Mechanics’ Liens and
Public Improvements:
A Primer
By: Andrew Balcar, Bricker & Eckler Construction Law Legal Assistant
Reprinted from July 2006
ohioconstructionlaw.com
Highlights. Nobody wants to see mechanics’ liens filed on a project, but they are a fact of life—at least a fact of life on many
construction projects. Although they may seem familiar, it does not pay to regard them too casually. Mechanics’ liens are statutory creatures,
and anyone dealing with them needs to follow the statutory procedure precisely to avoid undesirable consequences. Liens differ depending
on the type of project—private construction, public construction, home improvement work, railroad work, and several other categories.
Do not assume that one size fits all. This article provides some of the basic information necessary to avoid disaster in dealing with mechanics’ liens for
public construction projects.
What Is a Lien?
Liens are the statutory remedy that a subcontractor or supplier (called a “materialman” in the statute) should use to be sure of being paid for the work on a project. (To simplify the discussion, this article will refer to “subcontractors” to mean both subcontractors and suppliers.) By properly following the lien process, a subcontractor may recover money that is “due and unpaid” to it before that money reaches the hands of the contractor. The process works like a garnishment, in which a creditor is permitted to garnish the wages of a debtor.
However, in the public context, the lien is only against the funds owed to the contractor, not against the property itself. So no lien claimant can insist that the post office, jail, or school building be sold in order to assure the subcontractor gets the money owed for its work on the project.
There are many pitfalls along the way that a lien claimant must avoid if it wants to maintain a valid lien and collect any money. From the beginning of the project to a certain point after the work ends for a subcontractor, there are many important events and time periods that must be watched closely by a potential lien claimant. Owners and contractors have their specific roles in the process, too, and they must follow the statutes to protect their own rights.
The Notice of Commencement
Before any work is started or any materials are furnished for a construction project, the public authority must prepare a Notice of Commencement.
Unlike on private construction projects, the Notice does not need to be filed with the County Recorder or posted on the job site for a public improvement project. The purpose of the Notice is to provide subcontractors and suppliers with information about the owner that they may need later if they have to submit an affidavit for unpaid funds to the owner.
Ohio Revised Code § 1311.252 lists the things that must be included in a Notice of Commencement.
Name, location, and number used by the public authority to identify the improvement;
Name and address of the public authority;
Name, address, and trade of all principal contractors;
Date the public authority first executed a contract with the principal contractor;
Name and address of the surety for each principal contractors; and
Name and address of the representative of the public authority upon whom service shall be made.
If the Notice is not prepared or is otherwise not available to contractors before work begins, the public authority faces no statutory penalty. But it risks missing out on receiving some important information it may need later.
The Notice of Furnishing
If the system is to work properly, a project’s principal contractor needs to know all of the parties who are working on or supplying materials for that project. To accomplish this, contractors, subcontractors and suppliers who do not have a contract with the principal contractor need to serve a Notice of Furnishing to the principal contractor. The term “serve” is defined by statute. R.C. § 1311.19 states that “any notice, affidavit, or other document” served under Chapter 1311 of the Ohio Revised Code must be provided in one of three specific ways:
Service by the sheriff of the county in which the person to be served resides. This is done in one of the methods provided in the Ohio Rules of Civil Procedure.
. Service by any method that includes written evidence of receipt. Some of the methods that could be used include certified or registered mail, overnight delivery service, and hand delivery.
If the “person” is a corporation, then there is a special means of service provided in R.C. § 1701.07(H) that must be used.
Let’s assume that you serve one of the required documents to another party by regular mail. Let’s also assume it is received but there is no record of the date of receipt. You failed to preserve your lien rights! Until recently, you would have been completely out of luck.
The law changed in 2003, following a decision in Carey Electric Co. v. ABF Freight System, Inc., 1999 Ohio App. LEXIS 3704, a case dealing with a private construction project. Carey Electric sent a Notice of Furnishing to ABF by regular mail, not one of the methods listed in R.C. § 1311.19, since it does not provide written evidence of receipt. Although ABF admitted that it had the Notice in its files, the appellate court held that because Carey had failed to serve the Notice in the prescribed way, its lien for $177,975.56 was invalid. This case dealt with a private construction project, but it is a good example of how the service requirements are strictly enforced.
Following that decision, certain members of the construction industry lobbied to get the law changed. In 2003, § 1311.19
was amended so that service of the Notice of Furnishing will be considered adequate even without written proof of receipt if (1) the
recipient acknowledges he got it, as happened in Carey Electric, or (2) actual receipt can be proven by a preponderance of the evidence.
