Posting this for two reasons. First, folks apparently really liked the lien and bond chart I posted a few weeks ago. Second, I want mix things up and mess around with video as a medium for discuss. So, I am going to do series of video blog posts over the next few weeks. Next week back to more labor law with a video discussion – sans power point I promise – on union employee grievances.
Found an old chart I made summarizing the various deadlines for filing Pennsylvania, New Jersey, and Federal Lien and Payment Bond Claim that I used to give out to clients. It was pretty popular and I am not sure why I stopped giving it out. Anyway, I updated it and am making it available to anyone on the interwebs that wants to use it. Of course, this is a very topical summary and you should check with me (or your current attorney first) before filing a lien and bond claim and to understand your rights. You can also download a pdf version here – Summary of Bonds and Liens Law_Updated
Yes. There seems to be common misconception that a contractor, subcontractor, or supplier, has six months from its last day of work on the project to file a mechanics lien. I frequently see mechanics liens whereby the claimant states “Claimants last day of work on the project was X.” However, Section 1502 (49 P.S. Section 1502) of the Pennsylvania Mechanics Lien is clear that a lien must be filed within six month of “the completion of his work.” Under the Lien Law, “completion of the work” is a defined term and means “means performance of the last of the labor or delivery of the last of the materials required by the terms of the claimant’s contract or agreement, whichever last occurs.”
This distinction is significant because it means a contractor, subcontractor, or supplier must complete all of the scope of work in its contract before it files a mechanics lien. This also means that a contractor, subcontractor, or supplier must continue to work even if it is not being paid in order to maintain its lien rights.
The Superior Court has spoken on the issue and made this very clear. In Philadelphia Const. Servs., LLC v. Domb, 2006 PA Super 184, ¶ 18, 903 A.2d 1262, 1268 (Pa. Super. Ct. 2006) (full disclosure I represented the owner-appellant in this case and argued that a contractor needed to complete all of its work before it filed a mechanics lien), the Court held that a contractor must complete its work in order to perfect its mechanics lien rights, even if the contractor is not getting paid. As the Court held, the Lien Law “mandates an aggrieved subcontractor must serve preliminary notice prior to “completion of the work” and then finish the job so they can perfect the lien within four months of “completion of the work.”” The Court recognized that “such a mandate may seem fundamentally unfair because it forces a subcontractor to render full performance even when the other party already has breached the contract in order to be afforded the remedy of a mechanics’ lien.” However, the Court also recognized the uniqueness of a mechanics lien, calling it an “extraordinary remedy” and, therefore, opined that the result was reasonable.
The takeaway? From an owner’s perspective, if a contractor or subcontractor walks off a job because of non-payment (as was the case in Philadelphia Construction Services) and file a lien, preliminary objections should successfully strike the lien. From the contractor’s perspective, you have to make the Hobbesian choice of working for free to perfect your mechanics lien rights or walking off the job and pursuing an ordinary breach of contract claim.
The New Year will bring with it the biggest change to Pennsylvania’s Mechanics Lien Law since the current law was passed in 1963. These changes will impact owner, contractors, and subcontractors equally. However, the biggest benefits will probably be for real estate developers and other project owners.
On December 31, 2016, Pennsylvania will go live with a website known as the State Construction Notices Directory. On that date, owners will have the option of making projects costing $1,500,000 or more “searchable projects.” An owner makes a project a searchable project by filing with the Notices Directory a “Notice of Commencement” before works begins. The Notice of Commencement must include the name, address, and email address of the contractor, full name and location of the searchable project, the county where the project is located, a legal description of the searchable property, and the name address, and email address of the searchable project owner. Importantly, the owner must also post a copy of this Notice of Commencement at the project site.
If an owner does this, a subcontractor wishing to maintain its lien rights must file a Notice of Furnishing within forty-five (45) of first performing work on the project. The notice of furnishing must include the general description of the labor and materials provided, the full name and address of the person supplying the services or items, the full name of the person that contracted for the services, and a description of the searchable project.
