsite, the courts will presume that they were incorporated.
In plain English, the presumption works like this: If the building material supplier can prove that its materials were delivered to the job site, the courts will presume that they were incorporated. Once the material supplier proves the materials were delivered to the job site, the , that party challenging the lien or the supplier’s rights will have the burden of proving that the materials were not incorporated into the property.

Here are some examples of how this presumption is built into state statutes.  Remember, the presumption need not be within a state’s statutory language, many states have this principle outlined as a simple equitable common law test.  This post reviews two examples, one in Hawaii and one in Montana.

First, Hawaii’s HRS 507-41 provides that “The delivery of materials to the site of the improvement…shall be prima facie evidence of incorporation of the materials in the improvement.”  There’s even a presumption that arises if materials are delivered to an off-site area “upon written statement by the general contractor that the materials are for a particular improvement,” which, likely, can be a statement within a purchase order, contract or similar business document.

Second, Montana’s Mont. Code Ann § 71-3-524(2) provides that “the delivery of materials to the site of the improvement, whether by the lien claimant or another, creates the presumption that they were used in the course of construction or were incorporated into the improvement.”

So, what does this mean to material suppliers?  One thing that should jump right out at you is that you may not need to prove that the materials were used in the building’s structure, but you will need to prove the materials were delivered to the job site.  Some type of signed proof of delivery should be obtained by your company in the ordinary course of business, therefore. If an argument is later made that you’re without lien rights because the materials weren’t used, you’ll want to have this signed proof of delivery to whip out to claim your presumption.

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Special Mechanic Lien Rules for Specially Fabricated Materials

On January 11, 2012

Time and time again on this blog, I’ve said that if there is one lien law rule consistent from state to state, it’s that in order to qualify for a mechanics lien claim, the materials or labor you furnish must actually be incorporated into the jobsite’s property (click here to see mentions of “incorporation” on blog).

Sometimes, however, there’s an exception that applies to certain parties who manufacture or supply specially fabricated materials. According to these exceptions, a mechanics lien can be filed for materials created, but not ever incorporated into the property, under certain conditions.  This post discusses what specially fabricated materials are, which states have the exception, and under what circumstances the exception applies.

Specially Fabricated Materials Defined

What exactly is a “specially fabricated material?”  Generally speaking, most states who define this term as “materials not generally suited for or readily adaptable to use” in a structure. As you can see, however, this leaves a lot of room for interpretation.

Specially Fabricated Materials are defined as materials not generally suited for or readily adaptable to use.
As a result, you can think about building materials as being part of a spectrum, with some materials absolutely, positively being specially fabricated for a specific project, and others obviously being your run-of-the-mill standard building material that is not specially fabricated. Then, in the middle, there is some gray area.

Most courts will apply a simple test to decide whether a material is specially fabricated, weighing these two factors:  (1) Were the materials specially ordered and specially fabricated for that specific project?; and (2) Can the produced materials be easily used in another structure?

Survey of State Laws Giving Specially Fabricated Materials Special Treatment

There are a handful of states that specifically discuss specially fabricated materials in their mechanic lien laws. These states typically allow a materialman to file a mechanics lien if they produce the materials, and after production, the materials are not incorporated into the property because the order is cancelled or interfered with by the property owner or general contractor.  Some of these states require a special “specially fabricated materials” notice be sent at the time an order is placed.

Here is a survey of the states with special rules on the books about specially fabricated materials.

Florida

In Florida, there isn’t a statute that excuses specially fabricated materials from the state’s general requirement that materials must be incorporated into the property to qualify for mechanic liens. However, the courts ahve carved out an equity exception to the general rules for specially fabricated materials, providing they are lienable even if they never arrive at the job site, so long as the materials were manufactured to order and the non-incorporation is the fault (either direct, or by direction) of the property owner.

The jurisprudence was established in Lehigh Structural Steel Co. v. Joseph Langner, Inc. by the 1949 Florida Supreme Court, when the court explained as follows:

We are cognizant of the rule that the Mechanics’ Lien Law should be construed so as to afford to mechanics and laborers the greatest protection compatible with justice and equity…And we have previously noted and approved the rule, followed in many jurisdictions, that the real property to be improved is subject to a lien for materials specially fabricated for such improvement under a contract directly with the owner of the realty when such materials are not used or delivered by the act or direction of the owner. There are strong equitable reasons for holding the owner’s property subject to a materialman’s lien in such cases.

Hawaii

Hawaii presents an interesting case, as the statutes do not clearly provide that a party may file a mechanics lien for specially fabricated materials not actually incorporated into the property’s improvement. However, the statutes do mention specially fabricated materials, and therefore, it can be reasonably interpreted to allow a lien in the event these materials are created and never used.

