paonessa: the mechanic’s lien — are you protected?

8/10/2019 Paonessa: The Mechanics Lien Are You Protected?

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The Mechanics Lien Are YouProtected?

GREGORY PAONESSA

ABSTRACT

From time immemorial, property owners have been hiring others tomake improvements to their land. Since this practice began, these workersneeded to ensure that they would be able to collect the funds expended onthe others land. The mechanics lien has long provided workers andsuppliers of a piece of property the ability to gain a security interest in thatproperty should the owner or general contractor not come forth withpayment. The United States has used mechanic s liens on private projects

since its founding; however, based on sovereign immunity, such liens areunavailable on federal projects and property. It is due to this sovereignimmunity that the United States government instituted the Miller Act, abonding program that ensures payment down the chain of contractingparties.

Mechanics lien statutes have gone through numerous changes sincetheir inception. Two main types of mechanic s lien systems exist, withthe derivative-type system being most prevalent as it benefits the owner bypassing the risk of payment onto the subcontractor or materialman.Instituting a system that blends bonding, like the Miller Act system, andproviding general contractors, subcontractors, and materialmen, with adirect lien right against the owners property will alleviate a vast amount

of the current systems risk. It is only once a blended system is institutedthat all parties involved in a private construction project will be adequatelyprotectedresulting in a more prosperous development sector, nationaleconomy, and just contracting system.

Juris Doctor, cum laude, New England Law | Boston (2014). B.S., Business Administration,

University of Vermont (2007). I would like to thank the Law Reviewstaff for their assistance in

making this article what it is today. A very special thanks is owed to my family and friends

for their love, support, and guidancewithout you I would be lost.


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INTRODUCTION

any Americans hope that one day they will be able to build their

dream home.1

A property owner, Cornelius, hired a generalcontractor, Harrys Humungous Homes (Harrys), to build hisdream home. To facilitate this, Harrys hired subcontractors, including aplumbing company, Palumbos Plumbing Services (Palumbos).2 As inmany construction contracts, Cornelius and Harrys contract stated thatprogress payments would be released monthly, based on the amount ofwork performed during the preceding month.3 Such an agreement iscaptured in a monthly payment requisition.4As a result, Harry, Palumbo,and the other subcontractors, will work on credit.5Credit allows work to beperformed prior to payment.6This situation leaves the subcontractorslikePalumbosin a precarious position because they must outlay large sumsof cash in order to supply labor and materials.7 As such, these

1 Press Release, Chase, Owning A Home Is Still the American Dream (Mar. 15, 2013),

available athttp://www.businesswire.com/news/home/20130315005661/en/Owning-Home-

American-Dream (Owning a home is at the heart of most Americans dreams.).2 Corneliuss, Harrys, and Palumbos story is anecdotal; they are fictitious characters

whose story is based on real cases that will be used throughout as a basic illustration of the

constant struggle between property owners, contractors, and subcontractors in the world of

construction. See, e.g., Superior Mech. Plumbing & Heating, Inc. v. Ins. Co. of the W., 965

N.E.2d 890, 89192 (Mass. App. Ct. 2012) (showing how it is customary for general contractors

to hire subcontractors to perform work that falls within their specialty).3 Cf.Superior, 965 N.E.2d at 892.4 BLACKS LAW DICTIONARY1420 (9th ed. 2009) (defining requisition as [a]nauthoritative,

formal demand); see, e.g., Superior, 965 N.E.2d at 892 (explaining how the subcontractor,

Superior, submitted four requisitions for payment to PinnCon for work performed); see alsoKevin Johnston, The Definition of Payment Requisition,CHRON, http://smallbusiness.chron.

com/definition-payment-requisition-36536.html (last visited Aug. 21, 2014) (A payment

requisition is a request from a department for permission to pay a bill. The bill can only be

paid when you sign the payment requisition, and this gives you control over expenditures

each month.).5 The Ascent of Money:The Origin of Credit(PBS Documentary June 4, 2010), available at

http://www.pbslearningmedia.org/asset/fin10_vid_origincred/ (explaining how, without the

advent of credit or the belief that one will pay for services or goods provided, the entire

economic structure of our world as we know it would not be possible). Credit comes from the

Latin root word credomeaning to believe. Id.6 See, e.g.,Superior, 965 N.E.2d at 892 (describing how Superior submitted payment

requisitions for work performed up through March 18, 2008 for which they awaited payment);

Matthew V. Byrne, Jr. & John J. Costello, The Evolution of Coverage Under the Miller Act, 28

FORDHAM L. REV. 287, 287 (1959) (Inherent, however, in projects of this nature are the

dangers to which materialmen and suppliers are subject when they extend credit to the

contractor or his subcontractors.).7 Seesupratext accompanying notes36.

M


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2014 Are You Prot ec ted? 581

subcontractors depend on Cornelius and Harrys timely progresspayments, but those payments are not always forthcoming. 8 Whenpayment is not made, and the subcontractors fear that they will not receive

that payment, they may follow a statutorily defined process to perfect, orsecure, a lien on the propertycalled a mechanics lien9allowing thatparty to gain a security interest in the property at issue.10

While a mechanics lien is an available solution on private projects, it isnot available on federal projects.11 The federal government passed theMiller Act to protect involved parties and prevent federal property frombecoming encumbered the way private property can be.12 Instead, thesubcontractors and materialmen13 involved in federal projects covered bythe Miller Act are protected by payment bonds. 14A payment bond protectssubcontractors on a government project: if the general contractor fails toremit payment to its subcontractors or materialmen, the subcontractor ormaterialman will seek payment from the third party suretya bonding

companythus rendering a mechanics lien unnecessary.15

If Corneliuswas the government owner, and Harrys the general contractor, then

8 See,e.g., Superior, 965 N.E.2d at 892.9 SeeMasten Lumber & Supply Co., v. Brown, 405 A.2d 101, 103 (Del. 1979) ( [S]ecuringto

Mechanics and others payment for labor and materials in erecting or repairing any building or

structure . . . .) (citation omitted).10 JAMES D.FULLERTON,CONSTRUCTION LAW SURVIVAL MANUALapp. 43, at 514, 517

(2014), available athttp://www.fullertonlaw.com/docs/appendices/50_state_survey_of_

mechanics_lien_rights.pdf; seeByrne & Costello, supranote6 (If the improvement were made

upon private property, the supplier could, in the event of nonpayment, claim a lien against

the real property to the extent of the value of the materials delivered and incorporated into the

work.).11 See Byrne & Costello, supranote6.12 Compare 40 U.S.C. 3131 (2012) (stating that prior to awarding any contract over

$100,000, the contractor must furnish bonds to cover payment and performance, thereby

rendering mechanics liens moot), withMASS.GEN.LAWSch. 254, 4 (2012) (explaining how

subcontractors and materialmen may file mechanics liens to protect themselves from an

owners failure to pay for work performed). See also Byrne & Costello, supra note 6, at 287

([P]olicy and common sense prohibit such security [a mechanics lien] upon a public

project.).13 A materialman is a person who supplies materials, typically in the building trades.

