The Border War III: Mechanic’s Liens for Rental Equipment

map-of-america_rentalLiens for unpaid rent for machinery and equipment vary from state to state. Kansas has no special rules governing liens by those who rent equipment for others to use. Such renters are essentially treated as suppliers under Kansas law and are required to follow the lien law, K.S.A. 60-1101, generally applicable to all unpaid suppliers and contractors. The procedure is different in Missouri.

In 2005, the Missouri legislature rewrote its mechanic’s lien law, 429.010, R.S. Mo., to limit the ability of companies renting machinery or equipment for use by others to file liens. In order to file a valid lien for unpaid rent, the 2005 revision required the following elements to be met:  (1) the property must be a commercial property; (2) the amount of the claim must exceed $5,000; and (3) notice must be given to the owner within 5 days of the commencement of the use of the machinery or equipment that such items are being used on its property. The notice must include the name of the entity renting the equipment, the equipment or machinery being rented, and the rental rate. If any of these prerequisites is not met, the lien is invalid.

The 2005 revision caused confusion among contractors which rented machinery or equipment for their use on projects and included the cost of the rental in their subsequent mechanic’s liens. In 2007, the statute was revised to state that the prerequisities noted above for filing a lien for rental equipment do not apply to those persons who rent machinery or equipment in performing their work or labor. This statute is popularly read as allowing those who rent machinery or equipment, i.e., lessees, to include the rental charges in their liens without having to give the notice of commencement to the owner or meeting the other prerequisites. However, the statute could also be interpreted by those seeking to invalidate liens as excluding lessees from claiming a lien for the cost of rental equipment. Unfortunately, there are no cases which have specifically addressed this conundrum. The only case to address the issue, Mo. Land Development Specialities, LLC v. Concord Excavating Co., noted the differences in interpretation and side-stepped ruling on the issue.

There has been additional confusion centering on the amount which can be liened for rental charges. Under the statute, the lien for rental of machinery or equipment is “for the reasonable value…during the period of actual use and any periods of nonuse taken into account in the rental contract…while the equipment is on the property…” In the Concord Excavating Co. case, the Missouri Court of Appeals held that while rental machinery or equipment is idle on the project, such “downtime” charges are simply not lienable regardless of what the rental contract says about charges for “downtime.” Therefore, under this case, rental machinery or equipment is not lienable just because it’s on the property; it has to be in use improving the property in question.

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The Border War II: Where Can I Litigate a Dispute?

map-of-america_whereThe contract is signed, the work begins, and the relationship sours. The parties “lawyer up,” and the contracts are read. Many contracts contain forum selection clauses which state the place where disagreements are to be litigated. Depending on where you reside, you can either litigate in your backyard or some inconvenient, unfamiliar, distant location.

In the U.S. Supreme Court case of Atlantic Marine Construction Co., Inc. v. U.S. District Court for the Western District of Texas, a dispute arose on a Texas construction project between a Texas subcontractor, J-Crew Management, Inc. and a Virginia-based general contractor, Atlantic Marine Construction Co. J-Crew filed suit in Texas federal court since the project and witnesses were located there. Atlantic moved to dismiss the case because the subcontract contained a provision that Virginia would be the exclusive forum for litigating disputes. The U.S. Supreme Court held that unless “exceptional circumstances” exist, the forum selection clause will be enforced. In this case, no such circumstances existed, and the subcontractor was forced to litigate the dispute in the GC’s own backyard.

In a recent Missouri case, Raydiant Technology, LLC v. Fly-N-Hog Media Group, Inc., a forum selection clause again ruled the day. The Arkansas-based company Fly-N-Hog, licensed software and equipment to Raydiant, a Missouri company. After experiencing problems with the products, Raydiant filed suit in Missouri. Fly-N-Hog moved to dismiss based on the forum selection clause which set exclusive jurisdiction for litigation in Sebastian County, Arkansas. The Missouri Court of Appeals found that there was nothing unfair or unreasonable about the agreement to litigate in Arkansas and affirmed the dismissal of the Missouri case. The court held that the forum selection clause also overcame the argument that the forum selection clause shouldn’t apply because Fly-N-Hog fraudulently induced Raydiant to enter into the contract.

So the next time you read a contract, find out if it contains a provision requiring litigation in the other parties’ domain. If it does, ask yourself whether you are comfortable crossing one or more state lines to litigate an action. Could the provision create an advantage for your opponent? Did Fly-N-Hog have an advantage litigating in Sebastian County, Arkansas? Let me hear your best, “suey pig!”