Timing is everything where the Notice of Furnishing is concerned. It must be served on the principal contractor within 21 days after the subcontractor first performs work on the project. If the notice is not served within this 21-day period, the subcontractor will lose any lien rights for the work or materials provided more than 21 days before the notice is served. Many a procrastinating subcontractor has learned a lesson the hard way by losing valuable rights that were 22 or more days old.
The statute on Notices of Furnishing also requires principal contractors and subcontractors to provide to any subcontractors or suppliers with whom they contract both their own name and address and the name and address of the public authority. That way, the lower tier subcontractors will have the information they need for the Notice of Furnishing. If the principal contractor and subcontractors fail to provide this information, they may be sued by any affected subcontractors or suppliers, who may recover damages that resulted from any loss of their lien rights because they lacked this necessary information.
The Heart of the Matter: An Affidavit of Claim for Unpaid Funds
At this point in the project the owner has prepared the Notice of Commencement and any Notices of Furnishing have been properly served. If they have submitted their payment applications in a timely manner, subcontractors and suppliers who have performed work or furnished material for the public improvement should have been paid within 10 calendar days of the owner’s payment to the contractor for their work or material. That rule comes from Ohio’s Prompt Payment Act, the subject of an article in the May 2000 issue of ohioconstructionlaw.com.
But suppose the owner paid the contractor more than 10 days ago, and the subcontractors are still waiting for their money?
The unpaid subcontractors (and suppliers, too, of course) may establish a mechanics’ lien on the remaining funds due to the
contractor by serving the affidavit described in R.C. § 1311.26 on the public authority that owns the project. Again, timing is everything.
The affidavit must be served within 120 days from the last date the subcontractor performed labor under the contract or the
supplier furnished materials for the project.
There isn’t any wiggle room in the 120-day period. When dealing with mechanics’ liens, it is crucial that all statutory deadlines be met. In most cases, when the last work is completed, the time begins to run for filing a mechanics’ lien. Miss the deadline, and the lien is not valid. Properly filing a lien is especially important when determining any priority the lien may have with respect to other creditors. To see what happens when the statute is not followed precisely, we look to a case decided earlier this month that dealt with a private project and an owner’s failure to pay for construction work on that project.
In Swim Rite Pool Company v. Strausbaugh (Sandusky App. July 14, 2006), 2006-Ohio-3612, a pool contractor working on a home construction and renovation project let his lien rights float away by failing to file the lien within the statutory time period. The pool contractor completed installation of the pool in October 2002 but apparently was not fully paid.
The homeowners filed for bankruptcy in April of 2003. Although the pool contractor was still waiting to be paid in full, he had not yet filed a lien. More than 60 days—the statutory period for filing a lien on a residential project—had passed since he completed the installation.
The contract for the installation of the pool did not include a solar cover or solar reel, which were optional accessories. They had been discussed and rejected, but the homeowners decided later that they did want these additions. In May of 2003, the pool contractor returned to deliver and install the solar cover and solar reel in the pool.
On June 25, 2003, the pool contractor filed a lien for the unpaid amounts related to the work to install the pool. The court said this lien was invalid, citing the 60-day statutory period for filing a lien for work related to a residential project. The contractor argued that the lien was filed within 60 days of the installation of the solar cover and solar reel. But the court held that these were a separate contract from the pool installation. If the contractor wanted to protect his rights on the pool installation, he had to file a lien in December, 60 days after the installation was complete. Similar cases have enforced the 120-day period for filing a lien on a public construction project.
So all you need to do is file the lien within the 120-day time period on a public construction project, right?
That works, but you might want to think before waiting so long. Another case, L.E. Myers v. Jordano Electric Company (Franklin App. 1988), 47 Ohio App 3d 132, may influence your decision.
In that case Jordano received periodic payments from ODOT. However, Jordano failed to pay L.E. Myers for work that it performed.
ODOT terminated Jordano and owed Jordano no more money when it was notified of Myers’ first lien. The appellate court held that “a subcontractor is
not entitled to recover on liens filed against the owner when the owner has paid the contractor the entire amount due it prior to the
time the liens are filed and when no further payments are made or due thereafter.” If Myers had filed the lien before all the funds were paid to Jordano, then it might have been paid directly by the owner from the funds due and owing to Jordano for the work Myers had provided. Filing within the 120-day period protected Myers’ rights to a lien against a fund that, by the time Myers filed its lien, had been reduced to zero.
What must the affidavit of claim for unpaid funds say? It should state the following information:
amount due and unpaid for the labor and work performed and material furnished;
when the last labor was performed or material furnished, with all credits and set-offs; and
the post-office address of the lien claimant.