WEBSTERS THIRD NEW INTERNATIONAL DICTIONARY 1392(Philip Babcock Gove ed.,

1986).14 40 U.S.C. 3131(b) (2012) (stating that two types of bonds are required prior to a

contract being awarded to the lowest bidding contractora payment bond and a performance

bond).15 See 40 U.S.C. 3131(b)(2) (2012) (The amount of the payment bond shall equal the total

amount payable by the terms of the contract unless the officer awarding the contract

determines . . . that a payment bond in that amount is impractical. . . .).


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Harrys must secure a payment bond so Palumbos would be able torecover if Harrys failed to pay.16

16 Seesupratext accompanying notes1115.


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Because mechanics liens have existed in the United States since thelate 1700s, parties have litigated almost every aspect of various statesmechanics lien statutes.17 One such area is known as the defense of

payment, a theory in lien laws which requires that funds be due or tobecome due.18In other words, it requires that there is money owed on thecontract and that the owner has not paid.19Due or to become dueis readas a condition precedent20 which, like any condition precedent, must besatisfied in order to properly lien a piece of property.21 However, statesinterpret these terms differentlyNew York, for example, uses the amountof funds due or to become due to limit the owners possible liability to thatamount.22 Other states, such as Pennsylvania, ignored the effect of thisphrase entirely by allowing for no limit on liability to the owner within aspecific period of time.23

These different statutory designs resulted in two prevailing systems;

17 See, e.g., Gillespie v. Bradford, 15 Tenn. (7 Yer) 168, 171 (Tenn. 1834) (holding a

subsequent purchaser of property will be subject to the enforcement of a mechanics lien held

on the property); Haswel v. Goodchild, 12 Wend. 373, 377 (N.Y. Sup. Ct. 1834) (holding a

party must show money is due from the owner to the contractor to enforce a lien against said

owner).18 BloomSouth Flooring Corp. v. Boys & Girls Club of Taunton, Inc., 800 N.E.2d 1038,

1041 (Mass. 2003).19 See Superior Mech. Plumbing & Heating, Inc. v. Ins. Co. of the W., 965 N.E.2d 890, 894

(Mass. App. Ct. 2012) (holding that [s]uch lien shall not exceed the amount due or to become

due under the original contract as of the date notice of the filing of the subcontract is given by

the subcontractor to the owner) (quoting BloomSouth, 800 N.E.2d at 1041); Russell v.

Woodbury, 610 A.2d 798, 800 (N.H. 1992) (holding that recovery is limited to sums due or

owing to the principal or general contractor at the time of notice to the owner).20 SeeBLACKS LAW DICTIONARY334 (9th ed. 2009) (defining condition precedent as [a]n

act or event, other than a lapse of time that must exist or occur before a duty to perform

something promised arises).21 See, e.g.,Superior, 965 N.E.2d at 894 (requiring an amount due or to become due in

order for a subcontractor to perfect a lien against the owner); Russell, 610 A.2d at 800 (limiting

recovery to sums due or owing at the time of notice of lien to the owner); In reRaymond Profl

Grp., Inc., 408 B.R. 711, 737 (Bankr. N.D. Ill. 2009) (explaining how Illinois law provides for a

lien on improved property only in the amount due or to become due on improvements so

made).22 SeeEthan Glass, Old Statutes Never Die . . . Nor Do They Fade Away: A Proposal for

Modernizing Mechanics Lien Law by Federal Action, 27 OHIO N.U.L.REV.67,77,81(2000);see also

infraPart II.AII.B.23 See supra note22.These two systems of limited liability and no limit on liability are also

described as the derivative and direct mechanics lien systems and are each followed by

various states in the country. See infraPart II.AII.B; see alsoR.I.GEN.LAWS 34-28-4 (West,

Westlaw through amendments through chapter 534 of the 2013 Regular Session) (explaining

how any work performed within 200 days of the notice of intent to lien is lienable).


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Based upon this imbalance of power, this Note argues that statesshould get involved in the contracting process to protect the collectionrights of the weaker subcontractor by codifying the requirement that

projects over a specific dollar threshold must: (1) require a payment bondsimilar to the Miller Acts payment bond requirement; and (2) requireowners to waive the defense of payment to provide subcontractors andmaterialmen the ability to perfect a mechanics lien. Such requirementswould give owners the power to choose whether the owners or generalcontractor should shoulder the risk of general contractors absconding withpayments, either way ensuring that the less powerful subcontractor ormaterialman is fully paid.

Part I of this Note analyzes mechanic s liens generally including:mechanics liensorigins; mechanics lienspolicies and goals; the processof perfecting a mechanics lien; and the mechanics lien paymentdefense.Part II of this Note examines the two prevailing mechanic s lien theories:

the derivative system and the direct system. Part III explores the Miller Act,the federal governments solution to mechanics liens, focusing on theMiller Acts origins and goals. Part IV of this Note compares and contraststhe two prevailing theories of mechanics lien statutes and weighs the twotheories benefits and detriments. Lastly, Part V of this Note presents aunique solution to the pitfalls presented by the two prevailing theories ofmechanics liens so that neither the owner nor the subcontractor willshoulder an inappropriate level of risk.

