A few months ago I wrote an article for Construction Executive Magazine about a Western District of Pennsylvania case, Sauer, Inc. v. Honeywell, that discussed the devils that exist in the details of standard lien waivers and releases and the dangers that lurk for those that do not pay attention to them.

My article that appears in today’s Legal Intelligencer which discusses both the Honeywell case and a recent case from the Eastern District of Pennsylvania, First General Construction Corp. v. Kasco Construction Co. Inc, concerning the same subject.

It was also the subject of my June 15, 2011 blog post.

You now have been warned.  Review those lien waivers.

Stick around long enough and dealing with a bankruptcy during or after a construction project is inevitable.  Moreover, when a member of the construction “chain” – owner, contractor, or subcontractor – files for bankruptcy everyone is effected.

Receiving a Trustee’s “preference letters” might be largest cause of irate phone calls from clients to their attorneys.  Subcontractors and suppliers, in particular, are flabbergasted when they are told that the Bankruptcy Code permits a Trustee to require repayment of money even if the payment was due when the  debtor made it.  The Trustee’s “strong arm” power is a fitting moniker for Trustee’s ability to recover money rightfully owed when payment was made within 90 days of the date debtor filed bankruptcy.

In this month’s Construction Executive Magazine,  Michael R. King of Gammage & Burnham in Phoenix, gives a refresher  on what a contractor’s options are in responding to or defending against a Trustee’s demand for repayment of a “preferential” transfer.  The article also reminds us that further efforts to perfect, but not to collect or enforce, a mechanics lien are not subject to the Bankruptcy Code’s automatic stay provisions.  I recommend saving the article to your favorites as a quick reference guide for when you next receive a preference letter.

What the article does not discuss is an unpaid subcontractor’s super priority in unpaid funds either withheld from a debtor or retained by the debtor.  I have long been an advocate of subcontractors aggressively pursuing payment using this super priority. I am surprised how few subcontractors and suppliers pursue this claim.

Next time you have a payment owed form a debtor that files for bankruptcy, don’t simply write it off.  Instead, take a minute to explore your options.  What you will find is that you are not as bad off as you think.

 

Looking for last minute CLE credits?  Please join me on August 30, 2011 for at 12:30 p.m. for a 2 credit CLE “A Primer on Mechanics’ Liens and Bond Claims.”

We will address:

•Who can file a mechanics lien claim?

•What projects are subject to a mechanics lien claim?

•What are the specific requirements for filing a mechanics lien claim?

•Common mistakes made that caused mechanics lien claims to be stricken.

•When are payment and performance bonds required?

•Who can make a claim on a performance or payment bond?

•What are the requirements for making a performance or payment bond claim?

 

An excavator’s, landscaper’s, or demolition contractor’s right to a mechanics lien in Pennsylvania is a tricky question because, unlike typical trade contractors,  there is not a per se right to a mechanics lien for excavating, demolition, or landscaping. The Mechanics Lien Law states  erection, construction, alteration, or repair work includes demolition, excavation, and landscaping only “when such work is incidental to the erection, construction, alteration, or repair” of a building.  For years, this was accepted to mean that a building must actually be completed before a mechanics lien for demolition, excavation, or landscaping would attach.

However, as first blogged about by Robert Ruggieri across the street at Cohen Seglias, the Pennsylvania Superior Court recently issued an opinion stating that the completion of a building is not a prerequisite to an excavating contractor’s right to a mechanics lien.

In B.N. Excavating, Inc. v. PBC Hollow-A, L.P., 2011 WL 2190768 (Pa.Super.2011), the Superior Court overturned the trial court’s dismissal of a mechanics lien claim of an excavating contractor on a project that was never completed.  The trial court reasoned that in order for claimant’s work to be “incident” to construction a building must be completed.  The Superior Court squarely rejected this reasoning stating:

“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.”

The Superior Court declined to equate the Mechanics Lien Law’s phrase “incidental to the erection [or] construction” with the requirement that the structure actually exist.  The Court found more important whether the excavation work was performed “in preparation for planned construction.”

This decision has obvious implications on the myriad of projects that are left half finished because of lending issues.  It also raises the question as to whether landscapers and paving contractors should file mechanics liens and argue for a more liberal interpretation of the definition of “erection, construction, alteration, or repair.”