Monthly Archives: March 2012

AGC Federal Contractors Conference Scheduled for April 2012

Conferences can be a great way to get some work – or in some cases a great way to stay too late at the bar. The bottom line is that attendng a conference is hit or miss, but when you hit, it can be great. A couple of LienItNow’s customers have mentioned that they are going to be attending the AGC Federal Contractors Conference. We looked into it, and it looks like it has some great potential. Here’s a description of the conference fromm AGC’s own website. For more information, visit the AGC Website.

The AGC Federal Contractors Conference is a national event where AGC contractors and Federal agency personnel can meet in a neutral forum and review procurement and contracting issues from around the United States. These insightful and highly productive exchanges have solidified the need for both Federal construction contractors and the Federal construction agencies to share information on a wide variety of issues and foster better communication and real solutions.

Who Should Attend?

If you are engaged in any aspect of constructing, designing, or planning a Federal project and you are a general contractor, specialty contractor, service/supplier, attorney or any other important stakeholder already engaged in the Federal market, this conference has a place for you. If you are interested in learning more about Federal contracting opportunities and how to get started, this conference is a great place to begin your learning experience. AGC chapter leadership and staff are also invited to attend and be a part of this great meeting.

AGC contractor members who perform Federal work are served by two Occupational Divisions – the Federal and Heavy Construction and the Highway and Transportation. Division members perform a diverse range of projects including building construction for agencies such as the General Services Administration, military construction projects for our Armed Services, highway and transportation projects for our nation, and water resources projects that benefit our nation’s navigation and flood control. The Occupational Divisions provide members from specific industry segments the opportunity to stay informed of emerging issues and trends that are relevant to the type of construction work they perform every day.

If you have any questions regarding the 2012 Federal Contractors Conference or are interested in sponsoring an event at the Conference, please contact AGC of America’s Federal & Heavy Construction Division Staff:
Brynn Tupper | Program Coordinator | Construction Markets | (703) 837-5376

Spring Is Here: Get Your Construction Contracts and Legal Requirements in Order

Spring is here, and so is the rush of construction projects that need warmer temperatures to start (or restart as it were). With the economy giving signs that it is on the upswing, here is hoping that 2012 construction will start off with a bang.

If you are a contractor, it is time to start taking a fresh look at your contracts. Subcontractors and suppliers should do the same. Remember, in some states, no contract means no mechanics lien or construction lien. In Oregon, residential construction companies need a written contract for every project or risk waiving the contractor mechanics lien rights. The Oregon Construction Contractors Board also requires that residential contractors provide customers with certain, mandatory notices before work begins. The Oregon CCB website provides sample residential construction forms. Other states have also enacted provisions that may affect Oregon mechanics lien rights unless your contractual provisions meet certain requirements (see our blog on Texas Lien Waivers).

I am always suprised at how fast, and how often, the Federal and State legislatures pass new laws, change old ones, and feel the need to interfere in private contractual relationships. While you may think you are too small to really be affected by these laws and regulations, think again. As we reported earlier in the week, Texas has gone so far as to mandate what kind of lien waivers must be used at different milestones during a construction project – big government in a small government state, I dare say. So keep in mind that statutes abound regarding how and when you pay your subcontractors and suppliers, what your workers must receive in compensation and benefits, project safety issues, sexual harrasment policies, how and when you can file a construction lien for the work you performed, notices you must give prior to doing, well, just about anything…and the list goes on and on.

But enough complaining, keep your contracts in line and you can avoid any unfortunate consequences and hold on to your conractors license. According to an article by Katie Jeremiah in the Journal of Daily Commerce entitled Spring Cleaning, Dust off Construction Contract Forms, “The good news is that unlike 2003, when major public contracting reforms occurred, and 2007, when private contracting reforms took place, 2012 will not require a major overhaul of most construction contracts. But there are a few provisions that may need scrubbing. And contractors who have not updated their contracts for the past several years may want to take on a deep clean.”

Is a buyer responsible for a lien that does not appear on a title report, but is filed before the real estate closing?

