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Tuesday
Aug302011

Mechanic's Lien Law "Cram Down" Provision Enforced Again

On August 29, 2011, the Massachusetts Appeals Court issued a decision enforcing the "cram down" provision of the Mechanic's Lien Law, M.G.L. c. 254, section 4.  The case is Maverick Constr. Mgmt. Svcs., Inc. v. Fidelity & Deposit of Maryland, Inc., No. 10-P-998.  The "cram down" provision states that a subcontractor's lien is limited to the "amount due or to become due" the general contractor from the owner as the time the subcontractor's Notice of Contract is recorded.

The leading case on this issue is BloomSouth Flooring Corp. v. Boys' & Girls' Club of Taunton, Inc., 440 Mass. 618 (2003), issued by the Supreme Judicial Court.  In BloomSouth, the general contractor abandoned the project, and the subcontractors recorded their liens after the abandonment.  The SJC ruled that, once the general contractor abandoned the project, there was nothing due or to become due the general contractor and, as a result, the subcontractors' liens were valued at zero because they were recorded after the abandonment.

Maverick presented different facts.  In this case, the general contractor did not abandon the project.  Rather, the owner alleged that the general contractor's work was significantly deficient and withheld final payment.  The owner never formally terminated the general contractor, but did engage others to correct the deficient work.  The subcontractor recorded its Notice of Contract after the issues of defective work were raised by the owner with the general contractor.  The owner then recorded and served a lien bond to remove the lien from record

The dispute took two different paths.  Maverick sued the lien bond surety on its mechanic's lien.  The owner initiated arbitration against the general contractor.  The arbitration panel determined that the general contractor breached the contract and awarded damages to the owner.  The owner confirmed the arbitration award in court.  After that, the lien bond surety moved for summary judgment in Maverick's action to enforce the mechanic's lien, arguing that, pursuant to the Lien Law and the arbitration award, there was nothing due or to become due Maverick as of the date its Notice of Contract was recorded.  The Superior Court agreed and allowed the surety's motion.

On appeal, the Appeals Court affirmed the Superior Court's decision.  There are a few key issues in this decision.  First, the arbitration award was deemed to be final and conclusive as to the merits of the underlying matter between the owner and the general contractor.  Second, the fact that the general contractor did not abandon the project or the fact that the owner did not formally terminate the general contractor did not affect the analysis.  Third, even though the arbitration award did not specify the date of breach, the Court determined that the breach occurred prior to Maverick's recording of the Notice of Contract.  Since the general contractor breached the contract prior to Maverick's recording of the Notice of Contract, the Appeals Court affirmed the Superior Court's decision that there was no money due or to become due the general contractor at the time the Notice of Contract was recorded.

There are also practical considerations highlighted by this decision.  First, it was important that the arbitration concluded  before Maverick's mechanic's lien enforcement action concluded.  Depending upon whether you are an owner, general contractor, or subcontractor, the choice of forum (court or arbiration) can greatly impact the case.  Second, parties should consider joining in litigations or arbitrations (to the extent possible) so that all issues are resolved in one proceeding.  The viability of Maverick's mechanic's lien claim was unquestionably impacted by a private arbitration to which it was not a party.  

Thursday
Aug252011

Massachusetts Bid Protest Decisions Now On-Line

The Massachusetts Attorney General's Office is now publishing bid protest decisions on-line.  Here is the link -- http://www.bpd.ago.state.ma.us/

Saturday
Aug202011

Massachusetts Prompt Pay Act

On August 10, 2010, Governor Patrick signed into law M.G.L. c. 149 section 29E, called the Massachusetts Prompt Pay Act. This Act significantly changes payment terms on private construction contracts and sets forth requirements to enforce the soon to be limited effect of pay-if-paid clauses. Here are the highlights:

  • Effective Date: prime contracts executed on or after November 7, 2010 and the resulting subcontracts. Current projects are not subject to the Act

  • Applicable Projects: private projects of at least $3,000,000 in prime contract value. Residential projects of 1-4 units are not subject to the Act

  • Pay Application Processing: (a) periodic pay requests submitted no more than 30 days; (b) approval or rejection within 15 days; if no rejection within that time period, then deemed approved, unless rejected before the date payment is due; (c) an additional 7 days for approval or rejection for each lower tier; if no rejection within that time period, then deemed approved, unless rejected before the date payment is due; (d) payment must be made within 45 days after approval; (e) if no payment within 45 days, application deemed approved; (e) any rejection has to be in writing with an explanation of the reasons for the rejection and include a certification that the rejection was made in good faith.
    • Any rejection of a pay application shall be subject to the contract dispute resolution procedures. Any contract provision that requires a party to delay the dispute resolution procedures for more than 60 days after rejection of the pay application is void.
  • Change Order Processing: (a) approval or rejection of CO within 30 days of the later of submission of the request or commencement of the work; (b) 30 day period extended 7 days for each lower tier; (c) failure to respond is deemed approval; (d) rejection must be in writing stating the reasons and with the same certification as set forth above.

  • Pay-if-Paid Clauses: Pay-if-paid clauses as of the effective date of the Act are void and unenforceable, unless: (a) money not paid due to nonperformance of the person seeking payment, but the person seeking payment must have received written notice thereof and an opportunity to cure (14 days); or (b) the payor is insolvent or becomes insolvent within 90 days after pay request made, AND the party seeking to enforce the pay-if-paid clause (i) has filed a notice of contract prior to that person’s submission of its first requisition and (ii) is pursuing “all reasonable legal remedies” to recover payment.
    • The Act also requires that the exceptions to the soon to be voided pay-if-paid clauses must be expressly stated in the contract. Contracts executed 11/7/10 forward must be modified. Due to the language used in the Act, presumably, a “catch all” phrase such as “to the fullest extent permitted by law” may not suffice.

    • The Act places the burden of proof on the modified pay-if-paid clauses upon the party asserting same.

    • An aggrieved party seeking payment may now also seek a summary hearing pursuant to M.G.L. c. 254, sec. 15A, as long as that party has first made a request in writing to the asserting party which requires that party to identify the legal remedies it has or is pursuing. If no response is received identifying the legal remedies pursued within 10 days, then the aggrieved party may seek action under 15A. Additionally, if a response is received within 10 days, the aggrieved party can still seek redress under 15A if the aggrieved party requests that the asserting party pursue additional legal remedies and the asserting party refuses
  • Contract provisions that require a party to continue work when payment is overdue by 30 days will be void and unenforceable, but subject to disputes regarding quality of work or notices of default.

Without question, the Act will change how contractors, owner, and subcontractors approach contract negotiation, the payment process, and change order process. For general contractors, it is not only important to understand the new rules applicable to the various contracts executed for any given contract, but it is also important to strictly follow the Act’s requirements in order to assert the now limited pay-if-paid provisions – Notices of Contract must be recorded immediately upon contract execution and in no event later than the submission of the first application for payment.

If you have any questions, please do not hesitate to contact Jack DiNicola at (617) 279-2593 or Jack.DiNicola@dsu-law.com.

 

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