I. The Mechanics Lien

A. The Origins of the Mechanics Lien

Mechanics lien laws have existed since the days of the ancientRomans32and were used in the United States for over two centuries, withthe first mechanics lien law enacted the same year as the Bill of Rights,1791.33The creation of our nations first mechanics lien law is attributed toThomas Jefferson, who argued before the Maryland legislature that such alaw was necessary to develop our great nations newly minted capital,Washington, D.C.34 Without such lien laws in place, an owner couldcontract for improvements to their real property and then, when the bill

32 In reFontainebleau Las Vegas Holdings, LLC., 289 P.3d 1199, 1210 (Nev. 2012) (citing

Edward H. Cushman, The Proposed Uniform Mechanics Lien Law, 80 U.PA.L.REV.1083,1083

(1932)).

33 CHARLES EMMETT DAVIDSON, THE MECHANICS LIEN LAW OF ILLINOIS:ALAWYERS BRIEF

ON THE TOPIC6 (1922), available at http://books.google.com/books?id=KYUaAAAAYAAJ&

printsec=frontcover&source=gbs_ge_summary_r&cad=0#v=onepage&q&f=false.34 Id.(explaining how Washington was initially part of Maryland).


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came, simply refuse to pay, leaving the contracted party with littlerecourse.35 This pre-lien system stunted development and produced ashortage of housing in the Washington, D.C. area.36 After the first

mechanics lien law was put in place, and its success was realized, manyother states soon followed suit.37

B. The Mechanics Liens Policies and Goals

Mechanics liens are not a form of a judicial lien,38 but instead are aform of a statutory lien39designed to require strict statutory compliance toproperly perfect and enforce.40The statutory nature of the mechanic s lienmakes it an effective tool in collecting overdue accounts because the partyperfecting the lien need only follow the strict statutory guidelines to garneran encumbrance on the property.41This judicial-free process means that thecourt system need not get involved unless there is a dispute over an aspectof the lien-perfection process, which includes many timing, notice, and

filing requirementsall which must be met in order to have a properlyperfected and forceful lien.42Parties and attorneys filing mechanics liens indifferent states must pay great attention to detail because theirrequirements are created by state statute; consequently, lien requirementsvary from state to state.43

35 Id.; seeScott Wolfe Jr.,A Short History of the Mechanic Lien, THE LIEN &CREDITJ. (Nov. 15,

2010), http://www.zlien.com/blog/a-short-history-of-the-mechanic-lien/ (explaining how there

was plenty of land, but not many people willing to take the risk of paying for materials and

labor to improve anothers land without some security for payment).36 See DAVIDSON, supranote33.37 Id.; see Christopher H. Little, The Rhode Island Mechanics Lien Law: A Plea (and Proposal)

for Clarity and Fairness, 3 ROGER WILLIAMS U. L. REV. 207, 212 (1998) ([B]y the start of the

twentieth century, virtually all states had adopted such laws.);see alsoThaxter v. Williams, 31

Mass (14 Pick.) 49, 49 (1833) (explaining how a petition was made to the Court of Common

Pleas in Massachusetts for a lien upon improved land).38 Cf.Wolfe, supra note35 (discussing how mechanics liens are statutory by nature).39 See,e.g.,MASS.GEN.LAWSch. 254, 4 (2012) (statutorily defining the process and

procedure that must be followed for a subcontractor or materialman to perfect a lien against a

property owner).40 FULLERTON,supranote10.41 SeeMargaret Reiter, Types of Property Liens: Learn When a Creditor Is Allowed to Place a Lien

on Your Property, in SOLVE YOUR MONEY TROUBLES: DEBT, CREDIT & BANKRUPTCY (2011),

available athttp://www.nolo.com/legal-encyclopedia/types-property-liens.html.42 See ch. 254, 4 (setting forth the many requirements that must be met to properly perfect

a subcontractor mechanics lien).43 CompareMO.ANN.STAT. 429.012 (West, Westlaw though the end of the 2013 First

Regular Session of the 97th General Assembly), withch. 254, 4 (displaying the variations

between two states mechanic-lien statutes).


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Mechanics liens serve many goals, but one of the most important is toencourage development by providing security to persons makingimprovements to other peoples property if the owner fails to pay.44When

Harrys and Palumbos add labor and materials to the construction ofCorneliuss home and upon his failure to properly pay, they may secure amechanics lien on the property to ensure that Cornelius cannot transfer itwithout first satisfying the lien amount.45 Mechanics liens are one ofseveral legal tools at a subcontractors disposal to ensure payment . . .because it encumbers the improved real estate in much the same fashion asa mortgage or a judgment, effectively preventing resale.46 Becausemechanics liens have strong implications on the property subject to thelien, strict compliancenot merely substantial compliancewith thestatute is required by all states.47Some states identified [t]he purpose ofthe provisions providing for mechanics liens is to require the person withan interest in real property to pay for improvements or benefits which have

been induced or encouraged by his own conduct.48

Several principles justify mechanics liens, the first being ancillary tomechanics liens main goalto prevent unjust enrichment by ensuringthat property owners pay for improvements made to their property.49Rather than resorting to quantum meruit to recover the costs ofimprovements made to anothers property, a mechanics lien providescontractors with a surer and speedier, if not exclusive, method ofrecovery.50 The next goal of mechanics liens, closely tied to the first,ensures that laborers and suppliers are compensated for the work or goodsthey provide.51

Compensation must be made in dollarsthe contractor receives no

44 See Glass, supra note22,at68(explaining how the construction industry relies on credit;

people supplying materials and labor on credit need a mechanism to protect their

investment).45 Seeinfratext accompanying notes4654.46 AMERICAN SUBCONTRACTORS ASSN,INC.,LIEN AND BOND CLAIMS IN THE 50STATESiii

(2011), available at http://www.keglerbrown.com/content/uploads/2013/10/Lien-and-Bond-

Claims-in-the-50-States-2013-edition.pdf.47 See id.48 William H. Lindsley,Mechanic Liens, in26 ILLINOIS LAW & PRACTICE 2 (2014), available

atWestlawNext.49 Glass, supra note22, at68(citing Combustion Engg, Inc. v. Miller Hydro Grp., 577 A.2d

1186, 1188 (Me. 1990)).50 Comment,Mechanics Liens and Surety Bonds in the Building Trades, 68 YALE L.J. 138, 141

(1958) [hereinafter Building Trades] (citations omitted).51 Glass, supra note22, at68(citing Chamberlain v. City of Lewiston, 129 P. 1069, 1071

(Idaho 1912)) (explaining there is no benefit to destroying improvements to immobile real

property for non-payment).