Over the past couple of weeks, we received variations on the following question from homeowners, contractors, and others: “Is a buyer responsible for a lien that does not appear on a title report, but is filed before the real estate closing? Will the buyer be responsible for paying the lien, such as tax or mechanic’s liens, that did not appear in the title report?”
The short answer is that it depends on the state. We should start out by saying that a mechanics lien filed the day of or the day before a real estate closing is extremely rare.  The risk of a mechanics lien being filed is minimal to the purchaser because it almost never happens.  However, from the purchasers point of view, this is the exact reason that a buyer should protect themselves from undiscovered mechanics liens with title insurance. In many states, the rate that you pay for title insurance is regulated by statute, and is well worth the price. You can ask your closing attorney what the current rate is. Owner’s title insurance protects you against the possibility that undiscovered claims or liens pop up after closing. 

According to the American Land Title Association and Realty Title, title companies find and fix problems with the title in 25% of transactions – usually without the the borrower or lender even knowing it! In addition, title companies pay millions of dollars each year in claims. Title insurance provides significant value to lenders and homeowners. Before closing, title insurers search the public records for all matters affecting title. The search entails examining the records in the offices of the Register of Deeds, Clerk of Courts, and other municipal and county officials. These records include recorded documents, judgments, liens, taxes, street easements, sewer assessments, special taxes and other matters that could affect property ownership. This process, called a title search, provides early warnings of title flaws that must be dealt with before the property can be sold or refinanced. In those transactions where title insurance is involved, the title company must determine insurability of the title as part of the search process. This leads to the issuance of a title policy, which insures the existence or non-existence of rights to the property. The title insurance company will, at its own expense, defend the title and will pay losses within the coverage of the policy if they occur.

Last Chance to Save: LienItNow’s Winter 10% promotional is ending on March 31, 2012. ACT NOW by using coupon code ACTNOW at checkout.

toolboxWe’re Glad You Used It.
The ACTNOW coupon that provided a 10% discount generated a lot of responses from our customers. With usage of the coupon through the roof, we extended it through the entire Winter season. But if you want to take advantage, you only have until the end of this week, so make sure to ACTNOW to take advantage of the lowest pricing we will offer this year.
Pricing Alert!
We know you love our fair pricing, making us the most competitive lien filing company in the industry: and we’ve loved it too.  But over the last couple of years as city, county and state governments have felt the squeeze of the recession, they have increased taxes and fees, including fees to file a mechanics lien. Our delivery services, including the U.S. Postal Service, have also raised prices. While we’ve held off as long as we can, in order to account for these increased costs, we do need to finally make appropriate pricing adjustments. Starting April 1, 2012, our prices for mechanics liens and construction liens will be increased to $275.00.Liens are the only product that are seeing an increase in cost: we’re keeping the prices for all other products the same.

To soften the blow, from April 1, 2012 until May 31, 2012 existing customers can still get $25.00 off their lien orders by using coupon code PRICEBREAK.