The impact of these changes cannot be emphasized enough. First, subcontractors can no longer wait to take action in order to preserve their lien rights. This means no more waiting for your invoice to age a few months before filing a lien. The old rule that you have six months after completion of your work to file your lien no longer applies if you fail to act within 45 days of starting your work.
Second, owners need to diligent file the Notice of Commencement and post the Notice at the project. It is expected that many subcontractors (at least those that do not follow this blog) will not file a required Notice of Furnishing within forty-five days of beginning their work. That means if you – the owner – have filed the required Notice of Commencement you can bar a significant number of mechanics liens.
These rules only apply to projects beginning on or after December 31, 2016. But failure to understand these new rules going forward will have significant consequences to owners and subcontractors.
As we enter the New Year, here is a look at 5 areas that will be a hot bed of legal activity for contractors and their attorneys.
1. Aggressive Union Activity.
Decreasing membership and market share, will cause Big Labor to ramp up efforts to “persuade” public and private owners to use an all union workforce. This means increased picketing, bannering, and “ratting” of projects using non-union subcontractors. On public projects, labor will continue to lobby government officials for the use of union only project labor agreements. Owners and contractors need to be ready to combat labor’s tactics.
Union shop firms must be aware of their contribution requirements under their CBA. The 2008 stock market crash (from which union pension funds have never full recovered), increasing vested liabilities from an aging workforce, and decreasing membership have lead many union health and welfare funds to be underfunded. In fact, union pension funds may be the next big Washington bailout. In the meantime, unions will aggressively pursue delinquent contractors for contributions to health and welfare funds.
In Philadelphia (and perhaps around the country), eyes will be on jury’s verdict in the Ironworkers extortion trial involving former Ironworkers head, Joseph Dougherty. A conviction could lead to a wave of indictments against union leaders that have engaged in similar tactics across the country.
2. Increased Regulation of Contractors.
President Obama’s policy of creating a regulation nation continues unabated. In 2014, the Obama administration issued 78,978 pages of new federal regulations many which impact contractors. Any contractor or subcontractor performing work on a project receiving any form of federal funding assistance must be aware of the regulations that apply to them.
3. Rising Default Rates.
With the federal reserve signaling the era of free money coming to an end, interest rates will rise. Rising rates will make borrowing costs higher for both owners and contractors. Increased borrowing costs could lead many contractors to fail, especially firms that saw rapid expansion following the recession. Owners may increasingly default as projects are increasingly difficult to finance. Moreover, rising rates should slow the rapid increase in asset values, such as real estate. This could make development projects less attractive leading to many proposed projects being shelved. Bottom line for contractors, know you lien and bond rights.
4. Growing Comfort with Public Private Partnerships.
Cash strapped state and local governments will continue to look to public private partnerships (PPP) as a way to fund infrastructure projects. The success of high profile (and dollar) PPP projects in Florida, Pennsylvania, and Delaware will likely determine if the use of PPP as a source of infrastructure funding will increase in coming years.
5. Continued Growth in Health Care and Institutional Construction.
Whether you agree with it or not, our current public policy is that everyone has a right to a college degree and healthcare. Accordingly, the federal government has heavily subsidized higher education and healthcare. Increased dollars in the hands of administrators in higher education and healthcare has lead to a building boom in these two sectors. Eventually the music will stop, but in the near term contractors can expect increased work in these areas.
In January 2012, the Pennsylvania Superior Court issued a decision in Bricklayers of Western Pennsylvania Combined Funds v. Scott’s Development Co., that we called a “mechanics lien earthquake” because it overturned decades of prior precedent that in order to properly file and perfect a mechanics lien, a contractor or subcontractor, needed to strictly follow the requirements of the mechanics lien law. Before Bricklayers, courts would routinely strike mechanics liens that deviated, even slightly, from the Pennsylvania mechanics lien law’s requirements. The reasoning behind this was that because the lien law was a “creature of statute” it needed to be “strictly construed” by the courts. However, the Superior Court turned that on its head in 2012 when it held that the lien law was not subject to strict construction, but, rather, it should be “liberally applied.” In the Bricklayers case, the liberal construction meant union health and welfare funds and, even individual employees, enjoyed mechanics lien rights.
