Can I File a Mechanics' Lien on a Building that was Never Built? Maybe...

Posted by Jennifer M. Horn on June 05, 2013

By Jennifer M. Horn and Daniel E. Fierstein

The Backdrop

Since the Recession of 2008, the story of the construction project that fell through shortly after breaking ground has repeated itself far too frequently.  In too many of these situations, financing dries up, leaving owners without project funds to pay general contractors and general contractors without funds to pay early-phase subcontractors who have already performed their work (e.g., demolition, excavation, and site work).  With that uplifting backdrop, let’s discuss how these circumstances affect mechanics’ lien rights.

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As many of our readers know, mechanics’ lien claims are powerful tools for contractors to ensure that they get paid for their work by “encumber[ing] the owner’s property and, if taken to their logical end, force a sale of the property to pay creditors.”  A recent case in the Superior Court of Pennsylvania brought to light the issue of mechanics’ lien rights on buildings that go un-built.  

In B.N. Excavating, Inc. v. PBC Hollow-A, L.P. and PBC Hollowb, L.P., a site contractor (“BN Excavating”) was hired as a subcontractor to perform excavation work for the proposed construction of a two-building project.  BN Excavating performed its work, but the buildings were never actually constructed.  The contractor that hired BN Excavating never paid for the work, so BN Excavating filed a mechanics’ lien claim on the property. 

The owner argued that BN Excavating’s lien was invalid because the buildings were never actually erected.  The Superior Court, however, allowed BN Excavating’s claim to proceed because the excavation work was incidental to planned construction.  In other words, the Court held that BN Excavating’s lien rights were tied to the existence of a construction plan, not to the ultimate fulfillment of that plan.

The Take-Away

For contractors, subcontractors, and suppliers who perform site work can rest easier knowing that your lien rights are tied to the nature of your work and not whether a building is ultimately erected.   It is nonetheless critical for you to supply your attorney with detailed information about the project, so that he or she drafts the mechanics’ lien claim in a way that makes clear that your work was part of a construction plan.

For owners and developers, understand that the Mechanics’ Lien Law could be unsympathetic to situations in which a construction project falls through before a building is erected.  Predecessor work such as demolition and excavation will still be protected under the Mechanics’ Lien Law.

Jennifer M. Horn is Senior Counsel at Cohen Seglias and a member of the Construction Group. She concentrates her practice in the areas of construction litigation and real estate.

Daniel E. Fierstein is an Associate in the Construction Group of Cohen Seglias and focuses his practice on construction law.

Trevor Taniguchi, a summer associate with Cohen Seglias, contributed to this post.

New Pennsylvania Case: When Does a Contractor's Mechanics' Lien Rights Begin to Expire?

Posted by Kathleen M. Morley on January 22, 2013

By: Tony Byler and Kathleen Morley

Mechanics’ lien claims are powerful tools for contractors and suppliers who are owed payment for work or materials. To be enforceable, the contractor or supplier (“Contractor”) must file a lien claim within six months of completing its work. Recently, in Neelu Enterprises, Inc. d/b/a KB Builders v. Ashok Agarwal et al., the Pennsylvania Superior Court clarified the term “work” to exclude corrective work from its meaning. Based on the Court’s explanation of “work” as it pertains to the lien law, the six-month time clock for filing a lien could start to run well before the Contractor performs its last work at a project. In other words, Contractors should be more vigilant with regard to protecting their lien rights because those rights could start to expire well before the Contractor actually performs its last work at a project.

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Under Pennsylvania’s Mechanics’ Lien Law (the “Lien Law”), a Contractor must file its lien claim within six months of completing its work. If a Contractor files a lien claim more than six months after it has completed its work, a court can dismiss the lien and leave the Contractor without lien rights. Given such high stakes, the calculation of the six-month timeframe is critical to ensuring the preservation of lien rights.

Determining a Contractor’s last date of work for the purpose of filing a lien is not as easy as it may seem because the Lien Law does not explain the circumstances under which the Contractor has “completed” its work. For example, does the clock start running when the final punch list is complete? Is it when the Contractor was last on site, or, in the case of a supplier, the date on which the last materials were delivered? What about when warranty work or material is performed or supplied many months after demobilization? The Lien Law does not answer these critical questions, which means the courts must fill in the gaps.

The Law after Neelu Enterprises

In Neelu Enterprises, the Superior Court shed light on the issue of work completion. The issue before the Court in Neelu Enterprises was whether the Contractor had timely filed a mechanics’ lien claim within the six-month limitation period under the Lien Law. After performing significant work without being paid, the project owner terminated the Contractor. Many months after termination, the Contractor returned to the site to perform corrective work at no additional cost to the owner. Thereafter, the Contractor filed a lien claim, using its last date of corrective work as its completion date, not the date on which it was terminated. The owner argued that the Contractor’s lien claim was untimely because it was filed more than six months after the Contractor was terminated. The Contractor argued that its lien claim was timely because it had performed work (albeit corrective work) less than six months prior to the filing of its claim. The Court ultimately rejected the Contractor’s argument, finding that the Contractor’s lien rights began to expire from the date on which it was terminated, not the date on which it last performed the corrective work.

