BIA investors borrowed $4 M (Haselwood's) to fund the construction of the arena. The Haselwood's loan was secured by a commercial security interest and deed of trust. The Deed of Trust was secured by the real property at the arena location, the concession agreement, and all improvements.

Before the Deed of Trust was recorded on September 13, 2002, BIA's construction manager obtained a bid from RV Associates, Inc. (RV) to perform the site work and utilities for the Project. RV mobilized equipment to the Project on September 6, 2002 and signed a contract with BIA on September 20, 2002. Haselwood's Deed of Trust was recorded on September 13, 2002 a week after RV first delivered equipment to the site.

RV performed the site work and utility work, some changes were made to the plans and specifications which RV claimed increased the cost of its work. RV was not paid $101,905.30 and recorded a mechanics lien against BIA and the Arena in July of 2003.

BIA defaulted on its promissory note to the Haselwood's in August of 2003 and Haselwood filed a complaint against BIA, RV and other creditors who had an interest in the Arena. Haselwood sought a declaration from the Court that their security interest was prior to all other liens on the property and sought a decree to foreclose on the Deed of Trust. RV's position was that it delivered equipment to the site on September 6, 2002 one week before the Haselwoods recorded their lien and thus RV had priority over the Haselwoods Deed of Trust.

RV moved for summary judgment seeking a decision from the Court that its Deed of Trust was superior to all of their claims in the property that RV's lien claim was inappropriate because the Arena was not "public property". The trial court ruled that the contractor had no claim against the concession agreement or the real property and Haselwood prevailed.

RV appealed, asserting that even though RV recorded its lien nearly 10 months after it had started work on the Project, that its lien claim related back to the first day it had performed work on the Project, and the RV's lien attached to the improvements to the real property under the concessions agreement. The Washington Supreme Court ruled that under the concessions agreement BIA could only own improvements to the land and pursuant to the Washington lien statutes RV had a lien on the improved property to the extent BIA had an interest in the improved property. Since the building on the property belong to BIA (the land belonged to the City) RV's lien claim attached to the improvements on the property (buildings and substructures). The court also ruled that RV's lien related back to the first day it had mobilized equipment to the Project even though the contract was signed after the equipment was mobilized and even though the lien claim was filed 10 months after the equipment was brought to the job. RV's lien had priority over Hazelwood's deed of trust.

To read the case click here

Washington's Stop Notice presents an aggressive alternative to the traditional mechanic's lien.

The Stop Notice procedure, set forth in Section 60.04.221 of the Revised Code of Washington, gives a claimant the power to interrupt a project's construction funding by requiring the construction lender to withhold amounts that are due to the contractor, but have not been promptly paid in accordance with payment terms.

Before filing a Stop Notice, however, the claimant should be certain that it has filed all necessary pre-lien notices. Depending on the role that the contractor plays in a project, the pre-lien notice could be a Notice to Owner, Notice to Customer, or Notice of Furnishing Professional Services.

The next step is to provide a written Stop Notice to the lender. A Stop Notice may not be provided sooner than 5 days after the payment due date, but it must be provided within 35 days of the payment due date. A Stop Notice must contain the name of the lien claimant and general contractor, a description of the property, and a brief statement that the claimant has performed work and is entitled to payment.

The lender, upon receiving a Stop Notice, is required to withhold the claimed amount from future disbursements. In the event that the lender chooses not to withhold the claimed amount, the Stop Notice automatically takes priority over the lender's prior mortgage interest. This creates significant leverage for the contractor claimant because a traditional mechanic's lien is routinely subordinate to a lender's mortgage interest. As an added bonus in this situation, the claimant will also be entitled to recovery of reasonable attorney's fees upon final judgment.

