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#21:  Lower Tier Mechanic's Liens: The Westinghouse Wrinkle

11/29/2014

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Several months ago I blogged about the Notice of Intent to Lien required of a subcontractor, whose mechanic’s lien will be capped by the amount that the owner owes (or will owe) the general contractor on the date the notice of intent is received by the owner.  The precise language of the statute, RSA 447:6, is “Such notice may be given after the labor is performed or the material is furnished, and said lien shall be valid to the extent of the amount then due or that may thereafter become due to the contractor, agent or subcontractor of the owner.”

What if you are a third-tier sub or supplier?  By whose unpaid contract balance is your lien capped on the date of receipt of your Notice of Intent?  Is your cap (1) the amount due or to become due from the owner to the GC, or (2) the amount due or to become due to the party with whom you contracted?

While one can read the statute to suggest that (2) is the answer, (1) makes more sense as a policy matter.  After all, the point of the Notice of Intent is to protect owners from having to pay twice for the same work, once to the GC and a second time to a lienor who performed the work but whom he didn’t know about when he wrote his check to the GC.  On this logic, once the owner has fully paid the GC for all work without notice of any lien claims from unpaid lower tiers, his property should be lien-free.

But consider the case of Westinghouse Electric Supply Co. v. Electromech, Inc., 119 N.H. 833 (1979).  Westinghouse sold electrical supplies on credit to an electrical subcontractor, Electromech, who worked for two separate GCs on two separate projects.  When Electromech went bankrupt before paying for the materials, Westinghouse gave notice of intent to lien the two projects.  In each case the owners had not yet fully paid their GCs on the day the notices arrived, withholding sums more than sufficient to cover what Westinghouse was owed.  However, the GCs each had backcharges against Electromech such that Electromech wasn’t owed as much as it, in turn, owed Westinghouse.  The Court limited Westinghouse’s lien, saying: “We hold that a correct interpretation of RSA 447:6 limits the lien of the materialman to amounts due or that may thereafter become due to the subcontractor with whom the materialman contracted. Accordingly, Westinghouse can only recover the amount the owner owes the subcontractor, Electromech.”  Id. at 837.

(This may have been loose language.  An owner has no contract with the GC’s subs, so without some equitable remedy -- or perhaps an interpretation of RSA 447:8 -- “the amount the owner owes the subcontractor” is always zero.  Indeed, the Court in Westinghouse rejected the plaintiff’s argument that “once the owner's indebtedness to the principal contractor is established, the materialman's claim to the proceeds in the owner's hands becomes direct and completely independent of the rights of the contractor or other subcontractors.”  Id. at 836.)  

The Court’s decision that “RSA 447:6 limits the lien of the materialman to amounts due or that may thereafter become due to the subcontractor with whom the materialman contracted" leaves an important question unanswered: is the lien also limited by what the owner owes the GC?  If not, an owner who has fully paid for the project prior to getting a Notice of Intent can still suffer a lien from a third tier sub or supplier whenever the second tier who owes him money is itself owed money by the GC.  Perhaps both (1) and (2) are caps!  That would be consistent with Westinghouse’s purpose “to protect the owner from unknown liability to the subcontractor or materialman and from liability for payments in excess of the amounts owed to the general contractor.”  But the Court never had to reach this two-cap issue, since there was still money owed from owner to GC.  Until our Supreme Court gets a case that presents the question squarely, it is safest to assume that lower tier subs and suppliers who delay sending a Notice of Intent to Lien will have two hurdles to clear.


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#20:  Appeals From Arbitration Awards

11/10/2014

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Last month I blogged on the pros and cons of arbitration vs. litigation of construction disputes, and mentioned that appeals of an arbitrator’s award are somewhat limited, promising some follow up.

Under RSA 542:8, arbitration awards can be corrected or modified for "plain mistake" either of fact or of law.  Correction or modification for misapplying the law is available if the mistake was one which was "apparent on the face if the records and which would have been corrected had it been called to the arbitrator's attention."  Merrill Lynch Futures, Inc. v. Sands, 134 N.H. 507, 509 (1999).  That's a bit more deferential than review of a trial court's errors of law.

Appellate review of an arbitrator’s mistakes of fact is somewhat more limited as well.  When a trial court or jury finds facts based on the evidence presented, the Supreme Court defers to those findings and will not “retry” the case as long as there is some evidence apparent on the record to support the trial judge’s findings.  Review of an arbitrator’s findings of fact is similarly limited; the courts will “defer to the arbitrators' decision if the record reveals evidence supporting it,” Merrill Lynch Futures, Inc. v. Sands, 143 N.H. 507, 509 (1999).  But there is an extra layer of deference to arbitrators’ findings not accorded to a judge or jury.  The Supreme Court “will set aside a jury verdict if it is conclusively against the weight of the evidence . . . Conclusively against the weight of the evidence should be interpreted to mean that the verdict was one no reasonable jury could return.”  Quinn Bros. v. Whitehouse, 144 N.H. 186, 190 (1999).  Not so an arbitration award; a court will not “set aside the decision merely because it believes the arbitrator’s award is against the weight of the evidence,” Masse v. Commercial Union Ins. Co., 136 N.H. 628, 632 (1993).