In reaching its decision, the Court found significant that the Contractor sought payment for the work it performed prior to its termination, rather than for the corrective work that the Contractor performed after the termination at no cost to the owner. Relying on an opinion of the Pennsylvania Supreme Court dating to 1890, the Court distinguished extra work from corrective work, reasoning that the performance of extra work (such as change order work) entitled the contractor to additional payment and, therefore, prolonged the running of the six-month clock. Conversely, the Court reasoned that corrective work does not entitle a contractor to additional compensation and, therefore, does not extend the six-month time limitation.

While the Court in Neelu Enterprises dealt specifically with corrective work, the Court’s reasoning could arguably apply to any type of work that is performed without cost to the owner or for which payment has already been made (e.g., punch list, warranty and gratuitous work).

Recommendation

As a result of the Neelu Enterprises decision, when Contactors are not being paid in accordance with the terms of their contracts, they must be mindful of the nature of the work they are performing because it affects how much time they have to file a lien claim. As a consequence, keep this easy-to-remember saying in mind when determining whether your company’s work is complete: “if the Owner doesn’t have to pay, the six-month lien clock is likely in play.”

Tony Byler is a Partner at Cohen Seglias Pallas Greenhall & Furman PC and a member of the Construction Group. As a trial lawyer, he focuses his practice on representing public and private owners, contractors, subcontractors and material men.

Kathleen M. Morley is an Associate with Cohen Seglias Pallas Greenhall & Furman PC and a member of the Construction Group.

Protecting Supplier Lien Rights in New Jersey - Follow the Money

Posted by Daniella Gordon on January 02, 2013

By: Tony Byler and Daniella Gordon

Suppliers frequently provide supplies on lines of credit to contractor customers who are involved in multiple construction projects.  In an ideal world, both the customer and the supplier would maintain accounting records keeping each construction project and the payments attributable to those construction projects separate and accurate.  Out of practical convenience, however, contractors and the suppliers sometimes lump projects and payments into a single account, making it difficult, if not impossible, for the supplier to determine which payments apply to each ongoing project, i.e., a task that is necessary for a supplier seeking to assert a mechanics’ lien claim against a particular project when its customer fails to timely pay.

Several weeks ago the Appellate Division of the New Jersey Superior Court, in L&W Supply Corporation v. Joe Desilva, described the affirmative duty suppliers have to determine the source of its customers’ payments for materials, by requiring suppliers to ask.  According to the Court, a supplier who fails to do so “sacrifices its rights under the Construction Lien Law.”   A brief review of the evolving mechanics’ lien laws relating to suppliers helps explain the Court’s potentially severe ruling.

New Jersey’s Construction Lien Law

The New Jersey Construction Lien Law (“Lien Law”) allows contractors and suppliers who are owed payment for work or materials on privately procured projects to file a lien against the property where the improvements (labor and supplies) were constructed.  The lien encumbers the property, which prevents the owner from selling or transferring the property without first dealing with the contractor’s or supplier’s payment claim. 

The purpose of the Lien Law is twofold: first, to secure payment of money due to contractors and suppliers; and second, to protect owners from paying more than once for the same work or materials.  In order to protect owners from being forced to pay twice for the same work or materials, the Lien Law provides that the value of a lien cannot exceed the value of the “lien fund,” which, in the simplest terms, is the amount of money that remains unpaid on the job. 

Suppliers’ Evolving Affirmative Duty to Inquire into the Source of Payments

In 2004 the New Jersey Supreme Court held, in Craft v. Stevenson Lumber Yard Inc., that a material supplier who files a construction lien has a duty to allocate payments from the material purchaser to the appropriate construction project when the supplier has “reason to know” that the payment is associated with a particular project.  In other words, if a general contractor pays a subcontractor for work on a specific job and the subcontractor then pays its supplier, the supplier must apply the subcontractor’s payment to the same project account.  The supplier may not simply apply the payment to an older receivable from a different project.  This requirement protects the owner from double payment because it helps to ensure that when a supplier files a construction lien relating to a particular project, the supplier is not seeking monies owed from the subcontractor on a different project.   

L&W Supply: The Supplier’s Duty Explained

In L&W Supply, the Appellate Division clarified the circumstances that would give a supplier “reason to know” the source of the payment.  The Court held that in order to ascertain the source of a subcontractor’s funds, “a supplier must take some action, and an inquiry about the source of the funds is the most obvious action to take.”  In other words, suppliers providing material to New Jersey projects must now affirmatively inquire as to how payments should be allocated when the purchaser has not otherwise provided reliable instructions as to how the payment should be allocated.  As the Appellate Division held, “when the purchaser of materials has not provided specific, reliable instruction as to the allocation of its payment, or when the circumstances are such that a reasonable supplier should suspect the purchaser has not used an owner’s funds to pay for materials supplied for that owner, then the supplier must make further inquiry and attempt to ascertain the source of the payment funds so that it can allocate them to the correct accounts.”

