NH Construction Law
  • Home
  • Blog
  • Links

#121:  Owners' Duties to Withhold Money for Subcontractors

1/18/2023

2 Comments

 
In New Hampshire, an owner generally owes no duty to subcontractors to see that they get paid.  A few years back I blogged (#19) that RSA 447:8 might be an exception to this general rule, imposing a trust in favor of subcontractors on money that an owner owes to a general contractor if the proper notices are given by the subcontractors.  And this month, a court has finally agreed.
 
The case is In re The Prospect-Woodward Home, 2023 BNH 001, 2023 WL 124859 (Jan. 6, 2023), decided by New Hampshire’s bankruptcy court.  A Chapter 11 proceeding was commenced by a continuing care retirement facility in Keene whose real estate was subject to a construction mortgage and several mechanic’s liens.  The Debtor’s real estate was ultimately sold, and the respective interests of the construction mortgagee and of the construction manager and its subcontractors holding mechanic’s liens attached to the $33 million sales proceeds.  Because the total amount of the parties’ claims exceeded $33 million, the court was called upon to decide which of these interests had priority. 
 
The court began by analyzing New Hampshire’s “race-notice” rule of priority, under which the first to record its interest at the registry of deeds is first in line unless it had notice of another’s unrecorded prior interest.  Although the construction mortgage was recorded first, the mortgagee was aware at the time of that recording that MacMillin, the construction manager, had already commenced work, giving it an inchoate lien on the facility from the time its work commenced. Accordingly, MacMillin’s later-recorded lien was held to have priority over the mortgage.
 
Unlike MacMillin’s work, however, the subcontractors’ work did not commence until after the mortgage was recorded, so they were not race-notice winners.  The subs argued that RSA 447:8’s directive that owners “retain a sufficient sum of money to pay” subcontractor claims before paying a general contractor meant that they should share in MacMillin’s victory anyway.  The court agreed:
 
“The Subcontractors argue that because they have given notice of their lien claims to the Debtor
as required by RSA 447:5 (which apparently no one disputes), the Debtor is in essence a trustee
for the benefit of the unpaid subcontractors.  The Court agrees that RSA 447:8 will dictate how money the Debtor owes to MacMillin must be handled if MacMillin succeeds on its race-notice
claim.  Pursuant to this statute, the Debtor will be required to pay the Subcontractors, from the
net sale proceeds, the amounts owed on account of their own mechanics’ liens, as finally
determined by the Court.”
 
Given this ruling, the court found it unnecessary to rule on the subcontractors’ alternative argument that RSA 447:12-a nevertheless afforded priority to their later-recorded liens (see Blog #44): “Because the Court has determined that MacMillin’s mechanic’s lien is entitled to priority under the race-notice doctrine, and the Subcontractors will share in MacMillin’s race-notice victory, the Court need not determine whether the Subcontractors’ mechanics’ lien attachments also have priority based on the application of RSA 447:12-a.”
 
The takeaway here is that RSA 447:8 is a type of “trust fund” statute.  Several states have enacted statutes that make the general contractor receiving payment a trustee for the benefit of its subcontractors.  (Maryland is an example, Md. Code Ann. Real Property § 9-201(b)(1).)  By contrast, RSA 447:8 declares that any money due from owner to contractor is held by the owner for the benefit of subcontractors who have given the owner timely notice of their intent to claim a lien and the amount thereof.  Once those notices have been given, protection of the owner from threatened liens and protection of subcontractors from nonpayment by the general contractor trumps any contractual right of the general contractor to be paid those amounts (unless and until it pays the subcontractors what they are owed). 
 
[Update:  Affirming in all other respects, the District Court remanded for consideration of whether subcontractors giving notice under RSA 447:6 should likewise be within the trust provisions of 447:8 -- a matter not expressly mentioned by the Bankruptcy Court.  See 654 B.R. 824 (D.N.H. 2023).  The case subsequently was settled.]

2 Comments
Construction Companies link
6/20/2023 03:20:31 am

In many jurisdictions, construction laws require owners to retain a certain percentage of the contract amount as a form of security, known as a "retainage," to ensure that subcontractors are paid for their work. The retained funds are typically released to subcontractors upon satisfactory completion of their work or after a specified period of time.

Additionally, contractual agreements between owners and contractors may include provisions regarding the withholding of funds for subcontractors. These agreements may stipulate specific conditions under which owners can withhold payment, such as for incomplete or defective work, disputes, or non-compliance with contractual obligations.

It's important for owners to understand and comply with applicable laws and contractual obligations to ensure fair and timely payment to subcontractors while also protecting their own interests. Consulting with legal and construction professionals can provide specific guidance based on the relevant jurisdiction and contractual arrangements.

Reply
Commercial Site Concrete link
8/28/2024 06:32:09 am

You discussed this topic pretty well!

Reply



Leave a Reply.

    Author

    Frank Spinella

    Archives

    May 2025
    April 2025
    March 2025
    January 2025
    December 2024
    November 2024
    October 2024
    September 2024
    August 2024
    July 2024
    June 2024
    April 2024
    March 2024
    February 2024
    December 2023
    November 2023
    October 2023
    September 2023
    August 2023
    July 2023
    June 2023
    May 2023
    April 2023
    March 2023
    February 2023
    January 2023
    December 2022
    November 2022
    October 2022
    September 2022
    August 2022
    July 2022
    June 2022
    May 2022
    April 2022
    March 2022
    February 2022
    January 2022
    December 2021
    November 2021
    October 2021
    September 2021
    August 2021
    July 2021
    June 2021
    May 2021
    April 2021
    March 2021
    February 2021
    January 2021
    December 2020
    November 2020
    October 2020
    September 2020
    August 2020
    July 2020
    June 2020
    May 2020
    April 2020
    March 2020
    February 2020
    January 2020
    December 2019
    November 2019
    October 2019
    September 2019
    August 2019
    July 2019
    June 2019
    May 2019
    April 2019
    March 2019
    January 2019
    November 2018
    October 2018
    September 2018
    August 2018
    July 2018
    June 2018
    May 2018
    April 2018
    March 2018
    February 2018
    December 2017
    November 2017
    October 2017
    September 2017
    August 2017
    July 2017
    June 2017
    April 2017
    March 2017
    February 2017
    January 2017
    December 2016
    November 2016
    October 2016
    September 2016
    August 2016
    July 2016
    June 2016
    May 2016
    April 2016
    March 2016
    February 2016
    January 2016
    December 2015
    November 2015
    October 2015
    September 2015
    August 2015
    July 2015
    May 2015
    April 2015
    March 2015
    February 2015
    January 2015
    December 2014
    November 2014
    October 2014
    September 2014
    August 2014
    July 2014
    June 2014
    May 2014

    Categories

    All

    RSS Feed

Proudly powered by Weebly