Despite the obvious benefits of a Stop Notice, a potential claimant should also be mindful of potential negative impacts to the project. For instance, a Stop Notice could actually slow progress of construction. Depending on the size of the claim, the lender's decision to withhold claimed amounts might burden finite construction funds, thereby preventing payment to other trades and eventually slowing the overall progress of construction. In addition, the presence of one Stop Notice may encourage other Stop Notices, thereby increasing the burden on finite construction funds. Finally, even if a lender withholds the claimed amount, the parties might not agree to its release, and the issue might not be resolved until the conclusion of a foreclosure action.

Despite the potential drawbacks, a contractor, when faced with delinquent progress payments, must take prompt action to protect payment rights. In such cases, Washington's Stop Notice provides the contractor with an effective hammer to gain leverage when progress payments are due.

Editor's Note: The original version of this article was published in the January 2009 edition of Associated General Contractors of Washington publication, Cornerstone.

Do your homework: Require Personal Guarantees, Deposits or Bonds if Necessary.

Before entering into contracts it is important to evaluate potential clients to assure they are capable of performing their contractual obligations.

Contractors should first determine whether the party they are considering working with is financially sound. If there are any questions in this regard, it is important to obtain financial information, check references, and ask questions of both project owners and subcontractors about recent projects. Request information regarding project financing and be prepared to provide the same information to subcontractors. This injury is particularly necessary if you have not worked with the client in the past.

If clients are reluctant to provide this information, that hesitance should raise a red flag and call into question whether you really want to be working with this customer. If the answers received in regard to your financial inquiries still leave concerns, it is appropriate to request larger deposits, bonds or personal guarantees to assure that you get paid for the work. Remember the axiom that having no work is better than not getting paid for work performed.

Include Contractual Payment Terms which Protect Your Interests.

To the extent possible, general contractors should attempt to negotiate payment provisions to protect themselves in both their owner contracts and subcontracts.

An example of a key provision which contractors should always include in their owner contracts is a work suspension provision. A properly drafted work suspension provision will provide for an absolute right to stop work if a progress payment is more than specified period of time late. The provision should provide that in the event of a work stoppage due to late payment, the contractor is entitled to additional costs, demobilization and remobilization expenses, additional time to complete the contract, and in the event that the payment default is not cured that the contractor can terminate the contract and seek past due payments and lost profits on unperformed work.

In subcontracts, contractors should insist on including pay-if-paid provisions which require the general contractor to pay the subcontractor only if general contractor is paid by the project owner for the subcontractor's work. Such provisions make receipt of payment from the owner by general contractor for the subcontractor's work an absolute condition precedent to subcontractor's right to payment.

While it is always advisable to include such provisions in contracts, understanding, including and enforcing such provisions in contracts is essential to protect contractors in the present economy.

Secure your Lien Rights.

Equally important to protecting a contractor's interest is knowing the rules of lien and other contractor payment security rights, which may exist.

The most common payment security device utilized by general contractors is the private construction lien, known as a "mechanic's lien." Such liens are a statutory right that attaches to real property on private projects for the benefit of general contractors-or anybody providing labor services, materials or equipment to the project. If a party has lien rights it can foreclose the lien subject to any other senior interests in the property (e.g., a deed of trust encumbering the property before the contractor commenced work) and be paid from the project proceeds. In order to preserve lien rights contractors are required to follow strict statutory guidelines and in some instances provide pre-lien notices. Successfully protecting lien rights and securing a proper lien can be a valuable payment tool. The value of liens may be limited in the current economy where the equity in property is more and more often very limited.

Contractors should also familiarize themselves with the statutory procedures relating to "stop notice" rights. Stop notices are essentially "liens" on construction funds which exist on any private project in Washington where a payment bond has not been posted for half of the amount of the construction financing. When properly prepared and served, the stop notice lien attaches directly to the funds and requires the lender to withhold payment of the funds or be subordinated to the entity providing the stop notice who has not been paid. This can be an effective, though often underutilized, collection tool.

Bond rights may also exist to assure payment, though in most instances these bonds are provided for the benefit of subcontractors and suppliers, rather than general contractors. Who may take advantage of a private payment bond depends upon the language of the particular bond involved. At the onset of any project contractors should ask what bonds have been provided to the project and review the terms of the bond.