The Court’s decision in L&W Supply means that suppliers must be diligent in ascertaining the source of the funds that it receives from its customers, and we recommend that the supplier should memorialize its efforts in writing.  This should be done in writing because a supplier who files a lien claim after this L&W Supply decision must anticipate that the owner or general contractor will defend against the lien claim by (i) challenging the accuracy of the supplier’s accounting and (ii) questioning the sufficiency of the supplier’s inquiry into the subcontractor’s accounting.  Documented efforts by the supplier to ascertain the source of payments are the best way to overcome those challenges because they demonstrate the supplier’s good faith efforts to inquire and accurately account for customer payments.

Tony Byler is a Partner at Cohen Seglias Pallas Greenhall & Furman PC and a member of the Construction Group. As a trial lawyer, he focuses his practice on representing public and private owners, contractors, subcontractors and material men.

Daniella Gordon is a litigation Associate in the Construction Group. She represents clients in a wide range of construction related matters, including public bidding contests, construction defect claims, and appeals.

Getting One's Priorities Straight: Bank vs. Contractor - PA Case Could Have A Significant Impact

Posted by Daniel E. Fierstein on August 06, 2012

By: Daniel E. Fierstein and Jennifer M. Horn

Banks do not typically loan money if they can not be assured “priority” status over any other encumbrances that may arise. “Priority” in this context refers to the order in which various encumbrances, such as mortgages or mechanic’s liens, are paid off from the sale proceeds. As such, a question arises: what entity jumps to the front of the line when both a mortgage and a contractor-filed mechanic’s lien are present?Mortgage.jpg

In the case of Commerce Bank/Harrisburg, N.A. v. Kessler, the Superior Court was presented with a question concerning priority under the Pennsylvania Mechanics’ Lien Law. This is the second contractor/subcontractor-friendly opinion of 2012 - the first being the Bricklayers case.

Commerce Bank/Harrisburg, N.A. v. Kessler

In Commerce Bank, Stephen and Lisa Kessler (the “Kesslers”) contracted with Michael Ricker (the “Contractor”) to build a luxury home in Harrisburg, in October 2006. In January 2007, the Kesslers contracted with Commerce Bank for a construction loan of up to $435,000.00 with an open-end mortgage. The Contractor broke ground on the project in October 2006, and Commerce Bank recorded the mortgage in January 2007.

The Kesslers failed to make payments to the Contractor and mortgage payments to Commerce Bank, which prompted the Contractor to file a mechanics’ lien claim on the property and obtain a judgment against the Kesslers. This also prompted Commerce Bank to file a mortgage foreclosure action and obtain a judgment against the Kesslers.

In 2010, Commerce Bank and the Contractor asked a trial court to suspend the foreclosure sale of the property and determine which party enjoyed priority over the other in connection with their respective judgments against the Kesslers. The trial court concluded that the Contractor’s lien enjoyed priority over Commerce Bank’s mortgage, and the Superior Court considered the issue on appeal.

Under the Pennsylvania Mechanics’ Lien Statute, for projects that involve new construction (as opposed to alteration or repair), a contractor’s lien takes effect for purposes of priority as of the date when the commencement of work is visible. However, a contractor or subcontractor’s lien becomes subordinate to an open-end mortgage when the proceeds of the loan are used to pay for the cost of completing construction.

The Decision

Despite the fact that an open-end mortgage was in place, the Superior Court concluded that the Contractor’s lien enjoyed priority over Commerce Bank’s mortgage because not all of the proceeds from the mortgage were specifically used to cover the cost of construction. In other words, the Superior Court decided that if proceeds from an open-end mortgage are used to cover non-construction items such as closing costs, old mortgages or unpaid taxes, the open-end mortgage will not enjoy priority over a contractor or subcontractor’s mechanics’ lien where visible construction commenced prior to the lender’s recordation of mortgage.

The Impact

This decision could have a significant impact on construction lending in Pennsylvania because, as discussed above, banks do not typically loan money if they cannot assure priority over any other encumbrances that may arise. This decision technically means that a lender’s priority over a contractor or subcontractor’s mechanics’ lien could be defeated if the contractor or subcontractor can demonstrate that at least one dollar of the proceeds from a construction loan were used to pay for expenses that are not considered costs of completing construction.

Ultimately, this issue remains unresolved because Commerce Bank has asked the Superior Court to reconsider its decision, and could seek to appeal the matter to the Supreme Court of Pennsylvania if it remains unsatisfied with the Superior Court’s decision.

Daniel E. Fierstein is an Associate in the Construction Group of Cohen Seglias and focuses his practice on construction law.

Jennifer M. Horn is Senior Counsel at Cohen Seglias and a member of the Construction Group. She concentrates her practice in the areas of construction litigation and real estate.

Definition of "subcontractor" in Pennsylvania Mechanics' Lien Law Given Liberal Interpretation by Pennsylvania Superior Court

Posted by Jason A. Copley on January 16, 2012

By: Jason A. Copley and Lori Wisniewski Azzara 

On January 6, 2012, the Pennsylvania Superior Court, in a 7-2 decision, significantly expanded the Pennsylvania Mechanics' Lien Law’s definition of a “subcontractor” in Bricklayers of Western Pennsylvania Combined Funds, Inc. v. Scott's Development Co., 2012 Pa. Super 4. In this case, the trustees of employee benefit funds filed mechanics’ lien claims as a result of unpaid contributions owed to union members under collective bargaining agreements with the general contractor. The lower court dismissed the claims for lack of standing, concluding that the union members were not “subcontractors” under the Mechanics’ Lien Law because the collective bargaining agreements were not traditional subcontractor agreements and the union members were employees and/or laborers of the general contractor.