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D. Mechanics Liens and the Defense of Payment

The paymentdefense prevents the owner from paying twice for thesame workbecause the owner already paid.62The paymentdefense isan affirmative defense63 based on [a] defendants assertion of facts andarguments that, if true, will defeat the plaintiffs . . . claim, even if all theallegations in the complaint are true.64 Consequently, a subcontractorproperly asserting a lien, due to nonpayment for past work completed,may not recover from an owner who already paid the general contractor. 65If Cornelius paid Harrys for all the work performed on the projectandHarrys did not pay Palumbosthe subcontractor, although owed money,could not perfect a lien against Cornelius because he could assert thisaffirmative defense.66

The paymentdefense relates to the idea that subcontractors can onlylien a project in the amount that is due or to become due.67Once a lien isfiled, some courts will initially look at the amount of funds already

expended.68 Then the court will add the amount required to complete aproject after a general or subcontractors breach, and then subtract anyretainage held by the owner from the breaching contractor.69 Thisremaining dollar figure will be the amount due or to become due under theoriginal contract.70In contrast, other courts will not take these figures into

62 See Maverick Materials, Inc. v. Kauffman, 488 S.E.2d 690, 69192 (Ga. Ct. App. 1997)

([Under Georgia law,] the owner is entitled to credit against lien claims for any sums paid to

the contractor which were properly applied to bills for labor and material.); Superior Mech.

Plumbing & Heating, Inc. v. Ins. Co. of the W., 965 N.E.2d 890, 89394, 89698 (Mass. App. Ct.

2012) (holding that PinnCon already paid the general contractor the funds Superior attempted

to lien and, as a result, no funds were due or to become due preventing Superior fromperfecting a lien).63 See COLO.REV.STAT.ANN. 38-22-102(3.5) (West, Westlaw through the First Reg. Sess.

of the Sixty-Ninth Gen. Assembly (2013)).64 BLACKS LAW DICTIONARY482 (9th ed. 2009).65 See Wholesale Specialties, Inc. v. Vill. Homes, Ltd., 820 P.2d 1170, 1172 (Colo. App.

1991);Maverick, 488 S.E.2d at 692; Superior, 965 N.E.2d at 897.66 Seesupra text accompanying notes6265 (referencing the hypothetical characters used

throughout this Note).67 Superior, 965 N.E.2d at 896 (holding that payments were already made to the general

contractor for the work that the subcontractor attempted to lien so there were, essentially, no

funds due or to become due for that work as a result of the previous payments); see also

Maverick, 488 S.E.2d at 69192 (affirming summary judgment for the property owners because

they paid $1,902 over the contract price to complete the work, resulting in no more money due

or becoming due).68 Superior, 965 N.E.2d at 89394.69 Id. at 897 & n.11.70 Id. at 894.


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account.71If the cost to complete the project is above the original contractedprice, plus any approved changes, then there will be no funds due or tobecome due, and the party attempting to perfect a lien will not succeed.72

The defense of payment requires the party least able to control risk toshoulder the majority of the risk; thus the subcontractor may do everythingin their power to perform on the contract, but if they fail to make a properfiling, they will be precluded from perfecting a lien and unable to collect onany money owed.73

II. Two Prevailing Mechanics Lien Systems

Mechanics liens are born by state statute, meaning that each statedrafts these laws as they see fitresulting in little uniformity throughoutthe nation.74Over the years, different models for mechanic s lien statutesemerged and two prevailing theories developed.75 The first theory is thederivative system,76which holds that subcontractors and materialmen are

71 Compareid.at 89697 (explaining how L.A. Fitness, the property owner, expended

$237,140 over the original contract price to complete the contract, and as a result there were no

retainage funds remaining to fulfill the lien asserted by Superior), withMasten Lumber and

Supply Co. v. Brown, 405 A.2d 101, 104 (Del. 1979) (explaining how owners may be subject to

double payment regardless of the fact that the project will now cost more than the original

contract price).72 See Superior, 965 N.E.2d at 89697;Maverick, 488 S.E.2d at 69192.73 See Superior, 965 N.E.2d at 89293 (holding that the party who breached failed to meet a

condition precedent to funds becoming due, thereby precluding payment to parties who did

not participate in the breach); K. Brett Marston & Spencer M. Wiegard, Key Points to Consider

in Filing and Challenging a Mechanics Lien, 59 VA. LAW., Oct. 2010, at 37, 39, available at

http://www.vsb.org/docs/valawyermagazine/vl1010-mechanics-lien.pdf (limiting the amountof the lien to amounts owed in the chain of contract above the claimant means that parties

above the claimant in the chain of contract can affect the claimants own lien rights).74 See John W. DiNicola & Edwin L. Hall, The Massachusetts MechanicsLien Law, inLIEN

LAW &PROMPT PAY UPDATE 2011,at59(MCLE,Inc.2011).75 See infra notes7679 and accompanying text.76 See Glass, supra note22,at 77(describing the derivative system, used by states such as

New York, and the direct system, used by states such as Pennsylvania); see also Masten

Lumber & Supply Co. v. Brown, 405 A.2d 101, 10304 (Del. 1979).

Under the New York System the lien of a sub-contractor or materialman

depends on or is limited by the amount remaining due to the contractor,

and the sub-contractor, laborer or materialman has only a derivative

lien, being substituted to the right of the contractor. In contrast, [u]nder

the Pennsylvania System the right of sub-contractors, laborers or

materialmen does not depend at all upon any indebtedness due from the

owner to the contractor, but they get a direct lien as distinguished from a

derivative one.

Masten, 405 A.2d at 10304 (quoting State v. Tabasso Homes, 28 A.2d 248, 253 (Del. Gen. Sess.