Also note that the affidavit must be “served” upon the representative of the public authority named in the Notice of Commencement. The same service requirements discussed above would apply here.
The lien claimant must also file the lien with the County Recorder within 30 days of service of the affidavit of claim upon the public authority, according to R.C. § 1311.29. Failure to properly record the affidavit of claim doesn’t waive any rights the subcontractor may have against the party owing it money, but it does put the lien claimant in a much worse position with respect to other lien claimants that have properly recorded their claims against the same party. (Remember, if you are owed money, others likely are as well.)
Recording the claim sets up a lien claimant’s priority as to other claimants. If you record first, then you should be paid first, and so on down the line. If you fail to record your lien, then you will have no priority. You will receive a pro-rata share of the money left over—if there is any—after all of the lien claimants who properly recorded their claims have been paid.
The Public Authority’s Obligations
Once the public authority receives the lien affidavit, R.C. § 1311.28 says it must detain funds from the balance of the funds remaining under the contract with the principal contractor. The amount of funds detained cannot exceed the amount of the claim that was made, nor can it exceed the amount of money remaining under the contract with the principal contractor. The public authority must keep the funds in an escrow account.
If the lien claimant was required to submit a Notice of Furnishing—in other words, if the claimant is a subcontractor or supplier who did not contract directly with the principal contractor—then it must provide a copy of the Notice to the public authority and a sworn statement as to the date the Notice was served upon the principal contractor. If such a lien claimant fails to do this, then the owner is not required to retain any funds.
If an owner fails to detain the funds and goes ahead and pays the principal contractor, it must pay the lien claimant as well.
It pays twice for its mistake. “An owner who fails to retain in his hands a sufficient amount to satisfy the claim of a material man, who has
given proper notice, becomes liable on such claim notwithstanding the payments which he made after notice were made in good faith,” the
court said 92 years ago in Richards v. Bennett (Hamilton App. 1914), 3 Ohio App. 240.
Once the owner receives the lien affidavit, it must also serve the principal contractor with a copy of the affidavit, even if the lien claimant has already done so. Service must occur within five days of the owner’s receipt of the lien affidavit. Again, the word “serve” shows up. The same requirements apply with respect to service that were mentioned above.
The notice provided to the principal contractor must state that it has 20 days to dispute the lien. If the contractor fails to dispute the
lien within 20 days, then it has assented to the correctness of the lien.
If the contractor does dispute the lien, it may want to have the funds released from escrow while the dispute is being worked out. Posting a bond pursuant to R.C. § 1311.311 will accomplish this. The bond must equal 150% of the amount of the lien, be in favor of the lien claimant, and be filed with the public owner, who must approve it. Subcontractors or other interested parties may also post such bonds.
The public authority, a principal contractor, or a subcontractor who receives a lien affidavit may serve a Notice To Commence Suit upon the lien claimant, under R.C. § 1311.311. This notice means the lien claimant must file a suit to enforce its lien within 60 days or its lien will be void, and the funds can be released to the principal contractor. Such a notice speeds up the process and allows the parties to use the courts to determine the validity of the lien or the amount due to the respective lien claimants, or to resolve any other issues. Failing to file suit within 60 days after receiving such a notice does not mean the subcontractor must stop trying to collect the money it is owed, but it will no longer have the security of a lien as protection.
When Should the Funds Be Released?
According to R.C. § 1311.28, funds placed in escrow may not be released unless one of three things has happened:
the public authority is ordered to release them by the court;
the public authority is requested to release them by the principal contractor and the lien claimant because those two parties have come to an agreement; or
the lien claimant fails to commence suit (if a Notice To Commence Suit was given under R.C. § 1311.311).
Of course, the public authority would also release the funds in escrow if a bond had been posted, as discussed above.
As the Ohio Supreme Court explained in State ex rel. Dinneen Excavating Co. v. Sykes (1988), 40 Ohio St. 3d 84 (1988),
When funds due subcontractors have been placed in escrow pursuant to R.C. 1311.28, a court of competent jurisdiction must order the release of the escrow funds to specific parties, in specific pro-rata amounts, and at specific times, as properly determined by that court unless the parties agree to the amount owed. Where the parties agree to the amounts owed, the owner must distribute the funds on a pro-rata basis according to R.C. 1311.31.
The Bottom Line
Working with liens can be a tricky endeavor. The statutes impose deadlines, require language that must be included in certain notices and other documents, dictate escrow accounts, and mandate service and other requirements. The process discussed above is just the tip of the iceberg, as there are many intricacies to each part of the lien process for public construction projects. Whether you are dealing with a lien on a public improvement project or a lien on some other type of work, it is a good idea to consult with an attorney who is experienced in that area of lien law.