The Superior Court disagreed, concluding that a traditional subcontractor agreement was not a mandatory prerequisite to confer “subcontractor” status under the Lien Law. The Court found the collective bargaining agreements to be “implied in fact” contracts to furnish labor for the construction of an improvement. In liberally construing the Lien Law’s definition of “subcontractor,” the Court found the unions to be “subcontractors” under the Lien Law. Moreover, the Court held that the trustees had standing to assert the lien claims on behalf of the union members. Therefore, the mechanics’ lien claims were permitted to proceed.

This decision and its liberal construction of the Lien Law is a first in Pennsylvania. We will continue to monitor its impacts on the construction industry.

A more in depth discussion and analysis of this case can be found in the upcoming edition of our quarterly newsletter: Construction In Brief.

Jason A. Copley is the Managing Partner at Cohen Seglias and a Partner in the Construction Group. His practice is focused on representing contractors, subcontractors and owners in the areas of construction and commercial litigation.

Lori Wisniewski Azzara is an associate at Cohen Seglias Pallas Greenhall & Furman PC. Mrs. Azzara practices in the areas of construction and commercial litigation and has experience in contract negotiation, claims for delay and inefficiency, mechanics’ liens, and all types of contractual disputes.

Questions about the Impact of Sloan v. Liberty Mutual

Posted by Robert Ruggieri on August 19, 2011

By: Robert Ruggieri

Last week we blogged about an important decision recently handed down by the Third Circuit Court of Appeals on the enforceability of pay-if-paid provisions in Pennsylvania. In Sloan & Company v. Liberty Mutual Insurance Company, a surety, Liberty Mutual, was found not liable to pay Sloan, a subcontractor, on a payment bond claim because of a valid pay-if-paid provision in the subcontract between Sloan and Shoemaker, the general contractor who had secured the payment bond. The Court held that Shoemaker did not have to pay Sloan in full because it did not get paid in full from the project owner. Because Shoemaker was not liable under the contract, the Court held that its surety could not be liable on the bond claim.

The Sloan case certainly clarifies many issues regarding pay-if-paid provisions and liquidating agreements in Pennsylvania. However, language in the Court’s opinion calls into question the opinion’s lasting impact, and suggests that particular aspects the Court’s ruling may be limited by developments in Pennsylvania’s Mechanics’ Lien Law (Lien Law) that went into effect after the subcontract in question was formed.

Pennsylvania’s Public Policy in Favor of Subcontractors’ Right to Secure Payment

In the Sloan case, the subcontract between Shoemaker and Sloan required that Sloan waive its right to file a mechanics’ lien. Sloan argued that if the surety was able to rely on the pay-if-paid provision in the subcontract as a defense to payment on Sloan’s bond claim, this would result in a situation that is contrary to Pennsylvania’s public policy that favors subcontractors’ right to secure payment.

This public policy is spelled out in a 2007 amendment to the Lien Law. Specifically, Section 1401(b) of the Lien Law makes lien waivers invalid, and unenforceable, unless they are given in exchange for payment for work performed by the subcontractor, or, unless the contractor has posted a bond guaranteeing payment for labor and materials provided by subcontractors.

The purpose of this provision is to provide subcontractors with an alternate avenue for recovery of payment in exchange for their waiver of lien rights. A subcontractor gives up the protection afforded by the lien in consideration for the protection of a surety bond. In Sloan, that protection was taken away by the pay-if-paid provision. Importantly, however, this provision of the Lien Law was not in effect at the time Sloan entered into the subcontract.

Surety’s Ability to Rely on Pay-if-Paid Provision May Be Contrary to Public Policy

In a footnote, the Court stated that its ruling in favor of the surety was not contrary to public policy because the Lien Law amendment came into affect after Sloan entered into the subcontract, and Sloan, without relying on this policy, freely accepted the tradeoff between a mechanic’s lien and a surety bond.

However, this footnote begs the questions:

  • Would the Court have ruled the same way if Sloan entered into the subcontract after the 2007 Lien Law amendment? and;
  • Going forward, will courts allow a surety to rely on a pay-if-paid provision in a contract entered into after the 2007 Lien Law amendment where the subcontractor was required to waive its lien rights?

The Court did not address these questions in its opinion. However, arguments can certainly be made that after the 2007 Lien Law amendments, it is against Pennsylvania public policy to allow a surety to rely on a pay-if-paid provision as a defense to a subcontractor’s payment bond claim, where the subcontractor was required to waive its right to file a lien; and, had the Sloan Court been interpreting a contract entered into after the amendments that its ruling would have been different.

Whats Next?