Because "arbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit," Appeal of Merrimack County Bd. of Commissioners, 142 N.H. 768, 771 (1998), reversal on appeal is also possible if the arbitrator exceeded his or her authority by deciding a matter not within the scope of the arbitration agreement.  “A judicial challenge to arbitral authority requires the reviewing court to consider both the contract and the arbitral submission,” Lebanon Hangar Associates, Ltd. v. City of Lebanon, 163 N.H. 670, 673 (2012).  “Moreover, an arbitrator's view of the scope of the issue is entitled to the same deference normally accorded to the arbitrator's interpretation of the contract.”  Id.  While some arbitration clauses are broader than others, “In the absence of clearly restrictive language, great latitude must be allowed in the framing of an award and fashioning of an appropriate remedy,” John A. Cookson Co. v. New Hampshire Ball Bearings, Inc., 147 N.H. 352, 361 (2001).   Courts have taken this to heart.  The boilerplate arbitration provision in the AIA General Conditions form A201 (1997 version), referencing arbitration of “[a]ny claim arising out of or related to the Contract,” has been almost universally held to require the contracting parties to arbitrate everything under the sun – including the question of whether a demand for arbitration was timely filed (the most common area of attack on an award for allegedly exceeding the arbitrator’s powers).

The final basis for attacking an arbitration award is for fraud, corruption, or misconduct of the arbitrator.  Since arbitrators are an honest lot, and are typically picked by the parties after they disclose any interest or familiarity they may have with the case or the parties, it will be a rare day when this comes into play.  Suffice it to say that the New Hampshire Supreme Court has never once overturned or affirmed the overturning of an arbitration award on this basis.

If you’re getting the idea that an arbitration award is close to appeal-proof and overwhelmingly likely to be affirmed, you’re getting the right idea!


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#19:  Bankruptcy Preferences: When the Trustee Comes Knocking

11/2/2014

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A contractor, subcontractor or supplier who properly performs its agreed contract and gets paid for its labor or materials expects to keep its hard-earned money.  Imagine having to give it back!  If the payer files for bankruptcy protection within ninety days of making the payment, that is exactly what can happen.                                                             

One of the policies of the Bankruptcy Code is to foster equality of distribution among creditors of the debtor.  Any creditor that received a greater payment than other similarly situated creditors is required to disgorge so that all may share equally.  Section 547(b) of the Bankruptcy Code gives the bankruptcy trustee power to “avoid” or demand back any payment (1) to or for the benefit of a creditor; (2) for or on account of an antecedent debt owed by the debtor before such transfer was made; (3) made while the debtor was insolvent; (4) made within 90 days before the date of the filing of the petition; and (5) which would enable the creditor to fare better than it would fare in a Chapter 7 liquidation.  The debtor is presumed to be insolvent during the 90 days prior to the filing (meaning, the payee has the burden of proving otherwise).  If these conditions are met, the payment is deemed “preferential” and subject to disgorgement, leaving the payee in the position of an unsecured creditor who will be lucky to get pennies on the dollar.

There are some exceptions to this avoidance power, chief among them the “contemporaneous exchange for new value” exception―but if the payee had to wait for its money beyond the normal payment turnaround time (and chances are that anyone filing bankruptcy hasn’t been paying his debts on time!) this exception likely won’t apply.  The common practice of creditors applying payments to the oldest open invoice can also deep-six the "new value" exception.  Bogdanov v. Avnet, Inc., No. 10-cv-543-SM, 2011 WL 4625698, at *10 (D.N.H. Sept. 30, 2011).

Worse, it’s almost certain that any mechanic’s lien rights will have expired by the time notice of the bankruptcy is received, leaving the creditor without an alternative way to get paid.  The argument sometimes raised by creditors that giving up their lien rights in exchange for payment counts as “contemporaneous exchange for new value” has fared ill in the courts.  Even if a lien was actually filed and then released in exchange for payment, most courts refuse to apply the exception, particularly where the debtor is not also the land owner and thus any “new value” in the form of a lien discharge was not given to the debtor.  The outcome is different, however, if at the time of the lien discharge the owner still owed money to a now-bankrupt general contractor and could have set it off against any lien.  In that case, “the subcontractor’s release of lien rights against the owner causes ‘a coincident release of the owner's [secured] claims against debtor, thereby creating new value to the debtor.’”  In re Charwill Const., Inc., 391 B.R. 7, 12 (Bkrtcy. D.N.H. 2007).

When the debtor happens to be the land owner, however, a filed lien released in exchange for payment might protect the payment from preference attack on a different basis: if the lien would have resulted in full payment to the creditor in a Chapter 7 liquidation (because secured creditors get first dibs), there is no preference.  That approach won’t work when the debtor is the general contractor or a lower tier contractor, since any mechanic’s lien wouldn’t be on the debtor’s property.

Unlike some states, New Hampshire law does not automatically provide that payments received by general contractors or subcontractors are “trust funds” for the payment of lower tiers (although RSA 447:8 may impose a trust on money an owner owes to a general contractor if the proper notices are given).  If such payments were trust funds in the hands of the debtor, they would not be considered the debtor’s property, and a preference attack would falter (assuming the payments have been segregated and can be traced).  Some general contracts and subcontracts have language which imposes such a trust on payments – so if you are a sub or lower tier, before you swallow hard and write the bankruptcy trustee a check, make sure to check the language of the contract governing the tier above you.
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    Frank Spinella

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