Proof and Defenses
Introduction:
The ability of a construction claimant to place a lien on property and eventually sell the property in a court process if a claim remains unpaid is a unique and powerful tool. In almost all other cases, the claimant must go to court to prove the likelihood of success before having the power to file a lien which effects title.
But in construction, and only in construction, the claimant can cloud title with a lien by simply recording a mechanics lien and as long as certain timelines are maintained and legal action to foreclose on the lien is brought within a certain period of time, the lien is valid. A lien can utterly disrupt a project and almost all construction contracts require the contractor and subcontractors to keep the property free of liens. After all, the owner does not want title clouded since it alienates the lender and makes transfer impossible.
There are safeguards built in to protect against invalid liens. The claimant has to prove its case by a preponderance of the evidence and the owner of the property can post a bond to eliminate the lien, the bond acting as security for the claim instead of a lien on title, but such bonds are expensive and it may take years in court before the lien is removed.
Another protection for an owner of property is that the lien claimant must have a direct contract (“privity”) with the owner or must post a “twenty-day preliminary notice” to the owner. The notice tells the owner that a person who is not in contract with the owner may file a lien since another person on the contract, usually the contractor or subcontractor, is purchasing materials or labor that will be needed for the project. The twenty-day notice must be timely and filed correctly, and an owner who receives it at least knows who may be filing a claim later.
Another protection is that a material lien claimant (one whose claim is based on materials or supplies sold for the project) must prove that the materials were not only bought for the project, but actually used in the project. The rationale is simple: the lien attaches because the owner received the value of the labor or materials used in the job. If not used in the job, it would be inequitable for the owner to have to pay for the service or material.
Thus, the claimant whose claim is based on materials put into the project or used up in the project (the “materialman”) is required to prove the actual use of the materials, termed “incorporation” of the materials, showing that the material is either in the project or was used up in completing the project. And the burden is on the materialman to prove incorporation of materials.
This article shall discuss the concept of incorporation; how to prove it and how to defend against it.
The Concept of Incorporation:
Unlike the contractor or most subcontractors who are on the job site and/or under contract with the owner, a materialman is usually selling materials to the contractor or subcontractor and may never even see the project or the owner. The materialman is allowed a lien since, as the Supreme Court of California so ruled when our firm argued the matter before it, the usual small contractor seldom has credit or resources available to finance the often massive amounts of materials needed for the larger project (Connolly Development, Inc. v. Superior Court of Merced County, 17 Cal.3d 803 [132 Cal.Rptr. 477]). The Court ruled that in order to allow the smaller contractors to stay in business, the materialman should get a lien so that the sales on credit to the sub or contractor are secured. The idea was that it was the only way to keep smaller business people in construction in business. In effect, the owner was securing the purchase for the contractor or sub by placing his or her own property on the line.
The materialman is required to give the twenty-day preliminary notice to put the owner on notice that materials are being sold for the job for use in the job. This allows the owner to take various precautions to ensure that the materials are actually used in the job.
The equitable underpinning of the materialman’s lien is that the owner is benefiting from the materials that were sold, but to make that valid, the materialman must prove they were used in the project. That is often difficult.
1. Most materialmen simply have an account set up for the contractor and sell it to him or her. They do not necessarily deliver to the job site. (Even if they do deliver to the site, there are still proof problems as discussed below.) That means that while they have the business records to show the sale, those records do not prove the goods went into the job.
2. Often contractors mix and match materials from their own warehouse, but the materialman has to prove the actual goods sold were placed in the project. Thus, if thirty fixtures went into the project but the fixtures sold were placed on a shelf with two hundred others and shipped the next month, how does one prove certain fixtures were actually incorporated?
3. Change orders can alter the amount of materials installed and the thirty sold may no longer be needed, only, say five, in which case the materialman can never prove thirty went into the project.
4. Some subcontractors over purchase on the job which could be liened since the materialman will give credit for the order, but actually use some or all of the materials on other projects not subject to a mechanics lien. Often this is done over and over on a particular job: our office once encountered a subcontractor who had purchased four times the amount needed for the job and when he went bankrupt, our materialman client found to his dismay his lien covered only a fraction of what was due.