The Sloan decision does nothing to prevent a subcontractor, who waived its lien rights after the 2007 Lien Law amendment, from arguing that a surety’s reliance on a pay-if-paid provision is against Pennsylvania’s public policy. Subcontractors can, and will, argue that the purpose of the Lien Law amendment is to ensure that a subcontractor who is required to waive its lien right will have the protection of a payment bond; and that allowing a surety to rely upon a pay-if-paid provision to deny payment on a bond claim thwarts the very purpose of the surety bond and defeats the purpose of the Lien Law amendment.

On the other hand, sureties will rely on the Sloan decision, as well as other established principles of surety law holding that a surety’s liability is only triggered when the principal’s (general contractor’s) debt matures. Because the pay-if-paid provision prevents the general contractor’s debt from maturing, the surety cannot be held liable. Finally, sureties will argue that surety bonds are provided for the primary benefit and protection of the obligee, usually the owner, not the subcontractors, and therefore, a subcontractor’s reliance on the bonds is misplaced.

So, while the Sloan decision is certainly an important one in the line of cases dealing with pay-if-paid provisions, its impact may be limited and subject to change. In the realm of pay-if-paid provisions, many questions remain. It is likely that in the near future a court will have to answer the tough questions the Sloan Court was able to avoid.

Robert Ruggieri is an associate at Cohen Seglias Pallas Greenhall & Furman PC and practices in the area of complex construction litigation.

For Subcontractors Filing Mechanics' Liens in Maryland: Clarification of "Owner"

Posted by Jennifer M. Horn on August 14, 2011

By: Jennifer M. Horn

As all subcontractors are aware, mechanics’ lien rights are precious tools to recover payment on a project for work performed. Often with the aid of a title search, subcontractors and their counsel strive to ascertain the exact identity of the “owner” of the land – a critical factor in any successful mechanics’ lien claim. The Maryland Mechanics’ Lien statute defines an “Owner” as “the Owner of the land except that, when the contractor executes the contract with a tenant for life or for years, ‘Owner’ means the tenant.” But what happens when a tenant controls the design and construction of the Project, provides funding, and is the ultimate beneficiary of the subcontractor’s work?

How Is “Ownership” Impacted For Lien Purposes When The Tenant Controls Construction?

In BRC Lease Company, LLC v. Audio Visual Innovations, Inc.,  corporations of the Johns Hopkins University, BRC/FSK, argued that they were not the proper “Owners” of the Johns Hopkins Biomedical Research Center located on the Bayview Campus because the National Institutes of Health (NIH), their tenant, controlled the design and construction of the project, provided funding and was the ultimate beneficiary of the subcontractor’s audio visual work. In upholding the plain language of the Maryland statute and in accordance with case law, the Maryland Court of Special Appeals confirmed that there was no merit in BRC/FSK’s argument that the NIH should be considered the “owner” because NIH did not contract with the subcontractor to install the equipment.

Impact Moving Forward

The recent decision means that prudent contractors can continue to rely on the plain meaning of the real property article. In particular, when identifying the “Owner of the land” for mechanics’ lien purposes, contractors (in addition to a properly run title search) should look to the contract for guidance.

Jennifer M. Horn is Senior Counsel at Cohen Seglias and a member of the Construction Group. She concentrates her practice in the areas of construction litigation and real estate.

Update on PA House Bill 1602: Proposed Legislative Changes to Pennsylvania's Mechanic's Lien Law

Posted by Jennifer M. Horn on June 23, 2011

Last week, Pennsylvania’s House Labor and Industry Committee considered PA House Bill 1602  (HB 1602). Construction industry experts, including Cohen Seglias’ own Jason A. Copley, critiqued the bill in testimony presented at a televised public hearing. If approved, HB 1602 would require additional notice provisions and reduce a claimant’s time to file a lien from six to four months.

What is HB 1602?

Under HB1602, any subcontractor, contractor, or second tier subcontractor who fails to provide the newly proposed Notice of Furnishing within 20 days after first performing work or rendering services or material at the property could forfeit its lien rights. The Notice of Furnishing requires disclosure of, among other things, the estimated price of the labor, materials, and tools furnished. If approved, HB 1602 would also require owners, owner’s agents, and/or general contractors to file and post at the property a Notice of Commencement disclosing the true owner of the property, among other things.

Possible Effects on the Construction Industry

House Bill 1602 has negative implications for the construction industry as a whole because:

1. The lien law exists to protect all contractors and make sure that they get paid for work when unscrupulous owners fail to pay their bills. Making any changes that curtail those rights must only be done with great caution and to correct a "wrong" resulting from the current law. In this regard, the reduction of time to file from six to four months works to the detriment of both subcontractors and general contractors in that it would inadvertently increase the number of lien filings and prevent the amicable resolution of claims as parties rush to satisfy the shortened deadline.

2. Some subcontractors and second-tier contractors, that the lien law is designed to protect, will likely unwittingly forfeit their lien rights for the labor and materials they supply on projects by failing to satisfy the new Notice of Furnishing requirement.

3. The current Mechanic’s Lien Law is intended to protect contractors and promote economic growth by providing needed protection to contractors who provide labor and materials on projects. It is counterintuitive to the law’s purpose to restrict its scope and application by requiring notice prior to a dispute. Also, since the amendments in 2009, no floodgate has opened with respect to the filing of liens. Therefore, there is no economic or governmental interest to support an amendment to more narrowly tailor the application of the current version of the Mechanic’s Lien Law.