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derivative claimants to the general contractor, so their ability to perfect 77alien is dependent upon the general contractors lien rights.78The other maintheory is the direct system, which acknowledges that the right of

subcontractors to claim a mechanics lien is independent of the agreementbetween the owner and contractor.79Each theory is advantageous to oneparty over the otherthe derivative system is more beneficial to ownerssuch as Cornelius, and the direct system is more beneficial tosubcontractors such as Palumbos.80

A. The Derivative System

Most states follow the derivative system, commonly referred to as theNew York System.81Under this system it is understood that, [b]ecause asubcontractor is a derivative claimant and, unlike a general contractor, hasno constitutional, common law, or contractual lien on the ownersproperty, a subcontractors lien rights are totally dependent on compliance

with the statutes authorizing the lien.82When such a claim is dependentand involves a derivative claimant, subcontractorsliens must be satisfiedout of funds due and owing from the owner to the general contractor.83This exposes the subcontractor to increased risk.84

B. The Direct System

The second system for filing mechanics liens is the direct system.85

1942)).77 BLACKS LAW DICTIONARY 1251 (9th ed. 2009) (To take all legal steps needed to

complete, secure, or record (a claim, right, or interest).).78 SeeDiVeronica Bros. Inc. v. Basset, 624 N.Y.S.2d 296, 297 (N.Y. App. Div. 1995); Morrell

Masonry Supply, Inc. v. Lupes Shenandoah Reserve, LLC, 363 S.W.3d 901, 904 (Tex. Ct. App.

2012); Glass, supra note22,at 77.79 Glass, supra note22, at77(citing Tabasso Homes, 28 A.2d at 253).80 SeeR. Russell ORourke, Ohio Mechanics and Materialmens Liens, in OH.MECH.&

MATERIAL. LIENS 9-1 (3d ed. 2001) (explaining how changes in the applicable statute were

made with the intention of protecting the property owner); R UBINSTEIN, supranote29,at 23

(explaining how strict statutory compliance with lien laws is designed to benefit the owner

over the contractor or potential lien filer); Glass, supra note22,at 77(explaining how the right

of a subcontractor to file a lien is independent of the agreement between the owner and

contractor, thereby giving the subcontractor a direct lien right against the owner).81 Masten, 405 A.2d at 103 (quoting Tabasso Homes, 28 A.2d at 258).82 Morrell Masonry, 363 S.W.3d at 905 (quoting First Natl Bank in Graham v. Sledge, 653

S.W.2d 283, 285 (Tex. 1983)).

83 DiVeronica Bros., 624 N.Y.S.2d at 297 (citations omitted).84 See Superior Mech. Plumbing & Heating, Inc. v. Ins. Co. of the W., 965 N.E.2d 890, 896

(Mass. App. Ct. 2012).85 Glass, supranote22, at77.


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Under this system, the subcontractors lien rights are not dependent on thegeneral contractors rights, but are based solely on the subcontractor sability to meet the lien laws statutory requirements.86Under the direct lien

system, the breach of a party in a higher tier87

Harrys breach withCorneliuscannot bar that claimant from asserting a lien.88 So long asadequate funds remain, the second tier subcontractor may perfect its lienagainst the property.89The court explained that:

The plaintiffs right to a lien is given solely by statute, and is notmade to depend in any way upon the act of the originalcontractor in paying or not paying his immediatesubcontractor. . . . If the original contractor is, under the presentlaw, unprotected, in that he may be compelled to pay twice forthe same work and materials, the fault is not with the plaintiff,and the remedy must be sought in the Legislature and not in thecourt.90

The plaintiff possesses a direct right, and not one that is derivative (or

dependent) on the general contractors right to perfect its lien.91

III. The Miller Act

A. Origins of the Miller Act

The Miller Act was enacted in 1935 to protect the interests of thefederal government, taxpayers, and subcontractors and suppliers.92 Itrequires any contractor awarded with a federal construction contractvalued over $100,000 to furnish both a payment and performance bond:these bonds protect the interests of the federal government, taxpayers,subcontractors, and suppliers from defaulting parties.93 Before the Miller

86 See Steel Suppliers, Inc. v. Ehret, Inc., 486 A.2d 32, 36 (Del. Super. Ct. 1984) (holding that

the general contractors waiver of any lien right did not extend to the subcontractor because

subcontractors lien rights were independent of general contractors).87 SeeSeaman v. Climate Control Corp., 436 A.2d 271, 27475 (Conn. 1980) (explaining how

a second tier subcontractor retains their lien rights even if the first tier subcontractor had

already been paid in full).88 Steel Suppliers, 486 A.2d at 3536 (explaining how this disparity between states

mechanics lien statutes makes it difficult to use another states case law to decide mechanics

lien disputes).89 See Seaman, 436 A.2d at 274.90 Id.at 276 (quoting Barlow Bros. Co. v. Gaffney, 55 A. 582, 584 (Conn. 1903)).91 Seeid.

92 Associated Gen. Contractors of Am.,Miller Act: Preserve the Intent of the Miller Act,AGC,

http://www.agc.org/cs/advocacy/legislative_activity/miller_act (last visited Aug. 21, 2014)

[hereinafterMiller Act].93 40 U.S.C. 3131(b) (2006);Miller Act,supranote92.


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Act, federal-project contractors were at risk because the federalgovernments sovereign immunity prevented them from perfecting amechanics lien.94 Congress enacted the Heard Act in 1894 to protect

subcontractors, materialmen, and all others involved in federal projects,but due to its numerous deficiencies, Congress repealed and replaced itwith the Miller Act to better serve the goals envisioned.95

B. Goals of the Miller Act

The goals of the Miller Acts bonding scheme are straightforward:

[E]nsuring that construction contractors are qualified to performtheir contractual obligations to the government, [so] that precioustaxpayer funds are protected through third-party guarantees ofcontract performance and payment, and that subcontractors andsuppliers have a payment remedy in the event the primecontractor becomes insolvent or fails to pay them.96

This payment remedy is necessary because the governments sovereignimmunity prevents contractors from filing mechanics liens on federalprojects.97Additionally, the Miller Act fulfills many goals beyond ensuringpayment to persons involved in a project and preventing the filing of amechanics lien by a party against the government.98 Another goal isevaluating the capacity, character, and capital of construction firms todetermine their ability to performensuring contractors engaged infederal projects are fully qualified to complete them.99 The primarypurpose of the Miller Act, however, was to protect subcontractors whosupplied material and labor to federal public works projects by providingan alternative, and usually superior, remedy to the assertion of mechanicsliens.100 Thus, states should adopt the Miller Acts bonding scheme for

intrastate, private construction projects.101

94 FLA.BAR:CONTINUING LEGAL EDUC., FLORIDA CONSTRUCTION LAW AND PRACTICE 14,

14.2(2011).95 Id.96 Miller Act, supra note92.97 See David Henry, The Contractors Friend (The Federal Miller Act), PRIMERUS,

http://www.primerus.com/business-law-articles/the-contractors-friend-the-federal-miller-act-

1252011.htm (last visited Aug. 21, 2014).

