An Excessive Nevada Mechanic’s Lien

In this blog post from CMA partner NCS Credit, we explore how much money is needed to make an excessive Nevada mechanic’s lien claim.

How much money makes a Nevada mechanic’s lien claim excessive or frivolous? According to one Nevada court, $1,371,187.44. In this case, the subcontractor filed a lien for $2,117,602.78, which was contested by the general contractor. The court deemed the subcontractor’s mechanic’s lien excessive and ordered the claim to be reduced to $746,415.34. Let’s review mechanic’s lien rights in Nevada and the case at hand.

Securing a Nevada Mechanic’s Lien

For private commercial projects in Nevada, would-be lien claimants should serve a preliminary notice upon the owner and prime contractor after first furnishing materials or services, but within 31 days from first furnishing materials or services. In the event of non-payment, the lien should be filed within 90 days from last furnishing or 90 days from project completion, whichever is later. Suit to enforce the mechanic’s lien should be filed after 30 days from filing the lien, but within 6 months from filing the lien.

Here’s a quick look from The National Lien Digest©

When is a mechanics lien excessive in Nevada?

 

SMC Construction Co., v. Rex Moore Group, Inc., Dist. Court, D. Nevada 2017

In 2015, Edgewood Companies (Edgewood) hired SMC Construction Co. (SMC) to build a hotel in Lake Tahoe. SMC then hired subcontractor, Rex Moore Group, Inc. (Rex), to provide “the electrical system and electrical fixtures for the project.” The original subcontract was for $5,464,364, included terms for 10% retainage and stated only written change orders would be accepted. The subcontract also included verbiage that Rex “…would not be entitled to any monetary damages or other compensation or damages resulting from delays to the project.”

The court makes mention of the damage clause because, as you’d imagine, the story takes a turn. In the winter of 2016/2017, significant project delays prompted SMC to tell Rex to put in the time & resources to speed up the project. The delays and subsequent “hurry up!” resulted in 20 change orders. These change orders increased the subcontract from $5.4M to a little over $6.1M.

 

In early spring 2017, Rex submitted a claim for damages due to, among several items, delays on the project. The additional claim was for $927,000, and, based on the subcontract, SMC denied Rex’s claim. In turn, Rex filed a lien for $2,117,602.78. Here’s how Rex arrived at that claim amount:

 

“Rex Moore calculated its lien as follows: $5,464,364 under the original contract plus $1,941,710.74 in additional work (including approved change orders up to that time) and damages for breach of contract minus $5,288,471.93 for payments received for a lien of $2,117,602.78.”

 

Here’s the court’s review of Rex’s math:

 

“Here, it is undisputed that there is a subcontract and twenty written change orders between the parties which sets forth an agreed upon price of $6,184,183.00 for Rex Moore’s work on the project. SMC contends that Rex Moore has been paid $5,470,580.63 on the project leaving an amount due of $713,602.37.”

 

Now, there is apparently an extraneous change order floating about, and the parties further agree that Rex’s claim amount is no more than $746,415.34.

 

Continuing our math lesson, Rex’s lien was filed for nearly 3 times the amount of its actual claim. SMC argued Rex’s claim is “frivolous and made in bad faith.” Rex, of course, argues its lien is not frivolous and Rex has email communication to back up its claim.

 

In the email, Rex asks SMC if it should track its costs (during the delays and “hurry ups”): “[SMC] responded to [Rex]’s e-mail about tracking costs and possible delay issues by telling [Rex] that “tracking [Rex] costs is a good idea” and to have “[SMC’s construction supervisors] sign off tickets as the work is happening so we know they are valid if/when we need to talk about money.” Id.”

 

Rex considers this email exchange a waiver of the damage’s clause in the subcontract.

 

“Rex contends that this e-mail establishes that SMC agreed to pay Rex for delay related costs and damages and waived the subcontract requirement of written change orders for all changes in compensation… Rex argues that once SMC agreed to allow Rex track its additional expenses, this additional compensation became part of the agreed upon contract price even if it was not specifically identified by any change order and thus, the additional compensation is lienable under Nevada’s mechanic’s lien statute.”

 

Except… in its original lien filing, Rex claimed some amounts were owed due to breach of contract. And, as the court points out, damages resulting from breach of contract are not lienable under Nevada statute. “Thus, Rex’s own lien statement establishes that the lien requests compensation for aspects of the project outside the scope of the subcontract and which are not lienable under the mechanic’s lien statute. As such, Rex’s recorded lien is excessive as a matter of law.”

OK, but what about the email? Well, the court didn’t agree with this single email being a waiver of the damage clause, because the email didn’t actually say it was a waiver. The court furthered that if this email did constitute as a valid waiver, it still wouldn’t matter, because Rex’s claim was outside the strict limitations of the Nevada mechanic’s lien statute.

Lucky? Maybe.

On the upside, Rex’s lien was not entirely expunged. The court kindly reduced Rex’s lien claim amount to the $746,415.34 owed, because the court did not believe or have enough evidence to prove that Rex filed its excessive claim in bad faith.

Documentation, yet once again, proves to be vital in supporting a lien claim. Review contracts carefully, execute change orders properly and never ever assume anything!

Thanks to CMA partner NCS Credit for this information!

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/