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!

25 Reasons You Need to be in a CMA Industry Credit Group

CMA hosts the largest Industry Credit Group meetings in California and Nevada.

Why do your competitors know of “high risk” accounts months before your company does? Perhaps they are in an Industry Credit Group!

Credit Management Association’s Industry Credit Groups offer unique opportunities to network with leading credit professionals in your specific industry. Group members exchange valuable trade data and experiences on existing and prospective customers.

CMA offers more than 50 industry credit groups and networks at the local and national level; including food and beverage, construction, health care equipment and many more, where we host the largest local Industry Credit Groups in California and Nevada. To see a list of the current list of CMA-hosted Groups, click here.

As we’ve been doing Industry Credit Groups longer than just about anyone else, we are sharing 25 good reasons why credit professionals need to consider joining an Industry Credit Group.

  • Industry Credit Groups mitigate your company’s commercial risk
  • Industry Credit Groups provide immediate resources to check trade references quickly with similar companies in your vertical industry
  • Industry Credit Groups allow like companies to compare customer payment trends and payment methods
  • Industry Credit Groups help similar companies compare customer dispute reasons and trends
  • Industry Credit Groups proactively identify business deterioration and closures
  • Industry Credit Groups facilitate the reduction of bad debt expense (In 2012, Credit Today estimated that ICG participants saved approximately $205,000 per year)
  • Industry Credit Groups proactively identify problematic accounts
  • Industry Credit Groups help uncover industry trends & challenges
  • Industry Credit Groups identify best practices
  • Industry Credit Group members receive bankruptcy alerts and updates via CMA’s interactive website, anscers.com
  • Industry Credit Group members receive change of ownership notifications
  • Industry Credit Group members identify change of key personnel or location
  • Industry Credit Group members receive timely NSF alerts
  • Industry Credit Groups increase the credit manager’s value to your organization
  • Industry Credit Groups identify payment portal issues
  • Industry Credit Groups identify customers who are skipping invoices
  • Industry Credit Groups identify mergers & acquisitions and corporate linkage
  • Industry Credit Groups identify sources of funding
  • Industry Credit Groups identify best-in-class resources (software, credit reports, legal, vendors)
  • Industry Credit Groups offer the opportunity to find a mentor
  • Industry Credit Groups offer the opportunity to be a mentor
  • Industry Credit Groups help you expand industry knowledge
  • Industry Credit Groups help you understand your competitors better
  • Industry Credit Groups help you expand your professional network
  • Industry Credit Groups help you differentiate yourself as a skilled and much sought-after credit professional
  • Industry Credit Groups help expand your company’s brand awareness

CMA professionals facilitate all group meetings and information exchanges in strict compliance with U.S. antitrust laws. Group meetings give you the proprietary information you need to make fast, accurate credit decisions. If you have any questions please don’t hesitate to contact a CMA representative at 702-259-2622. We look forward to your participation in CMA’s Industry Credit Groups!

Avoiding Traps for the Unwary: What Nevada Claimants Must Know about Mechanic’s Liens in Bankruptcy

By: Tracy M. O’Steen and James Patrick Shea

This article assumes that the debtor is the owner of the real property where the services and/or materials were provided. Different issues may arise if the debtor is not the owner, but rather the general contractor with respect to the construction project. This article does not address such issues.

Nevada state law provides a fairly straightforward process for perfecting mechanic’s liens. Under Chapter 108 of the Nevada Revised Statutes (“NRS”), there are specific steps to follow. In its most simplified version, in Nevada a claimant must (1) record its notice of lien[1], (2) properly serve the notice of lien[2], and (3) foreclose on the mechanic’s lien through court action[3]. However, when a bankruptcy comes into play, there are some traps that may befall the unwary. Understanding how the perfection and foreclosure of a mechanic’s lien is altered by the Bankruptcy Code requires a basic understanding of both Nevada construction law and bankruptcy law. Certain provisions of the Bankruptcy Code modify some of the basic concepts generally understood to be true in the area of mechanic’s lien law.

