Posts Tagged ‘Incorporation’

Scenario: Can Mardi Gras Stand Constructors File A Mechanics Lien?

On January 27, 2012 Author By Scott Wolfe Jr        

Scenario: Can Mardi Gras Stand Constructors File A Mechanics Lien?Okay, this is a fun post.

Zlien operates out of New Orleans, LA, and so we’re all very excited about the Mardi Gras season. While Mardi Gras officially started on Kings Day (January 6th – Yes, we had our kings cake), the real active part of Mardi Gras is just now apporaching, with some of the first parade dates nearing.

In the spirit of the season, we’re going to address a scenario where folks may wonder about their mechanics lien rights. While this post talks about a very specific type of work that really only occurs in New Orleans, the lesson applies nationwide.  And that’s a lesson we’ve stated over and over again on this blog:  to qualify for mechanic lien rights, incorporation into the improvement is key.

Mardi Gras stands are simply temporary structures where people can stand or sit to watch parades. Local construction companies contract with the city or private entities to build these stands on public or private property.  I found a photograph online of some Mardi Gars stands at the famous Gallier Hall, which will give you a good idea of what these things look like.

Scenario: Can Mardi Gras Stand Constructors File A Mechanics Lien?

Mardi Gras stands constructed in front of Gallier Hall. This is what these Mardi Gras stands look like all over the city of New Orleans, which are constructed and left complete for approximately 1 month a year across the city.

Companies construct these stands to provide temporary value to the property (property owner’s can charge companies big money to use these stands), and they are a “construction project” … but do they qualify for mechanic lien rights?

In most states, the answer will be a resounding no.

The reason this construction does not qualify for lien rights is that they are not permanently attached to the property, and they do not permanently improve the property. Without permanent attachment, there’s no lien rights. That’s that.

Now here comes the surprise.

While the law is crystal clear in most states that this would not be lienable services, in Louisiana, the law isn’t so clear. In fact, after reviewing the law in light of this question, I’d be willing to state that this work very well may qualify for a mechanic’s lien.

The right to file the mechanic’s lien would arise out of the Louisiana Private Works Act.  When describing who has the right to file a lien, the law provides as follows:

The following persons have a privilege on an immovable to secure the following obligations of the owner arising out of a work on the immovable:

(1) Contractors, for the price of their work.

(2) Laborers or employees of the owner, for the price of work performed at the site of the immovable.

(3) Sellers, for the price of movables sold to the owner that become component parts of the immovable, or are consumed at the site of the immovable, or are consumed in machinery or equipment used at the site of the immovable.

What’s interesting about this is that the requirement for the work to be “consumed” at the site or to become “component parts of the improvement” are limited only to those who sell movables (i.e. material suppliers).  But, what about laborers, contractors and subcontractors?  These folks are entitled to the price of their work without any such qualification.

An additional step is required to see if Mardi Gras stand construction qualifies for a lien, as the Louisiana statute only allows a lien filing if the obligations “arise [sic] out of a work.”  The term “work” is a definable term, defined in the Private Works Act’s §9:4808 as follows:

A work is a single continuous project for the improvement, construction, erection, reconstruction, modification, repair, demolition, or other physical change of an immovable or its component parts.

Whoa!  Look at that.  It’s a pretty broad definition.  It includes any project for the construction, modification, repair…”other physical change” of an immovable or its component parts.

Now, practically speaking, I think a Louisiana judge would look at a mechanic’s lien for Mardi Gras stand construction very strictly, and perhaps interpret the Private Works Statutes in a way that does not classify these stands as a “physical change” to the immovable or component parts.  However, it would make for a very colorful argument, and I’m not convinced the law in Louisiana is clear on either side.

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

On January 19, 2012 Author By Scott Wolfe Jr        

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 Author By Scott Wolfe Jr        

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 Author By Scott Wolfe Jr        

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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