98 Miller Act,supra note92.99 Id.100 FULLERTON,supranote10,at 536.101 See id.


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ANALYSIS

IV. There Is No BestMechanics Lien System that Protects All Parties

Adequately

Although each serves its intended purpose, neither the derivative northe direct systems are perfect.102 Under the limited liability or derivativesystem, if Cornelius already paid Harrys $12,000 out of $15,000 (leavingonly $3,000 due or to become due), Cornelius s only liability is for theremaining $3,000; regardless of whether Harrys ever paid Palumbos anyof the $12,000.103 This leaves Palumbos unable to collect unpaidreceivables.104

Under the direct or no-limit-on-liability system, if Cornelius paidHarrys the $12,000, yet Harrys failed to pay the subcontractors, thosesubcontractors could lien the amount they are owedsubjecting Corneliusto double liability.105Cornelius would pay amounts in excess of the original

contract price and remain liable for funds not paid to subcontractors.106Under either system, one party is exposed to more liability than the

other.107 To fix this, states should enact a Miller Act-like bonding

102 See supraParts II.AB.103 See, e.g., Masten Lumber & Supply Co. v. Brown, 405 A.2d 101, 103 (Del. 1979)

(explaining that under the New York System, also known as the derivative system, the lien

amount of a subcontractor or materialman is limited by the amount due to the general

contractor); Superior Mech. Plumbing & Heating, Inc. v. Ins. Co. of the W., 965 N.E.2d 890,

89496 (Mass. App. Ct. 2012) (explaining how once the general contractor absconded with his

subcontractors payments and would not satisfy the condition precedent in Article 4 of the

rider, there were no longer any funds due or to become due because of the breach, and the

owners liability was therefore limited).104 Cf. Superior, 965 N.E.2d at 89798.105 See Masten, 405 A.2d at 104.106 See id.

[W]here the principal contractor has abandoned the work and the owner

is compelled to pay an amount in excess of the original contract price in

order to have the work completed according to the contract specifications,

this does not preclude a subcontractor under the original contract from

establishing his lien for the full amount of his claim.

Id.(citation omitted).107 ComparePond Cove Millwork Co. v. Steeves, 598 A.2d 1181, 1182 (Me. 1991) (The

Mechanics Lien Statute affords a double payment defense to a homeowner when persons

who have furnished material and services independently to the homeowners contractor seek

enforcement of their liens.), withFirst Comm. Corp. v. First NatlBancorporation, Inc., 572 F.

Supp. 1430, 143334 (D. Colo. 1983) (holding that the point of the states statutory trust law is

to make the owner a direct beneficiary so to avoid double payment by use of the trust fund),

and Masten, 405 A.2d at 103.


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requirement on private projects, while maintaining current lien laws; butthe payment defense will no longer be required.108 The defense ofpayment will no longer be necessary because a bonding requirement

eliminates the issue of an owner being subject to the possibility of doublepayment.109In the alternative, states could provide owners with the optionof either requiring bonds on their projects or waiving the paymentdefense, thereby ensuring that subcontractors and materialmen are able tofile and perfect a lien if the general contractor absconds.110The end resultwill be mechanics lien laws like those used in the direct system states.111

A. The Derivative System Benefits the Owner at the Expense of theSubcontractor

The two current systems of mechanics liens benefit either the owner ofthe property, Cornelius, or the parties who contracted with the generalcontractor on the project, such as Palumbos.112 A person in Corneliuss

shoes would prefer a derivative state that allows for the affirmativepayment defense.113 Under the derivative system, a subcontractor likePalumbos must be cognizant that failure to file one necessary document,such as a notice of contract, may result in a loss of their lien rights. 114Thesubcontractor can also lose its lien rights if the general contractor lacksfunds due from the owner when the subcontractor attempts to file amechanics lien.115This system requires notice to alert the owner of their

108 SeeinfraPart V.109 Cf.40 U.S.C. 3131 (2006) (The amount of the payment bond shall equal the total

amount payable by the terms of the contract . . . .); Byrne & Costello, supra note6,at 287

(explaining how bonds on federal projects are required because there are no lien rights and

that no lien rights means the government will never pay twice for the same work).110 SeesupraPart II.B. (discussing the direct system where there is no defense of payment).111 See, e.g., R.I.GEN.LAWS 34-28-4 (West, Westlaw through amendments through

chapter 534 of the 2013 Reg. Sess.) (making lien rights dependent on timing and not whether

there are funds due or to become due to the general contractor; thus, providing subcontractors

direct lien rights with the owner).112 SeesupraParts II.AB. (discussing the two systems of mechanics liens and how they

operate).113 See supra Part II.A. (describing the limitations on subcontractors lien rights embodied

in the derivative system);see also supraPart I.D. (describing the defense of payment).114 SeeMASS.GEN.LAWSch. 254, 4 (2012) (explaining how a subcontractor must file a

notice of contract with the owner of a project any time after execution of the written contract

between the parties and prior to other timing dates passing in order to successfully lien a

project); see alsoBonus Elec., Inc. v. Slosser, 687 P.2d 389, 392 (Ariz. Ct. App. 1984) (holding

that notice is implied when a subcontractors contract requires the other party to furnish

labor on the site and incidental materials and equipment.).115 See, e.g., Superior Mech. Plumbing & Heating, Inc. v. Ins. Co. of the W., 965 N.E.2d 890,


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potential liens and thus allow the owner to protect himself against doublepayment.116This is the main benefit of the derivative systemit protectsowners like Cornelius from double payment, or payment for the same

work or materials to two different parties resulting in the contract priceextending beyond its agreed-upon value.117 This system serves societybecause it eliminates fear of unexpected contractual costspromptingowners to invest in buildings and construction and prevent economicstagnancy.118