As can be imagined, the Superior Court’s decision in Bricklayers did not sit well with many in the construction industry and an appeal was filed. The Pennsylvania Supreme Court granted “allocator” (allowance) of appeal in the Bricklayers case in order to review the Superior Court’s decision. Last week, the Supreme Court issued its opinion and overturned the Superior Court’s decision in Bricklayers. (Those wishing to read it can click HERE.)
The Supreme Court’s decision left many in the industry happy because it held (correctly) that individual employees, laborers, and, in particular, union fringe benefit funds do not enjoy mechanics lien rights because they do not meet the definition of subcontractor under the lien law.
What the Supreme Court did not do (much to the chagrin of many construction lawyers including me) is explicitly state that the lien law should always enjoy strict construction and affirm prior holdings that any deviations from the lien law will result in a lien being dismissed. Instead, the Court held that clear and unambiguous portions of the law should be given the intent of the General Assembly while ambiguous provisions may be subject to additional review.
What this means is that if a provision is clear, such as stating that a lien shall be filed within six months of a contractors completion of its work, then Court’s should strictly construe it and strike any lien file more than six months after completion. However, if the provision of the law is ambiguous a contractor could have some wiggle room. Because most of the provisions of the lien law, in our opinion, are pretty straightforward and clear, it is hard to envision a scenario where a deviation from the lien law’s requirements should not result in a dismissed lien. Moreover, because the requirements are clear, there should not be any deviations in the first place. The lesson: look at the lien law and follow it – its pretty starightforward.
Pennsylvania used to be an unforgiving place for a subcontractor seeking to file a mechanics lien. For over thirty years, with few exceptions, higher tier contractors could waive a subcontractor’s lien rights by filing lien waivers before work began on the project. The onus was on the subcontractor to check with the Prothonotary to see if a lien waiver had been filed for a particular project and, thus, whether it had any lien rights. Because pre-construction lien waivers were routine there were only a few instances were subcontractors could file mechanics liens.
However, in 2007, the General Assembly greatly increased the pool of potential lien claimants when it amended the Lien Law and made pre-construction and contractual lien waivers void as a matter of public policy. Still, while the Assembly signaled a shift towards favoring contractors with the 2007 amendments, the courts still took a hard line in interpreting Lien Law and continued to “strictly construe” the Lien Law’s requirements, meaning even the slightest deviation from the Lien Law’s requirements could result in a lien being stricken. Thus, the courts muted any intended liberalization of the Lien Law by the Assembly.
At least that was the case until June of last year when the Superior Court issued the first in a series of opinions liberalizing the interpretation of the Lien Law and signaling a bias in favor of contractors and subcontractors. In June 2011, the Superior Court issued an opinion in B.N. Excavating, Inc. v. PBC Hollow-A, L.P., where the Court liberalized the definition of when excavation work is “lienable.” Prior to B.N. Excavating, the prevailing view was the in order for excavation work to support a mechanics lien claim the work must be part of a completed structure. However, in B.N. Excavating, the Superior Court reasoned “we do not interpret the [Mechanics Lien Law] . . . as creating a bright-line rule that a mechanic’s lien can never attach to land absent an erected structure.”
Then in January 2012, the Superior Court issued its “earthquake” opinion in Bricklayers of Western Pennsylvania Combined Funds, Inc. v. Scott’s Development Company, where the Court overturned decades of precedent and held that “[p]ursuant to the plain language of 1 Pa .C.S.A. § 1928(a) and (c), the Mechanic’s Lien Law of 1963 cannot be strictly construed on the basis that it is in derogation of the common law. See 1 Pa.C.S.A. § 1928(a), (c)” and permitted labor union health and welfare funds to file mechanics liens against a project!