Contractors should familiarize themselves with all requirements of lien, stop notice and bond claims and consult an attorney early on should issues arise on a project. Most importantly, be diligent in pursuing collections when not timely paid and be careful who you do business with to assure that other parties financial difficulties do not become your own and you get paid for work performed.

Editor's Note: The original version of this article was published in the Associated General Contractors of Washington Newsletter, AGC Works.

In both decisions, the courts ordered the sureties to pay the claims (regardless of the validity of the claims) based on the sureties' failure to strictly comply with the Paragraph 6 of the Bond. General contractors should be aware of the strict notice requirements contained in their payment bonds with which they, along with their sureties, are expected to comply. The main concern for general contractors arises from the indemnification obligation to the surety that is regularly included in a surety bond. A surety's failure to comply with Paragraph 6 creates significant liability for the general contractor under the indemnification provision, as the general contractor usually agrees to indemnify the surety for any amounts that the surety pays on behalf of the general contractor.

Although there are currently no similar published decisions in Washington, it seems likely that a Washington court would reach the same conclusion as in National Union and Gibson. To avoid being a test case in Washington, general contractors should consider these issues pre-bid and carefully review the language of their payment bonds prior to contracting.

The AIA has recognized the problems created by recent court decisions such as National Union and Gibson, and has published a notice of amendment, recommending modifications to the existing A312 Payment Bond form. The recommendations are only recommendations at this point. Permanent revisions, if any, will likely be made in 2009. At this point, the recommended modifications include:

• Increasing the number of days for the surety's response from 45 days to 60 days
• Adding language stating that "failure to discharge obligations" does not act as a waiver of the surety's defenses but will allow a claimant to seek reasonable attorney's fees as a sanction for such failure.

For a more detailed analysis of these decisions, click here.

The Court of Appeals ruled that the Trusts' liens against the bond and retainage were improper. The Court of Appeals was bound by the Washington State Supreme Court's decision in I.B. E.W., Local No. 46 v. Trig Electric Construction Company, 142 Wn.2d 431, 13 P.3d 622 (2000), which held that trust funds, such as those in the Leo Finnegan case, that were created under federal law and governed by the Employee Retirement Income Security Act (ERISA), were governed by federal law that preempted the Trusts' right to recover against the payment bond and retention under Washington state law.

The case demonstrates that until the Trig Electric case is overruled by the Washington Supreme Court, lower Washington courts will hold that trust fund liens against the payment bond and retainage are invalid.

The case arose out of a project for the City of Vancouver.  The general contractor, Berschauer Phillips, subcontracted with Dynamic International, to furnish labor and materials to the project.  Dynamic then subcontracted with Campbell Crane to supply and operate cranes on the project.  Campbell's invoices charged only an hourly rate for crane services and did not differentiate between labor and equipment rental.

Campbell was not paid by Dynamic and it filed a timely notice of lien against Berschauer's bond and the City's retained percentage.  However, Campbell never provided a pre-lien notice to Berschauer.  Berschauer argued that Campbell's lien was invalid because it did not provide the pre-lien notice.  The retainage statute requires a pre-lien notice for providers of materials, supplies or equipment to a subcontractor.  The bond statute requires the pre-lien notice for providers of materials, supplies or provisions to a subcontractor.

The Court of Appeals ruled that Campbell was not required to give the pre-lien notice under both statutes even though it provided equipment as well as labor.  The Court decided that the pre-lien notice was not required for the equipment supplied because Campbell used the cranes as tools incidental to the specialized crane operation labor and its invoices did not segregate labor and equipment provided to the project. 

A complete copy of the Court's opinion can be found here.  Despite this ruling, a prudent sub-tier subcontractor that provides materials or equipment on a public project should nonetheless provide the pre-lien notice in order to ensure that its lien rights are preserved.