4. The potential for a general contractor’s forced “double payment” (once to the subcontractor and again to a supplier or sub-subcontractor) should be otherwise avoided by limiting the liability of general contractors in relation to the amount they have already paid under a contract, similar to the defense owners enjoy pursuant to Section 1405 of the current Mechanic’s Lien Law. In addition, a "fund" could be established by an amendment to set up a trust fund mechanism like exists in New Jersey, which would provide for unpaid second-tier subcontractors to receive a pro rata distribution of unpaid funds.

5. Only 21 states have currently enacted legislation similar to the notice provisions proposed in HB 1602. Also, given that Pennsylvania law already offers other avenues of protection for owners and general contractors, the additional protections proposed by HB 1602 are unnecessary.

Cohen Seglias will continue to monitor HB 1602 and any amendments. If you have any questions about HB 1602 or the June 13, 2011 public hearing, please contact Jason Copley at jcopley@cohenseglias.com or Jennifer Horn at jhorn@cohenseglias.com, 215-564-1700.

Pennsylvania Superior Court Permits Mechanic's Lien Claim For Excavation Work Despite Cancellation of Project

Posted by Robert Ruggieri on June 16, 2011

On June 7, 2011, the Pennsylvania Superior Court, in what appears to be a departure from past rulings and conventional interpretations of Pennsylvania’s Mechanic’s Lien Law (Lien Law), issued a ruling that permits an excavating contractor to pursue a mechanic’s lien claim for work it performed on a project even though the two planned structures were never erected. This ruling is particularly important in today’s construction market where many projects continue to be plagued with financial problems that subject them to cancellation after work has begun.

B.N. Excavating, Inc. v. PBC Hollow-A, L.P.

B.N. Excavating performed excavation work as a subcontractor for a project in Phoenixville, Pennsylvania that included the planned construction of two office buildings. However, the project was canceled before the buildings were constructed. B.N. Excavating filed a mechanic’s lien claim (Lien) against the property after the general contractor failed to pay for the excavation work it performed. The owner of the property objected to the Lien on the basis that the Lien was barred because the planned buildings were never erected, and therefore, B.N. Excavating’s work was not related to the construction of an improvement on the property. The lower court agreed, and dismissed the Lien. However, on appeal, the Pennsylvania Superior Court overruled the lower court’s ruling, and allowed B.N. Excavating to pursue the enforcement of its Lien.

Pursuant to Section 1201(12)(a) of the Lien Law, a lien for excavation work (as well as liens for demolition work grading, paving and other site-preparation work) is only permitted when the work is “incidental” to the erection, construction, alteration or repair of an improvement on the property. Pennsylvania Courts interpreting the Lien Law have made it clear that liens for site preparation work are only permitted where the work is “incidental” to construction as opposed to when the work is performed “independent” of construction. Said another way, the site preparation work must be “connected to, and an integral part of” the construction of a structure. However, previous court decisions never indicated that lien rights existed when a planned structure was not constructed. In fact, the most relevant Pennsylvania case on the issue suggests, without specifically stating so, that a lien should not be allowed where a building or permanent structure is not erected. The Superior Court, in allowing B.N. Excavting’s lien claim, disregarded this “suggestion” and differentiated the B.N. Excavating case from prior cases by stating that the Lien was permitted because the work was performed in preparation for “planned” construction.

Impact

In light of this decision, a contractor that performs site preparation work should be confident that a properly filed lien will be allowed even where the planned structures are never erected.

Cohen Seglias attorney Ashling A. Ehrhardt contributed to this post.

 

New Jersey Construction Lien Law Changes: Protect Your Right to Get Paid

Posted by Jennifer M. Horn on February 15, 2011

New Jersey Governor Chris Christie recently enacted legislation revising the New Jersey Construction Lien Law, which was last amended in 1994. The amendments are effective paid.jpgimmediately, and include changes to critical timing, definitional, and enforcement requirements.

Please note that the changes affect only commercial and private projects and have no bearing on the Municipal Mechanics Lien Law, which pertains to only government projects.

The changes to New Jersey’s construction lien law include, but are not limited to, the following:

The Time You Have for Filing Residential Construction Liens Has Changed

Residential construction claimants must file a Notice of Unpaid Balance (NUB) and Right to File Lien within 60 days from when the claimant last performed work or supplied materials on the project. Within 10 days after filing the NUB, the claimant is required to serve a demand for arbitration for the purpose of determining the amount of the lien claim. This time may only be extended upon consent of the parties and arbitrator. Within 10 days after the arbitrator's determination, but within 120 days from when the claimant last performed work or supplied materials, the claimant must record the lien claim.

Multiple Liens Against the Same Residential Project Are Addressed

Parties aggrieved by lien claims relating to the same construction project may, under the new law, be joined in a single construction lien arbitration proceeding in order to avoid inconsistent arbitration awards. The new law also requires that, if possible, the same arbitrator determine all such claims - even if joinder is not possible. In addition, the arbitrator must consider the outcome of all previous proceedings relating to the same construction project in rendering her determination.