Nevertheless, the statute is not clear on this point, and there doesn’t appear to be any case law interpreting the same.  Here is what the statute says, within H.R.S. 507-41:

“Furnishing of materials” includes supplying of: materials incorporated in the improvement or substantially consumed in construction operations or specially fabricated for incorporation in the improvement; building materials used during construction but not remaining in the improvement, diminished by the salvage value of the materials…

Massachusetts

Massachusetts ALM GL ch. 149, § 29 has a special requirement for those supplying specially fabricated materials, and while the statute doesn’t clearly indicate a mechanics lien could be placed even if the materials were not incorporated into the property, this statute infers the same.

The statute requires that those providing specially fabricated materials must deliver a notice to the property owner within 20 days of when the order for materials is placed. Presumably, if the materials are produced and never incorporated, lien rights would still exist, as the need for the notice doesn’t apply once the specially fabricated materials are built and incorporated. Lawrence Plate and Window Glass Co. v. Varrasso Bros., Inc. At that point, the materialmen is treated like an ordinary material supplier without the notice requirement.

Therefore, the notice requirement is only there to preserve mechanic lien rights in the circumstance that the materials are never installed.

Montana

Montana has a statute dedicated to material suppliers and setting forth the specific circumstances when a materialman has mechanic lien rights, and this statute specifically addresses specially fabricated materials. Mont. Code Anno., § 71-3-524 provides:

(1) A lien for furnishing materials arises only if:
(a) (i) the materials are supplied with the intent that they be used in the course of construction of or incorporated into the improvement in connection with which the lien arises; and
(ii) the intent described in subsection (1)(a)(i) may be shown by a contract of sale, by a delivery order, by delivery to the site by the lien claimant or at the lien claimant’s direction, or by other evidence; and

(b) the materials are:
(ii) specifically fabricated for incorporation into the improvement and not readily resalable in the ordinary course of the fabricator’s business, even though the materials are not actually incorporated into the improvement;

Therefore, the supplier of specially fabricated materials may file a lien if the materials are never incorporated, but only under certain circumstances.  These circumstances in Montana, while statutorily provided, are really similar to the requirements elsewhere that are created by case law.

Nebraska

The rule in Nebraska is very similar to the rule in Montana, as both states specifically address specially fabricated materials in their statutes.  Again, the statutory rule in Nebraska (like Montana) is very similar to the standard created by case law in other states.

Quoting from the Nebraska statute, to file a mechanics lien for non-incorporated specially fabricated materials, the following is required: “Specially fabricated for incorporation in the improvements and not readily resalable in the ordinary course of the fabricator’s business even though not actually incorporated in the improvement.” Neb. Rev. Stat. § 52-134(1)(a)

North Dakota

Similar to the situation in Nebraska and Montana, North Dakota statutes build-in a reference to specifically fabricated materials, suggesting that lien rights exist in the state for material specifically fabricated for a project, but never actually incorporated therein.  The statute in North Dakota specifically provides as follows, in its definition of materials that materials include “custom or specially fabricated materials for incorporation in the improvement.”

Unlike the statutes in Nebraska and Montana, there is no specifying that the specially fabricated materials are worthy of a lien absent incorporation. However, since the statute specifically mentions specially fabricated materials and defines them as materials “for incorporation in the improvement,” it makes one wonder if there is an inference here that they are qualified for lien rights absent physical incorporation.

Tennessee

Tennessee Code Ann. §66-11-101(4)(A)(iii) includes in its definition of “furnish materials,” to “specially fabricate materials for incorporation in the improvement and, if not delivered to the site of the improvement, are not readily resalable by the lienor.”  This definition, like the definitions in some of the others states listed herein, make it evident that there are lien rights if specially fabricated materials are ordered, but not physically incorporated into the building.

Texas

The Texas Property Code provides a specific exception for specially fabricated materials to the general requirement that to file a lien, a supplier’s materials must be used in or delivered to the construction project. Section 53.0231(b) provides – quite clearly – that “A person who specially fabricates material has a lien even if the material is not delivered.”

Such clarity is surprising for a state whose lien laws are among the most complex in the nation.  Ah, but that is not all, of course.  To protect this right to lien for non-incorporated specially fabricated materials, the supplier must send a “Notice of Specially Fabricated Items” to the property owner.

All Other States

In this survey of specially fabricated mechanic lien laws, I’ve focused on those states that have statutes or cases mentioning these types of materials, and even further, allowing liens for the same. Just because a state doesn’t have a statute or a case addressing specially fabricated materials, however, doesn’t mean lien rights for these materials don’t exist.

As you can see in the case referenced under the above Florida discussion, providing lien rights to specially fabricated material suppliers is an equity exception to the state’s general incorporation rule. Every state who has an incorporation rule may, if the circumstances warrant, provide for such an equity exception.

Of course, there are some states who forbid such liens.  There are probably some other states that specifically allow these liens who have been overlooked in this post.  (Readers?  Lawyers?) However, this is a good survey of specific laws addressing this issue, and if you’re in a state not mentioned, you can probably apply the same equity principles to find a mechanics lien right.

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