On November 12, 2003, Woodstream filed a lawsuit against the Van Wolvelaeres seeking damages and to foreclose Woodstream's lien.  Weathervane was not named in Woodstream's lawsuit, but, on June 2, 2004, Weathervane filed an "Application to Join as a Party Pursuant to RCW 60.04.171."  The court granted Weathervane's application on June 16, 2004.  Weathervane then did not file and serve its lawsuit to foreclose its lien against the Van Wolvelaeres' property until November 2004. 

The Van Wolvelaeres requested that the court dismiss Weathervane's lien foreclosure action because it was not served and filed within eight (8) months after Weathervane recorded its lien, as required by RCW 60.04.141.  The eight month period for Weathervane expired on June 30, 2004. 

Weathervane argued that the period was tolled indefinitely because it had filed an application to join Woodstream's lawsuit.  Weathervane relied on RCW 60.04.171 which provides as follows in pertinent part:  "The filing of [a joinder application] shall toll the running of the period of limiation estalished by RCW 60.04.141 until disposition of the application or other time set by the court." 

The Court of Appeals ruled in favor of the Van Wolvelaeres.  The Court held that RCW 60.04.171 tolled the limitation period, but only until the trial court granted Weathervane's application to join the lawsuit (which occurred on June 16, 2004).  Weathervane then had until June 30 to file its lawsuit.  Because Weathervane did not filed its lawsuit until November, the Court of Appeals dismissed Weathervane's lien foreclosure lawsuit. 

The lesson for contractors is that you must file your lien foreclosure lawsuit within eight months of recording your lien or you will risk that you will lose your lien rights.

 

The prime contractor, Pyramid Enterprises, Inc. ("Pyramid"), entered into a contract to perform the design and construction work of a C-17 hangar at the McGuire Air Force Base for the United States Army.  Pyramid purchased custom fabricated structural steel for the building's framework from Havens Design-Build ("Havens") utilizing a purchase order form.  Havens contracted with E&H Steel Corporation ("E&H") to fabricate the steel and deliver it to the site.  Under the Miller Act, Pyramid provided a project payment bond.  Havens declared bankruptcy and defaulted on its payment to E&H.  E&H sued Pyramid and its bonding company.  The issue before the court was whether Havens was a "subcontractor" or a "supplier".  If Havens was a subcontractor, then E&H was a second tier supplier and would be covered by the Miller Act bond.  On the other hand, if the court determined that Havens was a supplier, E&H was either a supplier or subcontractor to a supplier and therefore, not covered by the Miller Act bond.  The bonding company argued that Havens merely supplied commodity materials and did not perform services on the project to qualify as a subcontractor.

The U.S. Appeals Court held that Havens was indeed a subcontractor, even though the agreement between Pyramid and Havens was a "purchase order", that applying the following principles, Havens was a subcontractor:

• Substantiality to Project. A subcontractor is one who performs specific parts of the original contract and has a substantial and important relationship with the prime contractor. In this instance, since the materials that Havens supplied were a crucial part of the materials required by the original contract, the court found that Havens relationship with Pyramid was a substantial and important one.
• Relative Contribution. Since Pyramid's contract with Havens was one of the largest on the project, the court found that Havens' contribution to the project was substantial, weighing in favor of Havens being a "subcontractor".
• Supplier Role. The court rejected to find that a claimant is a "subcontractor" requires some sort of uniqueness and customization of the product. The court held that a supplier of a commodity product may still qualify as a subcontractor.
• Bond Qualification. The ability of the prime contractor whose required bond substantiates the relationship as one with a "subcontractor", it is not necessary that the prime contractor actually require a bond, as long as the prime contractor could have requested the bond of the claimant, that is enough to find a "subcontractor" relationship.

This case demonstrates the extent to which the court will go to ensure that unpaid claimants come within the protection of the public works bond.

United States of America for the use and benefit of E&H Steel Corporation v. C. Pyramid Enterprises, Inc., et al., 509 F.3d 184 (3^rd Circ. 2007)