Last year, the Massachusetts Appeals Court ruled
that a subcontractor that asserts its mechanic’s lien rights prior to the real
property owner formally terminating its contract with a general contractor,
does not necessarily guarantee itself “full protection” for the entire amount
of its lien.[1] Instead, the court held that in connection
with the assessment of the enforceability of a subcontractor’s lien, the
question at hand is whether the general contractor was entitled to receive any
payments from the owner under the terms of the general contract at the time the
owner received notice of the lien. To
make this determination, the court looked at subsequent events and
circumstances to “cast a backlight” and highlight the point in time when no
further payments were due or to become due (owed and/or payable) from the owner
to the general contractor under the general contract.
This month, the appeals court further illuminated
this analytical process in its decision Superior
Mechanical Plumbing & Heating, Inc.
v. Insurance Company Of The West, 10-P-2255 Appeals Court (April 12,
2012). In Superior, the owner, L.A. Fitness (LAF), entered into a general contract
with PinnCon Inc. (PinnCon). As an express
condition precedent for each progress payment, the general contract provided that
PinnCon was required to provide LAF with proof of payment or partial lien waivers
from each of its subcontractors. Superior
Mechanical Plumbing & Heating, Inc. (Superior) was a PinnCon subcontractor
on the LAF project. On March 4, 2008, LAF
made the second of two progress payments to PinnCon. , On March 20, 2008, Superior
recorded its Notice of Contract asserting a mechanic’s lien against the LAF project. On March 24, 2008, LAF was notified of Superior’s
lien. On March 25, 2008, LAF learned
that PinnCon had absconded with both progress payments, had failed to pay its
subcontractors, and was ceasing operations.
On March 28, 2008, LAF formally terminated the general contract and
obtained a target lien bond from Insurance Company Of The West to “bond off” Superior’s
lien.
Superior argued in superior court that because its
lien was filed prior to LAF’s “formal termination” of the general contract with
PinnCon, that there were still monies due and owing to PinnCon at that moment,
and therefore, its lien should be satisfied.
The Superior Court agreed and entered summary judgment in Superior’s
favor. The lien bond surety appealed the
summary judgment finding and the appeals court reversed the lower court’s
decision.
In rendering its decision, the appeals court confirmed
that events such as certification of substantial completion, notice of
abandonment, and notice of termination may be helpful evidence toward
determining whether amounts are due and
owing between an owner and general contractor at any particular time. However, these
factors are not necessarily conclusive on this issue. As a result, the court will look at these
types of events and declarations and also to the underlying circumstances of
the contractual relationship between the owner and the general contractor to
determine whether or not any amounts are in fact due and owing, or to become
due and owing, which can be reached to satisfy the subcontractor’s lien. In this case, although Superior’s lien was
recorded prior to LAF’s formal termination of the PinnCon contract, it was
recorded after PinnCon had already materially breached its obligations to LAF
under the general contract. Therefore,
pursuant to the express provisions contained in the contract, PinnCon was not
entitled to any further payments, and under Section 4 of the Massachusetts mechanic’s
lien statute, there were “no amounts due or to become due” to satisfy Superior’s
lien, and therefore, the lien could not be enforced.
The Superior
decision provides additional guidance for owners as to what events and evidence
they can rely upon to contest and defeat a subcontractor’s mechanic’s lien, and
further confirms that the only way for a subcontractor to ensure full
protection of its lien rights is to file and give actual notice of its lien
prior to commencing work on a project.
Hugh Gorman
is chair of the Construction Law Practice Group at Prince Lobel Tye LLP. We
regularly represent owners, developers, contractors, subcontractors, and suppliers
in all aspects of private and public construction law. You can reach Hugh at hgorman@princelobel.com or 617 456 8093.
[1] Maverick Constr. Mgmt. v. Fidelity & Deposit
Co., 80 Mass. App. Ct. 264 (2011)