5. At times the material is deeply placed into the project, such as in a foundation, and two or more materialmen both claim their particular materials went into the job. Since the material cannot be identified, and since the subcontractor may have disappeared, both materialmen have an impossible burden of proof.
6. At times material was incorporated poorly and had to be removed and replaced. Thus, the materialman may have once had material in the project, but they were removed. No lien.
7. Materials stored at the project may be stolen and never incorporated and replaced. The materialman faces the task of determining and proving what materials actually went in.
There are numerous other issues that could arise on a project as to failure to incorporate; these are simply common examples.
Proving Incorporation:
Simply showing invoices with the project name on it will not suffice. Either through direct or indirect evidence, one must prove that the materials were incorporated. Often, courts will grant a presumption that the materials delivered to a job site were incorporated, but a presumption can be rebutted by the owner showing that after delivery, they were not incorporated.
The most direct evidence is the subcontractor testifying truthfully that the materials were actually used in the job site. Some subcontractors feel an obligation to assist the materialman who was a key supplier in the past. But be careful here, if the owner finds that the materials claimed to be used actually exceeded the amount needed for the job or were the wrong type of product, the subcontractor’s testimony will collapse. Further, if another sub put in identical materials, then the burden shifts back and the claimant must prove why the materials incorporated were his or hers. We once had a case in which the architect testified that there was no need for most of the materials that the subcontractor claimed to have installed. The judge commented that the missing materials must have been incorporated into an unknown job.
If the subcontractor has disappeared, another method is to get the plans and request for bid, compute the number of materials required, and if the job is done and no other materialmen are making a claim, that is good indirect evidence of incorporation. As a judge commented, the materials didn’t suddenly come from heaven and if the owner can not show where else they derived, the lien will stand.
Safeguards for the Supplier:
A wise supplier will take some safeguards before shipping materials:
1. Do not ship to the subcontractor or have a pick up. Ship to the job site and get a signed delivery receipt.
2. Ask to see the plans and bid so you can determine if the materials ordered are appropriate.
3. Ask the owner if any other materialman has filed a twenty-day notice. If so, contact the other materialman and ensure there is no overlap in materials.
4. If anything is returned, make sure the replacement is within the plan and specs and that the amount of the lien is not surpassed by the new materials.
5. Visit the jobsite and determine if the materials are being installed. If not, find out why and if necessary, reclaim them.
6. Talk to the general contractor if you are selling to the sub, or the owner if you are selling to the contractor, and confirm progress of the project and use of your materials.
7. Do not sign any joint check presented to you by the sub unless the payment will pay your bill in full. The full amount of the joint check may reduce your lien rights even if you do not get the entire amount of the check.
8. Keep a close timeline on when the job is completed and when your materials should be installed. Do not wait for a Notice of Completion. Be proactive in protecting your lien rights.
9. Learn the deadlines for filing a lien and for commencing legal action to enforce your lien. The time limits are strictly enforced.
10. Do not agree with the sub or owner not to record your lien if the sum due you is overdue or there is any question as to whether you will get paid. The lien rights require recordation of the lien, or it is extinguished, so unless someone has cash to pay out your account, move and move fast if unpaid.
11. Most salespeople do not want you to alienate customers by recording a lien or even sending out twenty-day notices. They want you to allow them to make the sale. Keep in mind that the subcontractor is usually buying far more from you than he or she can afford, hence the lien rights. It is the lien and only the lien that protects you and if you do not file the requisite notices at the right time, those rights are extinguished.
Conclusion:
Sales are only part of the business. Getting paid for the sales is equally or more important and in construction, you often are selling to professionals in the business who do not have sufficient resources to pay for the materials. You have mechanic liens, stop notices and other remedies precisely to allow you to sell with security. Ignore that safeguard at your peril.
Keep in mind that using guaranties from the contractor (personal) and asking for bonds are alternative methods, but a contractor who cannot afford the materials in the first place is not giving you a great deal by a personal guaranty. That’s better than nothing but not real security. You can always try selling to the general or the owner, but the subcontractor will protest since they will want to mark up the materials, and the general and owner may have problems of their own.
You have the tool. You have to prove incorporation. Make planning that proof a part of every sale.