The Critical Role of Backup Documentation in Mechanics Lien Filing

The Critical Role of Backup Documentation in Mechanics Lien Filing

Never underestimate the value and necessity of documentation supporting your mechanic’s lien claim. When assisting clients with mechanic’s lien filings, CMA partner NCS Credit always reviews backup documentation. Backup documentation may include invoices, statement of accounts, a copy of the contract, bills of lading etc. Backup documentation provides a bigger picture.

Backup documentation isn’t just used for preparing a document, there are states that require copies of open invoices and/or a copy of the preliminary notice to be attached to the lien. And, as one subcontractor has learned, backup documentation can play a vital statutory role in supporting a claim.

We will address recent case law, where a subcontractor filed a mechanic’s lien in the amount of $287,212.28 and included an itemized statement in accordance with statute; however, the itemized statement was for $6,574.69. First, we’ll review the statutory requirements for Kansas, and then the fate of the subcontractor’s lien.

 

Mechanic’s Lien Rights & Requirements for Kansas

Commercial and residential projects have separate statutory requirements in Kansas. For commercial projects, claimants do not need to serve a preliminary notice. Residential projects, however, have a notice requirement.

New Construction: file a Notice of Intent to Perform no earlier than 18 months prior to filing a lien, but prior to title passing to the buyer.

Improvement: serve warning statement upon the owner or obtain and retain a statement signed by the owner that states they were given warning statement.

The lien deadline, for commercial & residential projects, is different for general contractors versus subcontractors and material suppliers.

General Contractors: file the lien within 4 months from last furnishing materials or services.

Subcontractors/Material Suppliers: file the lien within 3 months from last furnishing materials or services.

For parties proceeding with suit to enforce the lien, file suit within 1 year from filing the lien or if a promissory note was attached to the lien in lieu of a statement, file suit within 1 year from the maturity date of the promissory note.

 

The Contents of a Kansas Mechanic’s Lien

Key to the case at hand is that Kansas mechanic’s lien statute dictates a mechanic’s lien must include the following:

 

(1) The name of the owner,

(2) the name and address sufficient for service of process of the claimant,

(3) a description of the real property,

(4) a reasonably itemized statement and the amount of the claim, but if the amount of the claim is evidenced by a written instrument, or if a promissory note has been given for the same, a copy thereof may be attached to the claim in lieu of the itemized statement.

 

It’s also important to note, mechanic’s liens can be amended, if within the time allotted and/or by judge’s approval. But, statute specifically states a mechanic’s lien cannot be amended for an increased claim amount.

 

60-1105. Limitations and amendment. (b) Amendment. Where action is brought to enforce a lien the lien statement may be amended by leave of the judge in furtherance of justice, except to increase the amount claimed.

 

OK, On to The Case!

In Madison, Inc. v. Western Plains Regional Hospital, LLC, Dist. Court, D. Kansas 2018, there are a lot of issues up for debate, but the focus for this post is on the validity of the subcontractor’s lien.

 

The subcontractor, Madison, Inc. (Madison), contracted with general contractor, Sanderling Healthcare, LLC (Sanderling). Sanderling was hired by project owner, Western Plains Regional Hospital (Western). The project was an improvement to a medical complex in Dodge City, Kansas.

 

Madison claimed its last furnishing was August 3, 2016. Based on Kansas’ statute, Madison’s lien (or an extension to file lien) should have been filed by November 3, 2016. Madison did file its lien timely on October 18, 2016. Madison’s lien for $287,212.28 was accompanied by an itemized statement showing $6,574.69.

 

Based on a lien filing date of October 18, 2016, Madison needed to file suit by October 17, 2017. Again, Madison was timely with its action, filing suit to enforce its lien on May 1, 2017. Then, on May 18, 2017, Madison filed a motion to amend its mechanic’s lien. Specifically, to “add additional itemization left out of the initial lien.”

 

As I mentioned earlier in the post, Kansas statute does permit liens to be amended within the statutory period, however, not if it is to increase a claim amount. In the court opinion, the judge mentions cases where an amended lien was permissible to correct the name of the owner, correct the incorrect use of the term “subcontractor,” and to correct the project description. Adding, the difference between Madison’s request to amend, and the cases cited in support of amendments, is that the other liens provided “sufficient information to give the property owners notice of the claims.”

 

In other words, how could the general contractor or owner review Madison’s itemized statement for accuracy when Madison failed to include the itemization for over 90% of its claim?

 

The court deemed Madison’s lien invalid based on its failure to include a “reasonably itemized statement.” Madison tried a last-ditch effort to save its lien, arguing that even if Madison can’t have a lien for $287,212.28, Madison should have a valid lien for the itemized statement amount of $6,574.69.

 

Well? According to the legal opinion, neither the Judge nor parties could find case law which addressed reducing the claim as Madison proposed. However, the judge did refer to a recent Court of Appeals decision, which essentially said “secure the lien according to statute, or don’t bother.”

 

“It is a settled rule in this state that equitable considerations do not ordinarily give rise to a mechanic’s lien. Being created by statute, a mechanic’s lien can only arise under the circumstances and in the manner prescribed by the statute. A lien claimant must secure a lien under the statute or not at all.

 

Unfortunately, Madison’s lien did not comply with statute, thus failing the “all or nothing” comment from the Court of Appeals.

 

What did the judge say? “Because Madison’s lien was vitally defective as filed, it cannot be found to be partially valid. Severing defective portions of liens would not give defendants proper notice of the claim against them and would circumvent the strict requirements of the statute by creating liens without statutory compliance. For these reasons, Western’s Motion to Dismiss the claim for enforcement and foreclosure of the lien is granted.”

 

Never Underestimate the Power of Paper

When assisting with lien filings, sometimes clients push back when NCS requests backup documentation, e.g. “You don’t need to review my statement of account, I know what I’m owed.” We certainly don’t want to invade your privacy or second guess the information you provided. We request the documentation because we want to assist in ensuring your lien meets the statutory requirements.

 

Maintaining comprehensive and complete records can be a challenge. But, losing lien rights and potential payment security can put a burden on your cash flow.

Thanks to CMA partner NCS Credit for this information!