The Border War: Insuring Others for Their Own Mistakes

Kansas Missouri mapWhen you purchase insurance, you do so to protect your assets in the event you make a mistake and cause an accident. One of the most publicly-debated but misunderstood issues in the construction industry is the practice of contractually shifting the damages caused by one’s own mistakes to another. Among state legislatures, this risk shifting is either wholly supported, wholly disallowed, or something in between. In 2004, the Kansas legislature made these so-called “broad form indemnity” clauses in construction contracts void, unenforceable and against public policy. Missouri had already made them unenforceable in public and private construction contracts in 1999.

Kansas went a step further in the Fairness in Private Construction Contract Act (2005) and Fairness in Public Construction Contract Act (2007) and made construction contract provisions which waived or extinguished insurance subrogation rights void and unenforceable. Therefore, in Kansas, insurance carriers which pay a claim are free to seek reimbursement for paid claims from the party or parties whose negligence caused the damages. Missouri has not yet followed suit and still allows parties to waive such insurance subrogation rights.

Despite efforts to limit risk shifting, it is still a common practice to require, for instance, subs to name general contractors (GCs) as “additional insureds” on their insurance coverages (or GCs to name owners and architects). Under this practice, if the GC makes a mistake, and it causes personal injury, death or property damage, the GC can make a claim on the sub’s insurance policy. If the liability insurer pays that claim, the limits of the sub’s coverage are reduced by the same amount. In 2009, the Kansas legislature joined just seven other states in closing this loophole by expressly voiding any provision in a construction contract in which a party is required to provide liability coverage as an “additional insured” for another. Missouri, on the other hand, still allows a construction contractor to name another as an “additional insured” on its insurance coverage.

Put this in perspective. You are a GC and you have ten separate projects. On each of those projects, you are asked to name the owner and its architect as an “additional insured” on your liability insurance. A design defect causes a building to collapse and one or more people are hurt or killed. When claims are made against the owner or architect, they make claims on your insurance. If you have a limit of $1 million and claims for $600,000 are paid, your limit is now $400,000. Such a small limit may leave your assets exposed in the event the limit is completely exhausted by another claim. If you’ve paid attention at all, you know that one bad accident can easily eat up the full $1 million in coverage. Needless to say, if you are able to renew that insurance, your premium will be substantially higher. Or, if you need bigger limits to accommodate the increased claims potential, you will pay more in premium.

So, Jayhawk vs. Tiger aside, would you rather be in Kansas or Missouri?

Lien Waivers

lien signingThe statutorily protected rights to file mechanic’s liens or a bond claims are essential weapons in the collection arsenal of any contractor. Such rights should never be waived nor compromised without a sufficient exchange of money as consideration.

A contractor can unknowingly or accidentally waive a valuable lien or bond right, even when receiving money, by signing an overbroad or poorly-worded lien waiver. For that reason, it is of utmost importance that a contractor be skilled in recognizing problem lien waiver language.

Some construction contracts contain very broad waivers in which parties waive all of their lien and bond rights before construction has even commenced. These contractual lien waivers are void in Missouri and Kansas as against public policy. They are also void under the Miller Act governing federal projects. However, contractual lien waivers are valid in some states. Such provisions should be deleted from any contract.

No lien waiver should ever be signed that is not conditioned upon receipt of a specific dollar amount. Waivers that include language such as “receipt of payment of which is hereby acknowledged,” or which do not condition the waiver’s validity on receipt of a stated dollar amount, are problematic. Lien waivers are commonly provided to the owner with a payment application. When a lien waiver signed by a subcontractor or supplier contains a statement acknowledging receipt of payment (when, in reality, none has been made) or which, at least, fails to contain language conditioning the waiver upon receipt of payment, the unpaid sub or supplier is, by law, prevented from filing liens against the owner’s property. The rationale is that the owner paid the amounts requested in reliance on the statement of the unpaid party that it had, in fact, been paid and the owner made payment to its detriment. In that circumstance, courts have held that an owner should not be made to pay twice even if the payee absconds with the money.

Also, beware when the proposed waiver purports to waive liens and bond claims up to, and including, a specific date. Frequently, the date inserted in the lien waiver does not correspond to, and is later than, the date of the last unpaid pay application. Therefore, language that waives liens and/or bond claims on a date later than the date of the pay application not only waives the lien for the amount of the unpaid pay application, it also waives liens for work done after the date of the pay application up to the date inserted in the lien waiver. Lien waivers also routinely fail to identify exceptions for unpaid retainage, unpaid change orders and claims which are unknown.