Prelien and Breathe Easy – A Follow Up Session

A couple of weeks ago we sent out an email that gave some accounts receivable tips and received quite a response. Thanks for all the feedback.  In this posting, we’re going to list a couple follow up questions / answers that we think would be helpful to everyone. We’d be happy to answer any other questions that anyone has.
Q. I have a lot of small projects under $500.00, should I send out preliens or file a lien?
A. We know the value of preliens and mechanics liens, but sometimes it just doesn’t pay to file or serve them. A good example of this is when you have a project that is less than $1,000.00.  Think of the cost and how it will benefit you. Some states don’t allow liens to be filed unless the contract amount is worth more than $1,000.00.  What we will say is that when you have a project that is over $1,000.00, it never hurts to send out a prelien (even if you have no intention of ever filing a lien).  A prelien, notice to owner, notice of furnishing and preliminary notice (they’re all the same, but the terms used varies in each state) can be as effective in getting paid as a lien because they make the owner know you’re serious.
Q. My customers get really upset when I send out preliens. How do I protect myself and keep the customer happy? 
Always be up front with your customers. They know you have the legal right to serve a notice of furnishing or notice to owner.  In fact, in most states, the contractor itself is required to provide the owner with a list of their subcontractors and suppliers. Tell the customer that it is your company policy to send out a prelien notice on every job, that sending out the preliminary notice does not mean that you think you won’t get paid, and that you’ll be wiling to say the same thing to the owner. If you’re able to have that dialogue, you’ll find that 9 out of 10 customers will be okay.
Q. I know there are time limits to when a lien has to be filed, but sometimes that doesn’t coincide with my customers net terms. What should I do?
Nearly every state allows at least 90 days for you to file a lien claim. There are exceptions, like New Jersey Residential Construction Liens (which require that the process begin with a filing at 60 days) and Ohio Residential Liens (which require the lien to be filed within 75 days). Unless you have net terms of 90 days, you shouldn’t have a problem with this time frame.  If you do have an unusually long period for net terms, let your customer know that you need to protect your rights and file a construction lien within the time period required by that state’s laws. The conversation is never easy, but it is necessary.  Our suggestion in general is that at 45 days past due, let customers know that they have 15 days to pay and then lien process will begin.  At 60 days, begin lien process.
Q. If I have strict collection policies, won’t people refuse to do business with me?
NO! Only the bad ones will!  The theme here (in case you haven’t notice it) is that customers are much happier when they know what to expect.  Just because you have strict collection policies, doesn’t mean people won’t do business with you.  Customers don’t like surprises and have more respect when they know you have the same policies for all customers.  They don’t like to feel that they are being singled out.

Texas Lien Waivers – A Guide

Texas recently enacted several new statutes that govern waivers and releases of Texas mechanic’s and materialmen’s liens. Designed to protect suppliers, subcontractors and laborers, mechanics liens are statutorily created and provide a certain degree of protection for those who provide labor or materials to a project. When perfected, a statutory lien attaches to the property and is subject to judicial foreclosure if payment is not made.
Owners have never liked the idea of mechanics liens, and have over the years done everything they can to make sure that the Texas Mechanic’s, Contractor’s or Materialman’s Lien – Lien Law for Construction Projects are interpreted strictly, and in their favor. Throughout the construction process, owners also demand waivers and releases of liens, which are important to ensure that the owner is aware at all times who may or may not file a mechanics lien on the property.
New legislation, codified in Chapter 53, Subchapter L, of the Texas Property Code, identifies what can be included in lien waivers and releases for them to be enforceable.
• Execution of an unconditional waiver and release for progress payments or final payments are not permitted, unless that person received payment. There is also no ability to require the waiver of any statutory lien rights.
A conditional lien waiver or release is enforceable only up to the amount actually paid to the lien claimant, and is only effective when the recipient has properly endorsed the check representing payment, whether a single- or joint-payee check, and the bank on which the check is drawn has paid it. 
• In attempting to standardize waivers, the Legislature, in Texas Property Code §53.284, provided model forms to be used when asking for a Texas lien waiver. Enforceable lien waivers must substantially comply with the statutory form that applies to the situation. Four different forms exist:
1) Conditional Waiver and Release on Progress Payment;
2) Unconditional Waiver and Release on Progress Payment;
3) Conditional Waiver and Release on Final Payment; and 
4) Unconditional Waiver and Release on Final Payment.
When using the forms, please make sure that you pick the right form considering the payment and project status for each lien claimant.
Note that each form require the lien claimant to warrant that it has paid or will use the funds received to promptly pay in full all of its subcontractors. Any lien claimant that does not make that payment or misrepresents that it already paid its subcontractors is vulnerable to suit for fraud: so be careful what you agree to.
• The new statutes apply to all contracts that began on or after January 1, 2012.
For more information on the lien waivers from a Texas Lawyer’s point of view, take a look at Daniel R. Smith’s blog posting on on the Texas Lawyer.

E-Shopping, E-Courts, E-filing, E-lated…But Mechanics Liens Aren’t So Easy!