You Must Use New Statutory Forms for the NUB, Lien Claim, and Amended Lien Claim

These new forms clarify the manner in which a claim is calculated. In addition, standard forms of affidavit to summarily discharge a lien claim and standard forms for the bond used to discharge a construction lien claim are provided.

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Subcontractors in Pennsylvania Must Be Careful When Filing a Lien for Work Performed On Multiple Plots of Land

Posted by Jennifer M. Horn on January 06, 2011

Smart contractors now more than ever must be vigilant about preserving their rights to mechanics’ liens. Lien rights provide another avenue of protection if and when payment is not made for work performed. Contractors should beware however, when performing work or supplying materials on Pennsylvania projects that cover multiple plots of land.

Mall.jpgRecently, a contractor in Philadelphia County performed concrete and masonry work on a strip mall that covered multiple plots of land, with multiple owners. In court, this contractor’s attempt to lien the project was unsuccessful because the contractor filed two liens for the same work against both plots and did not apportion the liens based upon the improvements made to each plot.

The practical message here is that Pennsylvania contractors who work on projects that span multiple land plots and involve more than one owner should be mindful of exactly where they are performing their work, and where the materials they supply are ultimately installed and/or deposited. The statutory expectation under the Pennsylvania lien law in this multiple-plot circumstance is that work performed on each plot is specifically apportioned. This means that the contractor must account for and divide the work and associated costs according to each plot of land where the work occurred.

Pennsylvania contractors would be well-advised in this multiple plot situation to maintain specific daily reports that delineate which work is being performed on which plot of land. Additionally, maintenance of delivery tickets and shipment receipts that specifically note where particular materials are installed is helpful.

Perfecting Mechanics' Liens in Pennsylvania

Posted by Robert Ruggieri on December 09, 2010

Contractors and subcontractors must be particularly vigilant in protecting their lien rights in these uncertain economic times. Despite an investment of time and labor into a project, contractors and subcontractors may be faced with a defaulting owner, or even worse, an owner who files for Pennsylvania.jpgbankruptcy before paying for the construction work. To fully protect itself from an owner who defaults on payment, a contractor or subcontractor must file a mechanics’ lien against the owner’s property once the work has been completed.

What does it mean to perfect a lien?

In Pennsylvania, a mechanics’ lien must be “perfected” by the contractor or subcontractor. Perfection simply means that the contractor or subcontractor has closely followed the law, taken all of the necessary steps, and filed the correct papers with the court. Because the steps vary from state to state, it is crucial that a contractor or subcontractor be aware of the law of the state where the project is located.

In Pennsylvania, the right of a contractor or subcontractor to file a lien on the property of a non-public construction project is governed by the Pennsylvania Mechanics’ Lien Law of 1963, as updated. To “perfect” a lien in Pennsylvania, a contractor or subcontractor must take each of the following steps:

  • First, the contractor or subcontractor must file a claim with the local state court within 6 months after the contractor or subcontractor completed its work. It is important that the lien be filed in the Court of Common Pleas where the project is located.
  • Second, the contractor or subcontractor must serve written notice of the filing upon the owner within 1 month after filing. Third, the contractor or subcontractor must file a proof of service with the same court within 20 days of service upon the owner.
  • In addition, Pennsylvania law requires that a subcontractor provide a preliminary notice to the owner before it can proceed with the lien perfection process. This requirement does not apply to a contractor.

Why does perfection matter?

Perfection matters because in Pennsylvania once a lien is perfected the contractor or subcontractor has rights, even if the owner later files for bankruptcy. This is an unusual wrinkle under Pennsylvania law, because usually once a bankruptcy is filed—no one can sue the owner. If a contractor or subcontractor has perfected a lien before the bankruptcy begins, that contractor or subcontractor might still be able to proceed in court against the owner.

In New Jersey, the process to perfect a mechanics’ lien is much more involved.

Perfection of a Mechanics' Lien on New Jersey Residential Projects

Posted by Douglas C. Burry on November 11, 2010

Although nobody is immune from the effects of the downturn in the economy, contractors and subcontractors are especially vulnerable in these uncertain New Jersey.jpgtimes. Even after investing time and labor, contractors and subcontractors face the possibility of not getting paid. To fully protect itself from a defaulting owner, a contractor or subcontractor must file a mechanics’ lien against the owner’s property once the work has been completed.

What does it mean to perfect a lien?

Because the steps regarding mechanics’ liens vary from state to state, and for residential and commercial liens, it is crucial that a contractor or subcontractor be aware of the law of the state where the project is located. In New Jersey, a mechanics’ lien must be “perfected” by the contractor or subcontractor. Perfection simply means that the contractor or subcontractor has closely followed the law, taken all of the necessary steps, and filed the correct papers with the court.