Most recently, in Commerce Bank/Harrisburg, N.A., v. Kessler, the Superior Court held that an open-end mortgage does not have priority over a mechanics’ lien filed after the mortgage is recorded if (1) work on the property began prior to the recording of the mortgage; and (2) any portion of the loan proceeds are used to fund something other than the “cost of completing erection, construction, alteration or repair of the mortgaged premises secured by the open-end mortgage.”
The Court reached this conclusion despite what appears to be a clear definition of when an open end mortgage is superior to a mechanics lien. Under Section 1508(c) of the Lien Law a lien is subordinate to an open-end mortgage “the proceeds of which are used to pay all or a part of the cost of completing erection, construction, alteration or repair of the mortgaged premises secured by the open-end mortgage.” Apparently, the Superior Court did not think that part of the open end mortgage proceeds could be used to fund construction and the other part of the proceeds pay for other items such as closing costs, old mortgages, unpaid taxes, ect. – as is commonly the case – for an open end mortgage to retain priority over a mechanics lien. Instead the Court held:
“[w]e interpret the use of the terms “the proceeds” to mean all of the proceeds.”
Obviously, lenders and title insurances companies are concerned about this decision and are looking for ways to protect themselves. Most of the recommendations I have seen do not make any sense, except for the recommendation that lenders pay contractors and subcontractors directly, which is a great idea for a myriad of other reasons the discussion of which is beyond this post.
There are also several questions that this opinion raises:
1. The Court agreed with the appellant’s argument that so long as a lender could show that $1 was spent on construction the lender could retain priority and stated that if lenders were permit to do so an absurd result would occur. However, couldn’t the same argument now be said from the contractor’s position? So long as $1 of the construction loan is used for purposes other than construction is the lender’s priority not defeated?
2. How does a lender control 100% of the loan proceeds? I.e. how does it insure that 100% of the loan proceeds are used for construction thereby maintain its priority?
3. Senior position is a basic premises upon which a loan is underwritten. If lenders cannot assure senior position what does that mean for underwriting of construction loans?
There is one question that the Superior Court did an answer “do I have lien rights?”, the answer, at least from the current Superior Court, is YES.
On March 27, 2012, the Pennsylvania House of Representatives passed HB 1602, a bill that makes major changes to Pennsylvania’s mechanics lien law and if passed by the Senate and signed into law will impact any contractor working in Pennsylvania. All contractors should be aware that HB 1602 weakens a contractor’s most effective weapon against non-payment, the mechanics lien.
1. No Right to Lien a Residential Project.
HB 1602 amends Section 301 of the Mechanics Lien Law, 49 P.S. Section 1301, adding a sub-part (b), which states that a subcontractor shall no longer have the right to lien a residential project when the owner has paid the general contractor in full. While other States, like New Jersey, have different rules for filing mechanics liens against residential property, I am not aware of any State that prohibits the filing of a mechanics lien against a residential property outright, as HB 1602 does.
HB 1602 would effect small contractors the most and it would take away a cost effective and efficient means for ensuring payment. The amounts owed on most residential projects are small. However, these small amounts have a huge impact on a small construction firm’s cash flow. Moreover, most small construction firms do not have the resources to devote to litigation for such small amounts, especially when litigation costs can easily exceed the amount owed and collection from a general contractor is often doubtful.
2. Notice of Commencement
The other major change to the Mechanics Lien law that HB 1602 makes concerns the prerequisites to filing a mechanics lien. Under HB 1602, an owner can require a subcontractor to provide a “notice of furnishing” to the owner within twenty days of its first day of work in order to preserve its mechanics lien rights. A subcontractor is required to provide the owner with a notice of furnishing when the owner has filed a notice of commencement in the “State Construction Notices Directory” maintained by the Department of Labor and Industry.