A recent phone call from a frustrated client of who had to file their mechanics lien that same day inevitably led to the question: “Why can’t you just file the lien electronically?”  The answer is enmeshed in a network of statutes, laws, codes and regulations contained in each of the 50 States of our Union: but the short answer is “because the clerk needs to see the original ink on the document.”

 While in many States there’s no specific law or regulation requiring that original signed mechanics liens or construction liens be presented to the clerk for filing, nearly every clerk requires it nonetheless.  This can slow down the process of filing a mechanics lien, especially when the clerk mistakes black ink for a copy and returns it to the filer! (It happens more often than you think). Utah mechanics liens are the only liens that can be filed electronically. 

Items such as bond claims, prelien notices and stop notices generally do not need to be filed with the clerk’s offices, and therefore fax and electronic copies are generally acceptable.

So why does the clerk need an original, signed construction lien?  The reasons vary from State to State, but for the most part anything that is being recorded in the land records office must be an original document.  From mortgages and notes to deeds, the clerk wants to make sure that no tampering has taken place with a document that is being filed. In an age where photoshop and other programs have made changing pictures and documents ever easier, most States believe that the original signature has enormous value. Of course, nothing keeps someone from just forging another person’s name, but that is a discussion for another day.

As the internet becomes more and more safe, and as digital signatures become acceptable, we still may not see a day when it is common to e-file a construction lien. Why not? First, because states are slow to change their laws; but a bigger reason is that property owners do not want to make it easy to file encumbrances like deeds, mortgages and liens on a property. 

Encumbrances such as mechanics liens can make it hard to resell, refinance, or finance a property.  Making it easier to file an encumbrance will cause more to be filed, slowing down the rate of transfer of real estate, and potentially damaging a State’s economy.  Take New Jersey for instance, which has increasingly made it harder to file a commercial construction lien or a residential lien.  Over the past year, New Jersey has enacted a new set of laws restricting the time frame for beginning the already cumbersome process of filing a residential lien to 60 days from the last date of work.  If a contract is with a tenant, the new commercial construction liens can only be placed against the land if the tenant’s lease with the owner explicitly authorizes the work and permits liens to be filed on the  property.  All these New Jersey Construction Lien Law restrictions are a result of a concern that the uninhibited sale of real property will hurt New Jersey’s economy.

So, here’s hoping that one day the more states will allow electronic filing of mechanics liens…but don’t count on it!

Pay if Paid v. Pay When Paid Clauses – Which is Which and Who Cares?

Over the last four years we’ve all had to deal with the funding crashes that followed the 2008 financial crisis.  In those four years, many have also learned the difference between pay-if-paid clauses and pay-when-paid clauses. But what is the difference between the two, when should each one be used, and why should it matter to you?

If you’re a contractor, subcontractor, or sub-subcontractor, you should take the time to find out how and if a pay-when-paid and pay-if-paid clause will effect you. As a contractor, how you word your contract could mean financing a project for an insolvent owner that never pays you. As a subcontractor, if the owner goes out of business you may never get paid for work you do if the contractor never gets paid.  In many states, all this depends on some simple wording. 

We’ll explain what a pay-if-paid and what a pay-when-paid clause is one at a time so you can compare the differences:

Pay When Paid Clauses

The phrase “pay-when-paid” is deceiving: most people believe pay when paid means that if the contractor does not receive payment from the owner, then he has no obligation to pay his subcontractor.  However, most courts have interpreted “pay-when-paid” as timing provisions. In New York, for instance, the court has defined pay-when-paid clauses as permitting a delay in payment for a reasonable period of time.  In short, courts refuse to permit the risk of non-payment to be shifted to the subcontractor based on pay when paid provisions.  According to an article titled “Pay-If-Paid Clauses: Freedom of Contract or Protecting the Subcontractor from Itself?“,written by William M. Hill and Mary-Beth McCormack in the Construction Lawyer, Winter 2011 edition, when interpreting pay-when-paid clauses, Courts usually point to the “harsh effects of ‘conditions precedent’, and a general policy of avoiding them if other reasonable readings of a contract is possible.”