Perfecting a Mechanic’s Lien Post-Petition:

What happens when a claimant has provided goods and/ or services for a construction project, but before the claimant has either been paid or perfected its mechanic’s lien, the owner of the project files for protection under the Bankruptcy Code? Typically, once a bankruptcy petition has been filed, the “automatic stay” under 11 U.S.C. § 362(a)(4)[4] prohibits “any act to create, perfect or enforce a lien against the property of the estate.” This would seem to be a straightforward prohibition against taking any action to file and perfect a mechanic’s lien covering pre-petition goods and/or services. An unwary claimant may then stop all efforts to perfect and enforce its mechanic’s lien once a bankruptcy has been filed, and then lose those lien rights as a result. However, Bankruptcy Code Section 362(b)(3) specifically carves out an exception for perfecting a mechanic’s lien post-petition. This section states that the automatic stay does not apply to “any act to perfect, or to maintain or continue the perfection of, an interest in property to the extent that the trustee’s rights and powers are subject to perfection under § 546(b) of [the Bankruptcy Code].[5]

Section 546(b)(1), in turn, limits the Trustee’s powers to avoid liens by providing that those powers are subject to any “generally applicable law” that would permit “perfection of an interest in property to be effective against an entity that acquires rights in such property before the date of perfection.” In other words, most bankruptcy courts agree that state mechanic’s lien statutes that allow a supplier of labor and materials to assert a lien relating back to the time such labor or materials were first provided fall within the scope of § 546(b)(1). Under Nevada law, a mechanic’s lien may relate back to a pre-petition date if that date is when the labor and materials were originally supplied[6]; therefore, the act of recording and perfecting a mechanic’s lien under such circumstances is not subject to the automatic stay. That being said, the claimant may still want to seek a comfort order from the bankruptcy court prior to taking such an action and is encouraged to file a proof of claim regarding its lien as well.

Impact of the Automatic Stay on Actions to Foreclose a Mechanic’s Lien:

Even if a mechanic’s lien is perfected, whether that perfection occurred pre-bankruptcy or post-bankruptcy, the automatic stay will impact a claimant’s ability to either initiate or continue a suit to foreclose on the mechanic’s lien. The Bankruptcy Appellate Panel for the Ninth Circuit Court of Appeals has specifically concluded that the commencement of a foreclosure suit by the claimant post-petition violates the automatic stay.[7] This creates a major problem in Nevada since the procedure to enforce a properly perfected mechanic’s lien is the commencement of a foreclosure lawsuit within six months from the date the lien is recorded. Of course, a claimant may always seek relief from the automatic stay to commence or continue an action to enforce its lien. However, as an alternative, the Bankruptcy Code allows a claimant to preserve its rights by taking the substitute action of giving notice of its right to enforce the mechanic’s lien. It is recommended that this notice be filed in the bankruptcy case within the same time frame the claimant would be required to commence its action to foreclose the mechanic’s lien under Nevada state law. In Nevada, that time frame is six months from the date the Mechanic’s Lien is originally recorded.[8]

The Notice Required by § 546(b)(2):

Unfortunately, although the Bankruptcy Code requires the claimant to file a notice in the bankruptcy court to preserve its state law lien rights, the Bankruptcy Code fails to provide specific guidance as to what constitutes the requisite notice. The notice requirements under § 546(b)(2) differ from jurisdiction to jurisdiction, and unfortunately, there are no reported cases in Nevada dealing with the sufficiency of the § 546(b)(2) notice. However, the Ninth Circuit has concluded that the filing of a secured Proof of Claim is not sufficient to satisfy the § 546(b)(2) notice to maintain the mechanic’s lien nor is the recording of the lien itself.[9] Something more must be done to maintain the perfection of the mechanic’s lien or it will expire within the statutory six month period.[10] The guiding principle seems to be that the notice should inform the court and debtor that the creditor would have commenced the foreclosure action had bankruptcy not intervened. Despite some courts holding that oral notice or out-of-court action evidencing an intent to assert and enforce a lien can be sufficient, most courts conclude that § 546(b)(2) requires that something in writing be filed in the bankruptcy case.[11] A claimant should, at a minimum, file a pleading in the bankruptcy case that expressly provides that (1) the claimant has a right to assert a mechanic’s lien under applicable state law; (2) it intends to assert and enforce such a lien; and (3) it is authorized to do so under Bankruptcy Code provisions. The filing of this notice should preserve the claimant’s lien rights through the duration of the bankruptcy case.