An owner files a Notice of Commencement by filing it with the Department of Labor and Industry and it must include:
- the name and address of the general contractor, name and location of the project,
- legal description of the property upon which the improvements are being made,
- name, address, and email address of the legal record owner of the property,
- name, address, and email address of the person other than the owner at whose direction the improvements are being made (I would imagine this means a tenant), and
- name, address, and email address of the surety if performance and payment bonds are posted (this makes no sense because if a payment bond is posted then subcontractors probably have no lien rights anyway.
Additionally, the owner must post a copy of this notice conspicuously at the project site before any “physical work” commences and ensure that the posting remains posted during the duration of the project.
For the subcontractor’s part, when a Notice of Furnishing is required it must state:
- a general description of the subcontractor’s work;
- name and address of the subcontractor; and
- name and address of the person with whom the subcontractor contracted.
Basically, all of the same information that a subcontractor is already required to give when it files it formal notice of intention to file a mechanics lien under Section 501. Moreover, HB 1602 dictates the format of the Notice of Furnishing.
This Legislation is a disaster and fails my test for supporting legislation:
(a) is there a compelling reason for changing current policy?, and (b) does it makes sense?
The answer to both questions is NO and I am not sure who this bill is intended to benefit. It is entirely unclear what problems with the current lien law this bill would solve. I do not see it benefiting owners who must not only pay a fee to file a Notice of Commencement but also assure that the Notice is posted and maintained. Additionally, it clearly makes it more difficult for subcontractors to file a mechanics lien, which I am not sure why we want a policy against that.
Hopefully, the Senate comes to its senses and defeats this Bill. We will be sure to keep you posted.
Mechanics Lien Earthquake: Everything You Learned About the Pennsylvania Mechanics Lien Law Is Now Wrong.
For years construction lawyers in Pennsylvania have been taught that the requirements of the Mechanics Lien Law must be strictly followed or a mechanics lien claim will be stricken and lost. In decades of precedent, it has been repeatedly stated that the Pennsylvania Mechanics Lien Law is a “creature of statute in derogation of the common law” and, therefore, in order for a lien claim to be valid it must be filed in strict compliance with the Mechanics Lien Law.
Construction attorneys representing owners, whose property became subject to a mechanics lien, have used this well established principal to dismiss mechanics liens for any variety of deviations from the Mechanics Lien Law. Failing to attach a written copy of the construction contract to the lien; failing to properly identify the owner of the property; failing to properly serve the lien; and failing to give proper notice are some examples of deviations from the strict requirements of the Mechanics Lien Law that have resulted in mechanics liens being dismissed.
However, on January 6, 2012, the Superior Court in Bricklayers of Western Pennsylvania Combined Funds, Inc. v. Scott’s Development Company, 2012 WL 29299. overturned decades of precedent and held that “[p]ursuant to the plain language of 1 Pa .C.S.A. § 1928(a) and (c), the Mechanic’s Lien Law of 1963 cannot be strictly construed on the basis that it is in derogation of the common law. See 1 Pa.C.S.A. § 1928(a), (c).” A copy of the decision is available here.
In Bricklayers, the Superior Court addressed the viability of mechanics lien claims that the trustees of employee benefit funds filed for unpaid contributions owed to union members under collective bargaining agreements between a contractor and the unions. The trial court concluded 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 a contractor. The Superior Court overruled the trial court and concluded “that under the specific facts presented in this case, the unions are subcontractors and given the unique legal relationship that exists between the trustee and the union, the trustee has standing to assert a mechanics’ lien claim on behalf of the union.”
The Court refused to strictly construe the Mechanics Lien Law as it had done in the past because “the ‘derogation of common law’ precept violates the commands of 1 Pa.C.S.A. § 1928(a) and (c)” Thus, “[it] should no longer be used in connection with the Mechanics Lien Law of 1963.” Moreover, the Court held “[t]his is especially true since Sampson–Miller,the source of the strict construction rule, erroneously rested on case law interpreting the Mechanics’ Lien Law of 1901 and inaccurately transposed it to the successor statute, the Mechanics’ Lien Law of 1963.” Therefore, the Court concluded, “the statute must be liberally construed to effect [its] objects and to promote justice.” Based upon its holding, the Superior Court for the first time permitted unpaid unions – through their trustee fiduciaries – to assert a mechanics lien claim for unpaid benefit funds.