In New Jersey, construction lien rights are governed by the New Jersey Construction Lien Law. To “perfect” a lien on a New Jersey residential project, a contractor or subcontractor must take each of the following steps:

  • First, the contractor or subcontractor must file a Notice of Unpaid Balance and Right to File Lien. This Notice should be filed within 50 days of the last day of work in order to ensure there is enough time to file the lien within 90 days.
  • Second, a Notice and Demand for Arbitration must be submitted to an arbitrator for a factual determination as to the value of the lien. The arbitrator must render a decision within 30 days of receipt of the Demand for Arbitration.
  • Third, the contractor or subcontractor must file a lien claim with the clerk of the county where the work was completed within 10 days of receipt of the Arbitration Decision. The lien claim amount must be limited to the amount determined by the arbitrator. Not only must the lien claim be filed within ten days after the decision is received, it must also be filed within 90 days after the work has been finished. The Lien Law provides a form that can be used to ensure the lien claim is properly drafted.
  • Finally, the contractor or subcontractor must serve the lien claim on the owner within 10 business days after filing it with the county clerk.

If the contractor or subcontractor has performed the work, it is likely that an arbitrator will make a factual determination that a lien can be filed. Problems sometimes arise because the contractor or subcontractor cannot control how quickly the arbitrator makes a decision.

Why does perfection matter?

For a lien to be perfected, the contractor or subcontractor must complete all of the above-outlined steps of the lien process. In New Jersey, this is important because once a lien is perfected, the contractor or subcontractor has rights even if the owner later files for bankruptcy. Unlike other states, if a project is residential, New Jersey’s process for perfection requires submission of a claim to an arbitrator. Arbitrators are not always quick to decide claims. If a claim is currently awaiting decision by an arbitrator, and the owner files bankruptcy before the arbitrator makes a decision, the contractor or subcontractor will lose all lien rights. This is true even though the contractor or subcontractor cannot control how quickly the arbitrator decides the claim. Simply starting the perfection process is not enough to protect lien rights. Currently, legislation to both modify and clarify the New Jersey Construction Lien Law is pending before the New Jersey Senate Commerce Committee.

We will continue to monitor and report on this pending legislation.

Pennsylvania Court Decision Limits Unjust Enrichment Claims for Subcontractors

Posted by Robert Ruggieri on October 14, 2010

It is not uncommon, especially in today’s economy, for a subcontractor to perform work on a project but not get paid. Under Pennsylvania law, there are several courses of action a subcontractor can take to recover payment. One option is for a subcontractor to seek payment unjust.jpgdirectly from the general contractor under a breach of contract claim. When bringing such a claim, it is important to remember that, even if successful, a subcontractor may not be able to recover payment for many reasons, including bankruptcy or non-payment from the project owner. Accordingly, it is wise for a subcontractor to seek other avenues for payment, such as filing a mechanic’s lien against the project or asserting an unjust enrichment claim against the owner and possibly even the project lender.

Valid mechanic’s liens ensure that a contractor has a secured interest in the property where the work was performed, whereas a successful unjust enrichment claim allows a contractor to obtain payment from a third party, such as an owner or lender, when that third party benefits from the work performed under the contract.

In order for an unjust enrichment claim to be successful, a subcontractor must prove:

  • That there was an enrichment, i.e., a benefit conferred by the claimant, and
  • That an injustice will result if the claimant is denied recovery for the enrichment

A recent Pennsylvania Superior Court decision has further defined and clarified the requirements of an unjust enrichment claim, and in doing so, has severely limited the situations in which a subcontractor can recover payment from an owner or lender.

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Establishment of a Mechanics' Lien in Maryland

Posted by Jennifer M. Horn on August 24, 2010

When payment for good work performed on a construction project is delayed, contractors, subcontractors, and suppliers alike must act quickly to preserve their mechanics’ lien rights in Maryland.  A mechanics’ lien is a way for contractors,subcontractors or suppliers whose work improved the value of a property to receive payment. The lien, when established, attaches to the property which serves as security for the unpaid amounts due to the contractors, subcontractors or suppliers. If critical deadlines are missed, however, these parties will forever lose their right to payment. Preservation of mechanics’ lien rights is particularly important in this economy where the risk of default and/or non-payment is especially high.

What Must Happen To Establish A Mechanics’ Lien in Maryland?

 In Maryland, the right of a “contractor” or “subcontractor” to file a lien against an “owner” – specially defined terms under Maryland law that include suppliers – is governed by the Maryland Mechanics’ Lien Statute.  To establish a lien in Maryland, a contractor or subcontractor must do the following:

  • First, a contractor or subcontractor doing work or furnishing materials at a project site must give a written Notice to Owner or Owner’s Agent of Intention to Claim a Lien within 120 days of performing the work or furnishing the materials.   The Notice must contain the following information:
    • The amount due and owing
    • A brief description of the work done and/or materials furnished
    • The time the work was performed and name of the person to whom the materials were furnished
    • The description of the property
  • Second, within 180 days of performing the work or furnishing the materials, the contractor, subcontractor, or supplier must file a petition to establish the mechanics’ lien, with a sworn affidavit. An attorney must file the petition for the contractor in the Maryland county where the property is located.
  • Third, after the petition is filed, the Court will issue a Show Cause Order and schedule a show cause hearing to determine whether probable cause exists to establish the lien or interlocutory order.  Probable cause is measured as the likelihood that a reasonable judge would establish the lien and the show cause hearing serves as a “mini-trial” on the contractor’s entitlement to the lien.