Courts have not uniformly construed “pay-when-paid” clauses. One of the premiere cases “that squarely addresses the issue is Seal Tite Corp v. Ehret, Inc., 589 F.Supp. 701 (D.N.J. 1984). In Seal Tite, the court, following the reasoning expounded in the Sixth Circuit case, Thos. J. Dyer Co. v. Bishop Int’l Engineering Co., 303 F.2d 606 (6th Cir. 1962), construed a subcontract “pay-when-paid” provision as postponing payment for a reasonable period of time rather than a conditional promise to pay by the general contractor. The court explained that because the payment clause did not make reference to the possibility of the owner’s insolvency, but did refer to the amount, a time and method of payment, the clause was merely a provision affording the general contractor a reasonable time to procure from the owner the funds necessary to pay the subcontractor. Seal Tite, 589 F.Supp. at 704 (quotations omitted). Ultimately, the court’s determination turned on whether there is any indication in the payment clause that the subcontractor would undertake any risk in the event the owner of the project would become insolvent. Id. Simply put, there must be express language clearly showing the intention of the parties to shift the risk. Id. The Dyer approach has been recognized as the leading decision in this area. Lafayette Steel Erectors, Inc. v. Roy Anderson Corp., 71 F. Supp. 2d 582, 587 (S.D. Miss. 1997) (“Dyer has been cited and relied upon repeatedly . . . .”); Mrozik Constr., Inc. v. Lovering Associates., Inc., 461 N.W.2d 49, 51 (Minn. Ct. App. 1990) (describing Dyer as “a leading case on which the Restatement [(Second) of Contracts] illustration was based”); Watson Constr. Co. v. Reppel Steel & Supply Co., 598 P.2d 116, 119 (Ariz. Ct. App. 1979) (terming Dyer “a leading decision in this area”).” See Fixture Specialists, Inc. v. Global Construction, LLC

Pay-If-Paid Clause – Majority Rule

Pay-if-paid clauses are generally enforced by courts.  Two big exceptions to the enforcement of pay-if-paid clauses are New York and California, which have held that pay-if-paid clauses are unenforceable and against public policy.  Let’s deal with the majority rule first though.

Enforcing pay-if-paid clauses is more palatable to courts because there is no “condition precedent” to payment.  The contract’s pay-if-paid generally clearly states that payment to the subcontractor is to be directly contingent upon the receipt by the general contractor of payment from the owner.  In MidAmerica Const. Management Co., Inc. v. Mastec North America, Inc., 436 F.3d 1257 (10th Cir. 2006), the Federal Court for the Tenth Circuit first noted the distinction between “pay-when-paid” and “pay-if-paid” clauses:

A typical “pay-when-paid” clause might read: “Contractor shall pay subcontractor within seven days of contractor’s receipt of payment from the owner.” Under such a provision in a construction subcontract, a contractor’s obligation to pay the subcontractor is triggered upon receipt of payment from the owner. Most courts hold that this type of clause at least means that the contractor’s obligation to make payment is suspended for a reasonable amount of time for the contractor to receive payment from the owner. The theory is that a “pay-when-paid” clause creates a timing mechanism only. Such a clause does not create a condition precedent to the obligation to ever make payment, and it does not expressly shift the risk of the owner’s nonpayment to the subcontractor. . . .

A typical “pay-if-paid” clause might read: “Contractor’s receipt of payment from the owner is a condition precedent to contractor’s obligation to make payment to the subcontractor; the subcontractor expressly assumes the risk of the owner’s nonpayment and the subcontract price includes this risk.” Under a “pay-if-paid” provision in a construction contract, receipt of payment by the contractor from the owner is an express condition precedent to the contractor’s obligation to pay the subcontractor. A “pay-if-paid” provision in a construction subcontract is meant to shift the risk of the owner’s nonpayment under the subcontract from the contractor to the subcontractor. In many jurisdictions, courts will enforce a “pay-if-paid” provision only if that
language is clear and unequivocal. Judges generally will find that a “pay-if-paid” provision does not create a condition precedent, but rather a reasonable timing provision, where the “pay-if-paid” provision is ambiguous.