Yesterday, I presented at a CLE on Pennsylvania’s Mechanics Lien Law. As usual, I received great questions from those in attendance. One questioner asked an interesting questions regarding whether an equipment rental company was prohibited from filing a mechanics lien in Pennsylvania. I thought the answer was fairly easy and gave a quick “No” response. However, after emailing with the questioner following the presentation I realized that the question was more nuanced than I originally thought. And, after further review, I believe the answer is “it depends.”
Three sections of the Pennsylvania Mechanics Lien Law make this question more complex than it appears. First, let’s start by seeing who the Lien Law says is entitled to file a Mechanics Lien as a matter of right. Section 1301 of the Lien Law states that a contractor or subcontractor is entitled to a mechancis lien to secure a debt incurred “for labor or materials furnished in the erection or construction, or the alteration or repair of the improvement, provided that the amount of the claim, other than amounts determined by apportionment under section 306(b) of this act, shall exceed five hundred dollars ($500).” 49 Pa. Stat. Ann. § 1301 (West).
Next, let’s look at what the Lien Law defines as “labor and materials furnished.” According to Section 1201(9) of the Lien Law “Labor” includes the furnishing of skill or superintendence.” 49 Pa. Stat. Ann. § 1201 (West). According to Section 1201(7) of the Lien Law “materials means building materials and supplies of all kinds, and also includes fixtures, machinery and equipment reasonably necessary to and incorporated into the improvement.” 49 Pa. Stat. Ann. § 1201 (West).
If we stopped out analysis here, then the answer to our question appears straightforward because clearly the Lien Law includes “equipment reasonable necessary to . . . the improvement.” Therefore, pursuant to Section 1301, a lien would be available for rental of such equipment, provided all of the other factors necessary for filing and perfecting a mechanics lien are met.
However, as the questioner pointed out Section 1303(e) of the Lien Law states ” Security interests. No lien shall be allowed for that portion of a debt representing the contract price of any materials against which the claimant holds or has claimed a security interest under the Pennsylvania Uniform Commercial Code or to which he has reserved title or the right to reacquire title.” 49 Pa. Stat. Ann. § 1303 (West) Clearly, a company that rents equipment retains title to that equipment. So, is a rental equipment company out of luck if it needs to file a mechanics lien?
If the rental company provides labor to operate the equipment, then it appears that the right to lien is clear because the labor provided was utilized in construction of the project.
But what about a rental equipment company that did not provide labor and just rents equipment to a contractor who will supply the labor? Well, there is no controlling case law on point. However, there are a few pre-1963 Lien Law cases that say equipment furnished to a project that is not incorporated into the project as a fixture is not lienable. Moreover, the Westmoreland County Court of Common Pleas held “the equipment or fixtures must be of a permanent character which will pass as a part of the freehold and reasonably necessary to equip the building for the purpose for which it is intended.” Joyce v. Sarnelli, 29 Pa. D. & C.3d 544, 547 (Pa. Com. Pl. 1984). However, the question before the Court of Common Pleas Court involved whether refrigeration equipment used in a supermarket was lienable. While the Court ruled that since the refrigeration equipment was not of a permanent quality of the building and thus lienable, it also should be noted that the refrigeration equipment was not used to construction the building either.
Moreover, the Lien Law’s use of the word “and” in the clause “equipment reasonably necessary to and incorporated into the improvement” seems to indicate that the equipment furnished must become a permanent part of the improvement.
Still its a close call. Certainly, there is a good faith basis for a company that only rents equipment without providing labor to claim a lien. Who knows, maybe that lien claim will end up with the Superior Court to clarify the issue. In any event, great question!
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Authored by Philadelphia attorney Wally Zimolong, Supplemental Conditions provides keen insight and insider analysis of construction law developments, prominent construction litigation and labor law in the construction industry.Read More....