The careful contractor will review all lien waivers as the project progresses and, if necessary, revise waivers to make sure they are consistent with the contractor’s intent. In order to preserve lien and bond rights, it is a recommended practice to use a stamp or attach a sticker to the lien waiver which states “this release shall apply only to work for which payment has been received in full; shall not apply to retention; shall not apply to unbilled changes or to claims which have been asserted in writing or which have not yet become known; and shall be conditional upon receipt of funds.” There may be other revisions that are necessary to correct the intent of the waiver and make sure all rights are preserved. The diligent contractor should make all revisions necessary without concern as to whether the party to whom the waiver is submitted objects.

Payment Bond Claims

Payment bondIt bears repeating that a mechanic’s lien is a contractor’s best friend. Mechanic’s liens should never be waived or compromised. However, there are instances when a lien is unavailable to protect a contractor’s payment rights. For instance, when the property upon which construction is taking place is a public property or quasi-public property, contractors are prohibited from filing mechanic’s liens. In other words, you can’t lien the King’s property. However, when the work is on public property, payment bonds are required to protect those supplying labor and/or materials from non-payment. Additionally, on some private projects, payment bonds can be legally substituted for lien rights.

A payment bond is a guarantee by a surety of a contractor’s obligation to pay its subs and suppliers. Not all unpaid contractors or suppliers are eligible to file a claim on a bond. As a general rule, those parties in direct contract with a general contractor or subcontractor are eligible to file a claim. In other words, third tier suppliers of subcontractors are normally eligible. However, bond rights erode the further away the contractor or supplier is from the general contractor. Fourth-tier subs or suppliers are typically not eligible. The language in the payment bond relevant state or federal statutes can further restrict those who are eligible. It is important to read the bond language to understand eligibility.

Bonds also include provisions reciting the time within which claims must be made. Most bonds restrict the time within which those who are not under direct contract with the bonded contractor must make a claim. Generally speaking, those parties have only 90 days from the last date of labor or material to make a claim. That period of time cannot be extended by punch list, repair work, or warranty work. Other parties under direct contract with the principal contractor are generally not restricted. However, bonds can vary the time within which any party must give notice. Miller Act bonds currently require notice within 90 days.

When the claim on a bond is made, the terms of the bond will identify the information that should be provided with the claim. At a minimum, bond claimants should give notice of the amount claimed, the party to whom the materials were furnished, and the work performed or materials provided. Upon receipt of a claim, the surety will commonly require the claimant to provide a sworn proof of claim with a copy of contract documents, pay applications, payment ledgers, delivery tickets, notice of non-payment to the contractor, etc. Given that normal practice, it is a best practice for the bond claimant to send such information and documents with the original claim and supply any additional documents requested by the surety.

The terms of the bond will state to whom notice must be given and by what method. As a safe practice, a claimant should give notice to the owner, the general contractor, the party which owes the claimant money (if it is different than the general contractor), and the surety. Notice should be given by certified mail, at a minimum, to insure that the bond claim is received by all parties.

Like notice provisions, bonds commonly include terms reciting when suit must be filed. These contractual statutes of limitation are void in Missouri but are considered valid under Kansas law. In Missouri, suits on bond claims must be filed within the five-year statute of limitations. Typical bond provisions and the Federal Miller Act require suit to be filed within one year after the last date work was performed or materials were provided.

Because it is sometimes difficult to get a copy of a payment bond after a project goes sour, and there are disputes between parties regarding payments owed, it is a best practice to get a copy of applicable bonds at commencement of project. Review that bond language and know applicable time deadlines. Don’t waive bond rights by signing overbroad lien/bond waivers as discussed in my Lien Waivers post. If it becomes necessary to file a bond claim, follow to the “T” the requirements for making bond claims as set forth in the bond itself.

Mechanic’s Liens

Wrench coinA mechanic’s lien is, short and simply, a contractor’s best friend. It is the most powerful tool available to general contractors, subcontractors, and suppliers to obtain payment. Liens allow a contractor to force the owner to sell a property in order to satisfy the amount owed for construction work. Lien rights should never be waived, compromised, diluted or allowed to expire. Contractors and suppliers that give in to the notion that protecting or filing a mechanic’s lien will hurt their ability to get future business are thinking foolishly and irrationally. Why give up the ability to get paid now, so that you can get business in the future from the same party that isn’t paying you now? Even parties with the best of intentions have financial difficulties or go out of business. You should never allow someone else’s problem to become your own. The best way to protect your financial interests is through mechanic’s liens.

