Real Estate - Construction - Lien Law Blog

Is it ever too early to send a preliminary notice?

As you may know, the deadline for sending a notice to owner (preliminary notice) varies from state to state and is also a function of the project type (private, public, federal). The State of Oregon requires that a notice to owner be post-marked within 8 business of the claimant’s first performance. Of course, it will relate back if mailed out on the 10th or 15th day, but we’ll leave that for another blog.

So, the question then becomes, what happens if a supplier sends the preliminary notice and then discovers that shipments won’t begin for 60 to 90 days? Would the delay in performance void the effect of a preliminary notice? There are two ways to approach this issue:

1. Perform an exhaustive review of the state statute and relevant case law. In particular, look to see if the statute says that the preliminary notice must be given “within” x number of days of the first performance. Based on the results, you would then decide if a second notice was required.

2. Just send an amended notice.

All things considered, just sending an amended notice is a more common sense approach, and far less expensive. The only other issue is what type of delay would trigger an amended notice. We have generally advised clients to send an amended notice if there is a delay in performance that is approaching 30 days.

Thanks again to Joanne Swyers, Corporate Credit Manager of Shelter Products, Inc. for recently bringing up the question.

When the 90-Day Filing Requirement is Waived on a Miller Act Project

The Miller Act (40 USC §3131 et seq.), which controls the bond claim process on federal construction projects, sets forth specific notice requirements if a party wishes to secure its receivable by claiming against the general contractor’s payment bond. The two requirements are:

1. Submit a notice of claim to the general contractor by certified mail or personal service within 90 days of the last day of performance.

2. Foreclose the claim within 1 year of the last day of performance.

However, for suppliers or subcontractors working directly for the general contractor, Requirement #1 is waived. That is, a supplier or subcontractor in contractual privity with the general can jump right to the foreclosure as long as it occurs within 1 year of that person’s last performance date. Don’t assume that just because you have missed the 90 day period that your lien rights have lapsed.

The Miller Act and Pay-if-Paid Clauses

Construction contracts between general contractors and their sub-trades often contain what is called a “pay-when-paid” (or “pay-if-paid”) clause. When a contract has this kind of a clause, the contractor is trying to relieve itself of the responsibility of paying its sub-trades until the contractor has been paid by its customer. On private works projects, if this kind of clause is allowed, the sub-trade is generally required to wait – and wait – for payment until its customer is paid. The exact rules can vary by state. On certain public works projects, however, the laws are different. Courts have addressed this question several times in recent years, and the decision is in: On projects involving the federal government, the right to claim against the payment bond is not affected by a pay-when-paid clause. That is, subcontractors and suppliers do not have to wait until the general is paid. They can and should file their claim within the statutory period of time.

Public works projects involving the federal government are covered by the Miller Act (40 USC §3131 et seq.). Under this Act, when a contractor enters into a contract with a federal agency, department, etc., the contractor is required to provide a payment bond, to ensure that everyone supplying labor and/or materials to the general contractor or its subcontractors will be paid. There are notice requirements and deadlines to make a claim against this bond, such as giving a notice of its claim within 90 days of its last work on or delivery to the project, and filing suit to enforce its claim within 1 year of the claimant’s last work or delivery. Failure to meet these requirements will prevent the sub or supplier from collecting on the bond.

Generally, pay-when-paid clauses do not have a time limit on them; this is what makes them so appealing to general contractors or subs. That way, if the general or sub is not paid on time, whether because of a dispute with the customer, the customer’s financial problems, or some other reason, the general or sub does not have to pay its subs or suppliers until it is paid, and in the meantime the subs and suppliers cannot sue to collect the debt. But the problem is, if the sub or supplier is required to wait until its customer is paid before it can file a claim on the Miller Act payment bond, then the claimant could lose its right to bring a claim against the bond altogether. Several courts have been asked to determine the bond claim rights on a federal project where the sub’s or supplier’s contract has a pay-when-paid clause. Must the sub or supplier wait until its customer has been paid, and has then failed to pay the sub or supplier, before claiming against the bond? Or, does the sub or supplier need to bring the claim within the time limits set out in the Miller Act? Each time it has been asked, the court has reached the same conclusion. They hold that the ability to make a claim against the bond depends on the claimant timely complying with the notice and filing requirements, not on the amount of time that has passed since the claimant’s customer has been paid (or not). If the pay-when-paid clause could prevent the sub or supplier from filing its claim, the courts point out, the pay-when-paid clause would essentially become a waiver of the subcontractor’s or supplier’s Miller Act rights. This would defeat the remedial purpose of the Miller Act, and make it essentially meaningless in many cases. As a result, when contracting on federal projects, a sub or supplier can be confident it is protected, regardless of the presence of a “pay-when-paid” or “pay-if-paid” clause in its contract, as long as it follows the notice requirements of the Miller Act.

Priority of Lien Claim in Texas

Anyone who has been involved in a lien foreclosure knows that proceeds from the sale of a property are distributed based on certain priorities. In most states, the highest priority is given to the first recorded deed of trust, followed by subsequent deeds recorded before any lien claims. After that, taxes and real estate fees are paid. Finally, lien claimants are paid on a pro-rata basis according to when their work commenced, whether they are just laborers or the recording date of the lien, depending on the particular state statute.

In 2005, Texas added a twist to this format when an appellate court ruled on a foreclosure in a case referred to as Huber Contracting, Ltd., 347 B.R. 205 (Bankr. W.D. Tex. 2005). Here, the court concluded that a lien claim will not take priority over a perfected security interest, such as an Article 9 security interest in account receivables.

We expect that banks in Texas will take advantage of this ruling and begin to perfect more security interests with respect to their borrowers assets.

For our clients that are selling to or working on construction projects in Texas, it is important to recognize that your level of protection just took a minor hit. It you would like to discuss this implication, please feel free to call Ted Levy

Materials may be liened even when they are not shipped to the job site

I’m often asked if construction materials must be shipped directly to the project for the supplier to have a valid construction lien. The answer is No.

However, there are a number of caveats to consider. With the exception of a Miller Act Claim (which relates to government projects), the key to having an enforceable lien is not delivery to the job site. Rather, it is being able to demonstrate that your product was incorporated into the structure. Of course, this assumes that a supplier has met all of the notification requirements and filed the lien on time.

Generally speaking, incorporation of materials is easier to prove if the supplier furnished visible fixtures, such as sinks, flooring, cabinets, etc., rather than generic rough-in wire, pipe, fasteners or adhesives. Even so, proving incorporation is the key, even when materials are shipped directly to the job site.

Thank to Charles Hosman of Mesher Supply for bringing up this question and giving us the opportunty to post a answer.