Tolling of the Foreclosure Deadline:

Assuming the claimant has taken all the proper steps to preserve the lien, a majority of courts, including the Ninth Circuit Court of Appeals, agree that § 108(c) of the Bankruptcy Code tolls the deadline for commencing a foreclosure action to enforce a mechanic’s lien.[12] A claimant who timely records a mechanic’s lien under Nevada law and files the required notice under § 546(b)(2) in lieu of commencing a foreclosure action, has at least 30 days after the termination of the automatic stay (which may occur upon dismissal of the case or abandonment or surrender of property) to commence or continue its foreclosure action.[13] It is important to note that § 108(c) of the Bankruptcy Code only operates to toll the time period for commencing or continuing a civil action to foreclose the mechanic’s lien, and cannot be used to extend the time period for filing the original lien or the § 546(b)(2) notice discussed above.

Conclusion:

Claimants are cautioned to seek counsel if they have provided labor and materials with respect to a construction project and the property owner files for bankruptcy protection. In order to assert, perfect and maintain their lien during the bankruptcy case and avoid traps for the unwary, careful attention should be paid to the requirements of Nevada’s mechanic’s lien statute and the Bankruptcy Code. Otherwise, claimants risk waiving their mechanic’s lien rights.

Tracy O’Steen is an attorney in Armstrong Teasdale’s Financial and Real Estate Services practice group. She counsels clients on bankruptcy matters, distressed loans, commercial loan transactions, receiverships, landlord tenant disputes and other related commercial litigation. Mr. O’Steen can be reached by phone at 702.678.5070 or by email to tosteen@armstrongteasdale.com.

James Patrick Shea is a partner in Armstrong Teasdale’s Financial and Real Estate Services practice group and the immediate past president of the American Bankruptcy Institute. He has more than 30 years of experience advising financial institutions, landlords, vendors and other creditors in business bankruptcy proceedings. Currently, he serves as Special Counsel to the Chapter 7 Trustee in the Fountainebleau mechanic’s lien litigation. Mr. Shea can be reached by phone at 702.678.5070 or by email to jshea@armstrongteasdale.com.

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Footnotes:

1 NRS 108.226.
2 NRS 108.227.
3 NRS 108.223; NRS 108.239.
4 Unless otherwise stated, all section references in this article refer to sections of the United States Bankruptcy Code.
5 In re Orndorff Construction, Inc., 394 B.R. 372 (Bankr. Ct. M.D.N.C. 2008) (“An action to perfect a materialman’s lien is excepted from the automatic stay by Section 362(b)(3)”). See also In re Richardson Builders, Inc., 123 B.R. 736, 738 (Bankr. W.D. Va. 1990); In re Victoria Grain Co. of Minneapolis, 45 B.R. 2, 6 (Bankr. Minn. 1984).
6 NRS 108.222 (amount of lien); NRS 108.225 (a lien under this chapter is preferred to any lien recorded after the commencement of construction of a work of improvement).
7 In re Baldwin Builders, 232 B.R. 406 (9th Cir. B.A.P. 1999).
8 NRS 108.223.
9 In re Baldwin Builders, 232 B.R. at 413-14 (9th Cir. B.A.P. 1999).
10 NRS 108.223; In re In re Baldwin Builders, 232 B.R. at 413-14.
11 See In re Baldwin Builders, 232 B.R. at 413-14 (collecting cases).

 

Upcoming November and December Networking Opportunities in Nevada, Northern and Southern California

CMA members are welcome at several upcoming networking opportunities in Northern California, Southern California, Las Vegas and Northern Nevada. These events will provide several great opportunities to network with credit and financial professionals from other industries in those geographical areas.

The dates and locations (as well as more information) can be found by clicking on the links below.

For more information about other related events where CMA will have a presence, visit www.creditmanagementassociation.org/events.

 

CMA Las Vegas Office Hosts Open House

The CMA Las Vegas Office recently hosted an open house and networking event for nearly 50 Las Vegas-area credit managers, CMA Members and Board of Directors members, on May 20. The open house is an annual event with the sole purpose of allowing members to meet and network in an informal setting. Below are some pictures from the event. Thanks to everyone who came out, and we look forward to creating more networking opportunities for Las Vegas-area credit managers in the near future.

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