The derivative system also allows for a carefully worded contract tobar the subcontractor from properly perfecting a mechanics lien againstthe owner.119 Consequentially, if the owner has completely paid thegeneral contractor, yet there are still funds due and owing from the generalcontractor to the subcontractor, the subcontractor cannot secure amechanics lien against the owner.120 This is the exact situation that theMiller Act and similar bonding schemes were designed to cure, and do

cure.121

Rather than Palumbos collection rights being derivative ordependent on Harrys collection rights, Palumbos would go to Harryssurety for paymentleaving Palumbos with a sure-footed method to

896 (Mass. App. Ct. 2012) (explaining how failure of the subcontractor to properly notify the

owner that they contributed labor and materials to the project, coupled with the fact that there

were no funds due and owing at the time of filing the lien, dispensed with the contractors

lien rights).116 Bonus Elec., 687 P.2d at 391 (showing how the derivative system is primarily concerned

with protecting the owner at the expense of the contractor or subcontractor).117 SeeRussell v. Woodbury, 610 A.2d 798, 799 (N.H. 1992) (explaining how the clear

statutory language limiting recovery to those sums that are due and owing to the principal, or

general, contractor is designed to protect the owner from unknown liability) (quotingWestinghouse Elec. Supply Co. v. Electromech, Inc., 409 A.2d 1141, 1144 (N.H. 1979)).

118 Cf. The Economy, ARCHITECTURE 2030, http://www.architecture2030.org/the_solution/

solution_economy (last visited Aug, 21, 2014) (A healthy economy relies on an active

Building Sector because so many other sectors and industries are directly tied to it.).119 SeeSteel Suppliers, Inc. v. Ehret, Inc., 486 A.2d 32, 35 (Del. Super. Ct. 1984); Superior, 965

N.E.2d at 89293 (explaining how a general contractors failure to pay the subcontractor out of

the funds paid by the owner in the payment requisition, prevented the subcontractor from

perfecting its mechanics lien against the owners property because the general contractor

failed to file a required document).120 See Superior, 965 N.E.2d at 892. A general contractor who absconded with a payment

requisition did not satisfy a condition precedent, payment of subcontractors, to receive further

payment from the owner. Id. Therefore, funds were not due or to become due and a

mechanics lien could not be properly perfected by the subcontractor. Id.121 See Byrne & Costello, supra note 6 (Section 2 of the Act confers upon a laborer or

materialman the right to sue the surety upon the payment bond where he has not been paid

for a period of 90 days from the date when the last of the materials or services were

supplied.) (footnote omitted).


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collect.122

Superior Mechanical Plumbing & Heating v. Insurance Company of the West clarified how the derivative system works.123 In that case, the plumbing

contractor, Superior, performed work as a subcontractor for PinnCon, theacting general contractor.124 Superior submitted monthly requisitions,which began to go unpaid.125 However, PinnCon continued to submit itspayment requisitions to the owner and, after receiving a requisitionpayment in the amount of $690,966, PinnCon absconded with the paymentand closed its doors, paying its subcontractors nothing.126 BecauseSuperiors lien rights were derivative to PinnCons lien rights, which at thetime were non-existent,127Superior could not complete the lien-perfectionprocess.128 In states following the derivative system, many subcontractorsand materialmen routinely face a similar situation.129 Had thesubcontractors and materialmen secured bonds similar to those embodiedin the Miller Act in their projects, these parties probably would not meet

the same fateunpaid and powerless to secure payment.130

The derivative system shifts the burden to the subcontractor to retainthe right to file and perfect a mechanic s lien.131Some state statutes havebeen interpreted to require the claimant to provide notice to the owner thatshe intends to furnish labor or material, intends to claim a lien, or bothbeforeshe provides the materials or labor or within a specific period of timeof providing these.132These requirements are occasionally unrealistic fromcost, as well as from professional relationship standpoints.133Owners and

122 SeesupraPart III.B.123 Superior, 965 N.E.2d at 89697.124 Id. at 892.125 Id. at 892 n.3.126 Id.127 The lien rights were non-existent because Superior failed to file a notice of contract with

the owner prior to the effective termination date of the general contractors contract, thereby

leaving no funds due or to become due because there was in fact no operative contract

remaining. Seeid.at 896.128 Seeid.129 See, e.g., Superior, 965 N.E.2d at 890, 89192; see also BloomSouth Flooring Corp. v. Boys

& Girls Club of Taunton Inc., 800 N.E.2d 1038, 1040 (Mass. 2003); Pond Cove Millwork Co. v.

Steeves, 598 A.2d 1181, 1182 (Me. 1991).130 The liberal reading of the Act coupled with the goal of the Act, to ensure payment to

those subcontractors or materialmen contributing labor or materials to a project, would likely

result in an opportunity to collect the funds due to those parties. SeeByrne & Costello, supra

note6,at 288, 290.131 SeeGlass, supranote22,at 76 (citations omitted).132 Id.(emphasis added) (citation omitted).133 Little, supra note37,at 222 (Lenders are unlikely to advance funds upon recording of a


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lenders do not want contractors and subcontractors filing liens againsttheir property prior to owing any payments.134 Such a system createsdistrust and further complicates the working relationship among the

parties involved.135

Therefore, requiring bonds on all construction projectswould benefit all parties involved;136 there would no longer be a lack oftrust among the contracting parties because all parties will feel secure thatpayment and quality work is forthcoming.137

B. Public Policy Demands that the Derivative Systems Negative Effectson the Financial Well Being of Subcontractors Should End

The subcontractor is the party most vulnerable on a construction site tothe variable nature of the construction process and resulting costfluctuations.138Thiscoupled with the fact that the subcontractor, or evenworse the materialman, is typically last in a long line of parties seekingpayment from the ownerplaces those parties at even greater risk.139

