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!

President’s Blog: CMA Membership Budget Guide for 2017, by Mike Mitchell, CAE

 

CMA President and CEO Mike Mitchell
CMA President and CEO Mike Mitchell

All too often, our members tell us that they want to take advantage of all of CMA’s benefits but they say they do not have the budget to do so. For companies on a calendar fiscal year, here’s your opportunity to begin planning for those budget worthy benefits for 2017. Even if your next fiscal year extends well into 2017, it’s never too early to start your wish list.

If your company is one of the 600+ members that participate in one of CMA’s 51 Industry Credit Groups, then you know how valuable it can be to have unlimited access to anscers Credit Reports, RFIs, Credit Alerts, and the knowledge and experience of other credit professionals in your industry. In the past year, CMA group members have submitted more than 45,000 RFIs, warned other group members with more than 6,800 Credit Alerts (which included NSF and bankruptcy information), and shared countless stories about best practices in credit. Many credit group members have reported that they still find their credit groups and the shared trade payment experience the fastest and most economical way to conduct timely due diligence on prospective customers and effectively manage existing customer accounts. The unique combination of industry trade data, insider knowledge about common customers and industry best practices often recoups your dues many times over in helping group members minimize risk and grow revenue.

Before you budget, consider whether you are getting the best value possible for your credit information needs. Let CMA’s experts help you analyze your current credit reporting product mix – we might be able to save you money (and help you get better results) by suggesting a different report or mix of products that better meet your company’s risk assessment requirements while staying within budget. In addition to credit bureau contracts, CMA has several transactional credit report products priced to deliver maximum value at minimum cost. We have also seen usage for the NACM NTCR increase significantly over last year. Only CMA members have access to the millions of tradelines in the NACM National Trade Database (many of which are only available in this report), and at only $14.95 each, the NTCR reports are a great value for an initial credit check. CMA’s anscersX multi-bureau report combines proprietary scores and data elements from all three major credit bureaus (Dun & Bradstreet, Experian, Equifax) to give you a comprehensive look at the payment history of your customer or prospect ($69 per report). Be sure to budget for some anscersX reports to supplement your existing credit reports.

If you are a construction supplier, consider how using CMA’s Lien Filing Service can save you time and money. With more than 30 years of experience providing services ranging from preliminary notices to lien warning notices, mechanics liens, bond claims and stop notices, CMA has hundreds of clients across the United States who value the personalized, unlimited support from CMA’s caring and knowledgeable staff. You might be interested in CMA’s new Construction Credit Report, providing title data, public record data, active trade lines, credit analysis and scores, collection agency activity and links to state contractor information. The report, which is the only all-inclusive report of its type, runs $29.95 per report.

CMA’s collections partner, AG Adjustments, offers third-party collection services at competitive rates on a contingency basis.

If you’re looking for professional development help for your staff, CMA is again offering NACM Certification Courses for the CBA (Credit Business Associate) and CBF (Credit Business Fellow) designations starting in January. These will only be offered once next year, unless there is sufficient participation for additional classes. If you plan to get certified in 2017 or early 2018, you’ll need to register for the Certification Courses now and budget accordingly ($899-$995 per course). Information for all professional development events can be found on CMA’s website and on anscers.com under the Education tab.

CMA will continue to offer its standard webinar program, which includes several series on topics such as collections, advanced lien law and credit reporting. Our webinars typically cost $49 for CMA members and $69 for non-members, but some may be free to CMA members, depending on the topic.

We hope this list is helpful as you consider your needs for 2017.

Are there other credit-related services that you’re looking for that we currently don’t offer? Feel free to reach out to me by responding to this blog. Thank you for reading, and we look forward to your increased participation with CMA in 2017!

Why Are Lien Waivers Important?, by Sergey Garanyants

Lien waivers and releases, which were once just a way for owners and general contractors to make sure they wouldn’t have to pay for the same work or material twice, are now became something much more broader affecting much more than just a mere mechanic’s lien rights.

Mechanic’s liens (a.k.a. construction liens) are designed to provide additional protection and way to ensure payment for contractors, subcontractors or suppliers for the work provided or material supplied. A mechanic’s lien essentially gives the person or company an interest in the property equal to the unpaid amount, affecting the owner’s ability to convey or transfer the property free and clear without paying the amount owed. While such laws aim to protect contractors and subcontractors, it also creates a risk for property owners and real estate developers of paying for the same work or material twice. In an attempt to protect themselves, developers, property owners and contractors are now increasingly insistent on the practice of obtaining a signed waiver or release of lien rights to the extent actually paid, as condition to furnish any payments to contractors and subcontractors working on the project. However, signing such waivers may directly or indirectly cause for contractors and subcontractors to “sign away” many of their rights to dispute contractual and related project issues.

Modern-day construction lien waivers and releases became much broader than simply addressing mechanic’s liens. In some instances, signing a release not only waives the right to file a mechanic’s lien, but also waives the ability to file claims for any other related issues, such as breach of obligations by a party to a contract, delays caused by mismanagement of the project, or additional expenses incurred. Contractors, subcontractors and suppliers should remember to preserve their own rights when executing any construction waivers or releases. For example, if a subcontractor is concerned about underpayment, it could refuse to accept payment until the general contractor has been paid in full, or the subcontractor could accept payment, but note on the release that it was reserving the right to make certain additional claims.

Many projects usually only have one general contractor, and each general contractor knows all of its subcontractors or suppliers, each of whom may be eligible to file a mechanic’s lien. However, many state construction lien laws are now allowing tier 2 and tier 3 subcontractors, including suppliers and others with whom the general contractor has no direct relationship, to file mechanic’s liens, thus creating a much larger and potentially unknown number of parties that are able to create liability on the project. That is why many general contractors require their subcontractors to acquire signed lien releases from all other subcontractors and suppliers on a periodic basis before issuing any payments. One of most common issues challenging the ability to secure signed lien releases on a monthly basis is the struggle of many companies to maintain enough cash flow to make all of their payment obligations in time. It can be easy for companies to find themselves in a difficult situation in which they can’t afford to pay their subcontractors or suppliers right away, and, in the same time, they can’t obtain payment from the general contractor or the owner without first providing a signed release stating in turn that they have already paid everyone.

It is vital that general contractors and subcontractors review the proposed contractual language carefully in order to ensure the appropriate cash flow and lines of credit, so they are able to fulfill their payment obligation when required. Carefully review the exact terms of any release or waiver you are expected to sign. Exercise care before accepting any payment, particularly if the payment is not for the full amount owed. Most importantly, always remember that lien waivers are separate obligations, and no matter how unfair the underlying result may be, courts are very likely to uphold provisions of signed waiver or release.

Source: Joshua R. Lorenz: “Mechanic’s Lien Waivers Place Burden on Contractors and Subcontractors; Construction Law”, the Legal Intelligencer (Online), September 6, 2016; Copyright 2016 ALM Media Properties, LLC.

Sergey Garanyants runs CMA’s Construction Forms Filing Services, helping CMA members in the construction industry protect their lien rights in all 50 U.S. states. For information about CMA’s construction forms filing services, visit http://creditmanagementassociation.org/services/construction-forms-filing/