Pay-If-Paid Minority Rule

Regardless of the language used in the pay-if-paid clauses, courts in New York and California will not enforce such clauses, holding the clauses to be void and unenforceable as contrary to public policy.”  Interestingly, the courts based their decisions on New York’s mechanics lien law and California’s mechanics lien law. In so finding, the courts held that conditional payment provisions effect an indirect waiver of a subcontractor’s protected mechanics’ lien rights.  

In yet some other states, pay-if-paid clauses have been outlawed by statute: generally in the “prompt payment” acts that have been enacted throughout the country.  Over 32 states have some type of prompt payment act, which requires timely payment of amounts due from contractors to subcontractors.  Massachusetts is one of these states, voiding any pay-if-paid clauses for projects worth over three million dollars, unless the project involves residential construction consisting of 4 or fewer dwelling units.  Illinois, Maryland, Missouri, Wisconsin, North Carolina and South Carolina have banned pay-if-paid clauses for all private projects.

Florida “Hard and Fast” Rule on Unlicensed Subcontractors Suing Gets a Little Softer

There’s a strange thing about the law: even when it seems like a bright line rule is established by a court, or a statute appears to provide a hard and fast rule, there can always be circumstances that make a judge think twice about applying those rules as harshly as intended. If the law is intended to provide fairness and equity to society, then different applications of the law are inevitable.

And so, in the case of MGM Constr. Services Corp. v. Travelers Casualty & Surety Co., 57 S. 3d 884 (Fla. Dist. Ct. of App. 3d Dist. 2011) we have yet another example of a court attempting to balance the old rules with the set of circumstances presented to it.  

MGM is considered a landmark case because the court reversed a trial court’s finding that a subcontract with an unlicensed drywall subcontractor was unenforceable. The basic facts are that the general contractor hired a subcontractor to perform drywall and stucco work on four projects in Miami-Dade County. During the course of the work, a dispute arose between the subcontractor and the general contractor, the subcontractor ceased performing work and filed Florida construction lien claims on each project.  At the time the work was performed, the subcontractor did not possess a a specialty contractor’s license as required by the local construction ordinances issued by Miami-Dade County.

Litigation between the contractor and the subcontractor ensued, in which the general contractor sought causes of action for fraud, breach of contract, and asked the court discharge what the contractor alleged were the defectively filed Florida mechanics liens.

In response, the subcontractor asserted an astounding thirty two (yes, that’s 32!) counterclaims, including breach of contract, conversion, fraud, lien foreclosure, etc. Included at that time were claims against the owner and the general contractor’s surety payment bond.

On summary judgment, the owner, the contractor and the surety argued that the subcontractor’s unlicensed condition precluded it from bringing suit.  The trial court granted the summary judgment motion, finding that the subcontractor’s failure to maintain a license violated the ordinance requirements, rendering the agreement (at least as enforced by the subcontractor) void as against public policy.

The case was appealed. The appellate court initially determined that section 489.128 of the Florida Statutes, rendering contracts with unlicensed contractors unenforceable, only applied to state licenses and had no bearing on local licenses like drywall. The Third District Court of Appeal held that the trial court erred in summarily determining that the subcontract was unenforceable based solely on the lack of a local license.  Unlike section 489.128, the ordinance was silent about the effect of a licensure violation on the enforceability of the underlying contract, though it did provide for civil, administrative, and criminal penalties for unlicensed contracting.

While the Third District Court of Appeal summarily held that the amendment to § 489.128 prevented the defendants from relying on that statute, their opinion did not end there. The court went on to hold that, where the Legislature has not added the penalty of non-enforceability to a licensing provision, the courts may nevertheless still do so after weighing the relative strength of the policies behind the local licensure requirement and any competing policies of injustice. With regard to the local licensure defense, the appellate court remanded and directed the trial court to consider, at a minimum, the following relevant and material factors to determine whether the subcontract was unenforceable: (i) whether the nature of the contracting parties’ relationship made the need to protect the public from shoddy workmanship; (ii) the extent to which the subcontractor’s violation of the MDCO was serious and deliberate; (iii) the quality of the work performed by the subcontractor; (iv) whether the Contractor knew the subcontractor was unlicensed; and (v) whether and to what extent injustice would result in preventing the subcontractor from any recovery.

