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)

The first issue before the Division I Court of Appeals was whether the trial court erred in not awarding ARM all of its attorneys' fees and costs. The court held that while the award of attorney fees is not discretionary under the bond and retainage statutes, the amount of any such award is discretionary. The Court of Appeals affirmed the trial courts award of $135,000 in fees to ARM (the total amount at issue in the trial was $140,955).

The second issue was whether the award of attorney fees against Travelers was appropriate. Travelers argued that it did not have a sufficiently adverse interest in the matter to justify an award of fees under the bond and retainage statutes. The Court of Appeals held that there was a sufficient adverse relationship where Traveler's answered the complaint by denying the allegations in the complaint and sought dismissal of the complaint. The Court also contrasted Lakeside Pump & Equipment, Inc. v. Austin Constr. Co., 89 Wn.2d 839, 576 P.2d 392 (1978), where the Supreme Court had previously held that a surety was not liable for attorney fees where it merely filed a notice of appearance but did not answer and deny the allegations in the complaint.

The Court of Appeals disagreed and held that because McDonalds placed Keystone in charge of constructing its restaurant, Keystone was McDonalds' construction agent. McDonalds also argued that the extra work was not lienable because because it was not within the "contract price" as defined in RCW 60.04.011(2). The statue defines contract price as "the amount agreed upon by the contracting parties, or if no amount is agreed upon, then the customary and reasonable charge therefor." McDonalds argued the extra work sought by Henifin was not a part of the agreed upon price. The Court of Appeals held that the extra work was lienable because Keystone, McDonalds' construction agent, authorized the change orders.

In December 2004, Athletic utilized the services of Lien Data USA, Inc. to file a $276,825 lien against the property. The attestation clause required by RCW 60.04.091 was signed by Rebecca Southern, an employee of Lien Data, as agent for Athletic Field. Williams filed suit under the frivolous lien statute (RCW 60.04.081) claiming the lien was invalid because neither Athletic, nor its attorney, signed the attestation clause and that Athletic was fully, if not overpaid, for the work it performed. Athletic argued in response that any authorized agent may sign the clause and that issues involving the amount due could not be resolved in a frivolous lien proceeding because they involved resolution of disputed factual matters. After a hearing, a Superior Court commissioner ordered the release of Athletic's lien and awarded attorneys' fees to the Williamses. Athletic appealed.

The Court of Appeals reversed holding that RCW 60.04.091(2) provides that the attestation clause may be signed by "the claimant or some person authorized to act on his behalf." The appeals court rejected the property owner's argument that Lien Data's lack of first-hand knowledge of the facts underlying the lien claim prohibited Lien Data from acting as Athletic's agent. The court further stated that because the issue raised was one of first impression and therefore debatable, the lien should not have been dismissed as frivolous under any circumstances. The Court of Appeals ultimately reversed the lower court by awarding attorneys' fees for both the frivolous lien proceeding and the appeal to Athletic. This case is noteworthy in its affirmation of a commonly-utilized lien filing practice and in its reiteration of the narrow circumstances in which a frivolous lien challenge will be upheld.

The holding is significant because if the required pre-claim notices are not provided, a sub-tier subcontractor will be precluded from recovering any money under the bond and retainage statutes for the materials portion of their claim. The Supreme Court's ruling reversed a previous Court of Appeals decision, which was generally cited for the proposition that sub-tier subcontractors providing a blend of labor and materials on public construction projects were not suppliers, and thus were exempt from the pre-claim notice requirements. Because subcontractors performing improvements on public projects do not have lien rights against public property, RCW 39.08.030 allows subcontractors of any tier to assert a claim against the general contractor's payment bond to recover any unpaid sums.

Similarly, RCW 60.28.010 provides subcontractors of any tier with a remedy against the statutorily prescribed retainage held by the public owner. Obviously, without lien rights, the bond and retainage statutes provide a secure basis for recovery in the event of non-payment by a general contractor or subcontractor with whom the claimant has contracted. Providing the required pre-claim notice is critical for maintaining a claim for materials supplied under both statutes. RCW 39.08.065 and RCW 60.28.015 require that a sub-tier subcontractor (i.e., subcontractor contracting with a subcontractor) who has provided materials on a public construction project to provide pre-claim notice to the general contractor prior to filing a claim against the bond or retainage. First tier subcontractors are expressly exempt from the notice requirement.

The question before the Supreme Court was whether a sub-tier subcontractor who had provided both materials and labor was a supplier, and thus required to provide the pre-claim notice. The Washington State Court of Appeals had held that a sub-tier subcontractor, who had provided both labor and materials, was not required to give the pre-claim notice to the general contractor. The Supreme Court reversed the Court of Appeals by strictly construing the notice requirements of the bond and retainage statutes, and holding that if both labor and materials are provided, the pre-claim notice must be provided for the materials portion of the claim.