In protecting the right to file a lien, you must be aware of the requirements for filing a mechanic’s lien. Some states require contractors or suppliers to provide certain notices prior to commencing work or supplying or renting materials. Failure to give these pre-commencement or pre-furnishing notices can result in a waiver or a dilution of lien rights. Kansas lien laws do not currently require such notices, but Missouri lien laws do require certain statutory notices to be provided to the owner in order to subsequently claim a lien. These notices can vary depending on whether the project is residential or commercial in nature, and whether you are renting equipment or actually performing work on the property.

The most litigated issue is whether a lien has been filed in a timely manner. Contractors and suppliers must impose deadlines in their collection procedures to assure that the process of drafting and filing a lien can be completed before the statutory deadlines expire. In Kansas liens of general contractors expire four months after completion of the contract, while liens of subcontractors expire three months after completion. Currently the deadlines may be extended to five months after completion, but only if an extension is filed within the original deadlines. Liens in Missouri must be filed within six months of contract completion. Keep in mind that the time for filing a lien starts when the contract is completed, not when punch list or warranty work is completed. Additionally, parties cannot agree to amend or suspend these lien deadlines.

Contractors and suppliers must serve a 10-day notice on the owner (in Missouri) prior to filing a lien. They must also give themselves and their counsel adequate time to obtain and identify information necessary to file a lien. This information should include the proper legal names of the owner and the general contractor as well as a legal description of the property. Documentation should also include contracts, change orders, pay applications and invoices, and labor, material, and equipment summaries necessary to prepare reasonably itemized statements. Liens require very specific and exact information, and time is required to complete liens correctly. It is very dangerous to wait until the last minute to file a lien. Also, just filing a mechanic’s lien is not enough to protect your rights. You must file suit in a court of law in order to enforce and foreclose on your lien. In Kansas, suit must be filed within a year of filing the lien. In Missouri, liens must be filed within six months of filing the lien.

The lien process can look complicated and expensive to the inexperienced. However, the truth is the mere threat of a lien can frequently lead to a resolution of issues. If it becomes necessary to file a lien or suit to enforce the lien, the claimant gets the attention of the owner as well as its lender. Then the pressure and incentive to get the matter resolved becomes even greater. Contractors and suppliers that choose to abandon their lien rights are assured of getting no payment, while others who engage in the process almost always see the benefit of their efforts.

The Cost of Employing Undocumented Workers

wood framing_morguefileThe Department of Homeland Security and the Internal Revenue Service sent a strong message to those who harbor undocumented workers. Owners of the Spring Hill contracting company Advantage Framing Systems Inc. were recently sentenced to serve at least a year in federal prison for harboring undocumented workers.

Authorities believe that the company was employing undocumented aliens to gain a competitive advantage against others in the construction industry. The undocumented workers were paid in cash as part of an effort to lower operating costs and boost profits. The company didn’t pay for Social Security, worker’s compensation or unemployment benefits for the undocumented workers. The DHS and IRS had been investigating the case since March 2012. Read the full indictment.

According to a release from U.S. Attorney Barry Grissom, the owners of the lumber framing company, James Humbert, Kimberly Humbert and Charles Stevens II, each pleaded guilty to one count of conspiracy to harbor illegal aliens for commercial advantage. The owners admitted to devising a payment scheme requiring crew leaders obtain insurance. The company then would pay the crew leaders, who were responsible for allocating the payments to the undocumented workers. The company paid 32 crews about $4.6 million in total.

Grissom also stated that Advantage Framing held safety training meetings at which employees were instructed on how to react if Occupational Safety and Health Administration investigators came to perform a site inspection. Undocumented workers were told to tell investigators that they worked for a subcontractor — not for Advantage directly. The company even ran drills to practice for such an event.

Last year, Advantage Framing crew leader, Edino Pacheco, also known as Dennis Erickson Portillo, was sentenced in a federal court after pleading guilty to harboring undocumented workers. Pacheco was sentenced to time served and turned over to U.S. Immigration and Customs Enforcement for deportation. Two other crew leaders, Angel Arguello-Plata and Jorge Uriel Delgado-Ovalle, are awaiting trial. Harboring undocumented aliens carries a maximum five-year prison sentence and a fine of as much as $250,000. Money laundering carries a maximum penalty of 20 years and a fine of $250,000.