Therefore, as explained in a summary by Lee Weintraub of the Fort Lauderdale firm of Becker & Poliakoff, “although local ordinances requiring local licenses like drywall may not expressly make a contract with an unlicensed subcontractor unenforceable, the courts may nevertheless do so with their own powers after weighing various policy considerations on a case by case basis.” 

According to the law firm of Cole, Scott & Kissane’s construction division, “The decision is a departure from the general doctrine that one who is required to have a license may not benefit from the illegal act of engaging in work without the license.  Notwithstanding the subcontractor’s violation of a local law, the appellate court held that subcontract was not automatically unenforceable.”

Montana Priorities Favor Lienors – Montana Mechanics Lien Held Valid

Yesterday we posted a blog about the Nevada Supreme Court’s ruling on priority of Nevada Mechanics liens over mortgages in situations where a bank has actual knowledge that a contractor commenced work, but there is no “visible” work being performed on the property.  In that case, the Nevada court ruled that actual knowledge of work being performed is not enough, because the statute contains plain language requiring that the work be visible to someone inspecting the property.

Montana has a similar statute, had a similar case arise, and came to a completely opposite conclusion.  In Gaston Engineering & Surveying, P.C. v. Yellowstone Bank, 249 P.3d 75 (Mont. 2011), the Montana Supreme Court was faced with the issue of whether a Montana mechanics lien has priority over a bank mortgage. The case was brought by a contractor that performed preconstruction services. Montana’s lien law states that a lien attaches to the property at the “commencement of work,” defined as “the date of the first visible change in the physical condition of the real estate caused by the first person furnishing services or materials pursuant to a particular real estate improvement contract.” In that case, a Montana “construction lien arising under this part has priority over any other interest, lien, mortgage, or encumbrance that may attach to the building, structure, or improvement or on the real property on which the building, structure, or improvement is located and that is filed after the construction lien attaches.

After the commencement of the preconstruction services, the owner of the property signed a “buy-sell” agreement with a developer. The buyer’s purchase was contingent on results of certain tests that were to be performed by the contractor.  Based on the test results that were procured by the contractor, the property was purchased by the developer. The lender issued the funding for the purchase on that same day. A mortgage was thereafter recorded by the lender.

The funding provided by the bank was also being used for the construction of the project. When the funding came through, the contractor’s preconstruction services invoices were provided to the lender in order for the developer to obtain a draw from the bank to pay the contractor. The bank specifically knew that the invoices related to work performed by the contractor prior to the issuance of the mortgage. 

Thereafter, a dispute arose between the developer and the contractor, and the contractor sued for payment. The lawsuit included a lien foreclosure count, and named the bank as an interested party. The bank claimed that its mortgage had priority.

At the trial level, the court ruled that the bank indeed had priority. In ruling on a summary judgment motion, the court found that a lien could not have existed because at the time the work was performed, the developer did not own the property.  The Montana Supreme Court, however, disagreed.  In its ruling, the Montana Supreme Court found that a lien attaches when the work begins. Specifically, construction liens extend to the interest of a “contracting owner in the real estate” and that the buy-sell agreement made the developer a “contracting owner.”

Furthermore, the court also held that the Montana construction lien had priority over the lender’s mortgage, finding that the lender “knew [that the contractor] began work before it recorded its Mortgage, as evidenced by an email [the lender] itself produced in discovery. Given this factual record, it cannot be disputed that [the contractor] commenced work before [the lender] recorded its mortgage.”

The the Montana Court’s ruling on the “visible” requirement directly contradicts the ruling in Nevada. Does the Montana Court’s decision seem more equitable? Or should the letter of the law be followed in every circumstance. Is actual knowledge more important that, pardon the pun, constructive knowledge?