The subcontractors financial position is inherently one of dependence,since his receipt of payment is tied to the successful performanceof all those above him and, to some extent, of those below him aswell. Conceptually, and in the absence of statute, once a generalcontractor defaults, an unpaid subcontractor might be able torecover from the owner in quantum meruit for the price ofmaterials and labor supplied. Nonetheless, the costs of and

notice of intention [to file a lien] for fear that doing so will cause subsequent payments to lose

priority to the person filing notice.).134 See supra note133 and accompanying text.135 SeeMichael Pollick, What is a Mechanics Lien,WISEGEEK, http://www.wisegeek.com/

what-is-a-mechanics-lien.htm (last visited Aug. 21, 2014) (explaining that many contractorsuse mechanics liens as a last resort because of the strain it places on the contractors

relationship with the property owner).136 SeeByrne & Costello, supra note6,at 290 (stating that a supplier has a right of action up

to ninety days after all the materials are delivered, therefore requiring no filings prior to

default).137 See supra Part III.B.138 SeeBuilding Trades, supranote50,at 139 (explaining that contractors and subcontractors

alike must quote prices well in advance of actual construction and then perform that contract

at a time when prices for labor or materials may have changed dramatically); Byrne &

Costello, supranote6,at 287 (explaining how contractors, and therefore subcontractors, may

be harassed by unforeseeable difficulties; labor problems, increased costs, or unexpected

ground conditions.).139 Cf.Peacock Constr. Co. Inc. v. Modern Air Conditioning, Inc., 353 So. 2d 840, 84243

(Fla. 1977) (stating that unless unambiguously expressed, payment by the general contractor

to the subcontractor is not a condition precedent that requires payment from the owner to the

general contractor, but a contractual obligation of the general contractor to the

subcontractorthus showing the lineage in payment on construction projects).


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delays in pursuing such a remedy would render it impractical;and, of course, legal fees would diminish, and the owner sinsolvency could frustrate, any recovery. Moreover, until thesubcontractor had successfully litigated his claim, he would often

lack sufficient capital to carry on his business.140

Without the ability to successfully file and perfect a mechanics lien, thesubcontractor faces a precarious financial position, potentially unable tocontinue operating its business.141For public policy justifications, this resultshould be avoided at all costs because small businesses are the drivingforce behind our economy.142

Americas 28 million small businesses are the backbone of oureconomy.143In the United States, small businesses employ approximatelyhalf the workforce.144Many consider a small business to be any companywith fewer than 100 employeesPalumbos surely satisfies this statistic.145Some believe that over 60% of private sector jobs come from smallbusinesses.146 Of these small businesses, over half are home-based

140 Building Trades, supra note50, at 140 (emphasis added) (citations omitted).141 See, e.g., Pond Cove Millwork Co. v. Steeves, 598 A.2d 1181, 1181 (Me. 1991) (explaining

how the subcontractors attempted to perfect liens totaling approximately $20,852.15, but were

unsuccessful due to the defense of double payment); BloomSouth Flooring Corp. v. Boys

and Girls Club of Taunton Inc., 800 N.E.2d 1038, 1040 (Mass. 2003) (stating that BloomSouth

was seeking to recover $85,428 along with another subcontractor, the roofer, who sought to

recover $18,929.85not small sums of money); Superior Mech. Plumbing & Heating, Inc. v.

Ins. Co. of the W., 965 N.E.2d 890, 893 (Mass. App. Ct. 2012) (holding that Superior could not

perfect its lien valued at approximately $55,574); see also Peacock, 353 So. 2d at 842 (stating that

small subcontractors are unlikely able to assume the risk of the owners failure to pay the

general because they will not be able to remain in business under such a scheme).142 SeeKorey Tichenor,Jobs, Small Business, and Economic Growth,THE RECEIVABLES

EXCHANGE (Sept.7,2012),http://web.archive.org/web/20120922171943/http://blog.receivables

xchange.com/blog/jobs-and-small-business (Small businesses are proven to fuel growth and

innovation while providing a steady stream of new jobs to the economy yet they experience

many adversities. Small business promotion is (and should be) an economic policy priority for

current as well as future administrations.).143 Karen Mills, Small Business Tax Incentives in the Fiscal Cliff Deal, SBA (Jan. 5, 2013, 1:20

PM), http://www.sba.gov/community/blogs/official-sba-news-and-views/open-business/small

-business-tax-incentives-fiscal-cliff.144 The Importance of Small Business to the US Economy, EVOLVEYOURBIZ, http://www.evolve

yourbiz.com/the-importance-of-small-business-to-the-us-economy.php (last visited Aug. 21,

2014) [hereinafter EVOLVEYOURBIZ].145 SeeObamaCare Small Business Facts,OBAMACAREFACTS,http://obamacarefacts.com/

obamacare-smallbusiness.php (last visited Aug. 21, 2014) (explaining how some industries

believe that 500 employees is a small business, but that the Small Business Health Option

Programs will be limited to small businesses with 100 employees or fewer).146 EVOLVEYOURBIZ, supranote144.


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businesses.147These facts are directly related to the financial well-being andstability of our nation, whose weight is on the shoulders of the smallbusiness subcontractor like Palumbos.148 Each time a company like

Palumbos or Superior goes unpaid, it puts one of these small businessesthe driving force behind the United States economyat risk, along withthe people who they employ.149

Construction is a huge part of our economy, ranking seventh out of allindustries for number of paid employees.150 In 2008, there wereapproximately 7 million construction workers in the United States.151 Ofthose 7 million, approximately 2.6 million worked for companies that hadless than 20 employees.152It is vital that their jobs are protected through theinstitution of a payment protection scheme combining bonding and theavailability of mechanics liens.153Under such a system, Cornelius wouldbe protected from double payment because Palumbos would simply goafter Harrys bond, while Harrys and Palumbos would also remain

protected from Corneliusdefault by retaining the right to file and perfect amechanics lien.154

C. The Direct System Benefits the Subcontractor at the Expense of theOwner

For those states that follow the direct system, the benefit is with thesubcontracting party.155It is for this reason that states allowing such directaction against the owner expressly notifyowners that double payment mayresult upon their contractors failure to pay subcontractors and the owners

147 Id.148 See supratext accompanying notes143147.149 See, e.g.,Superior Mech. Plumbing & Heating, Inc. v. Ins. Co. of the W., 965 N.E.2d 890,

893 (Mass. App. Ct. 2012) (showing how subcontractors lose tens of thousands of dollars

when they go unpaid and have lost their ability to perfect a lien).150 U.S. DEPT OF COMMERCE, U.S. CENSUS BUREAU, STATISTICS OF U.S. BUSINESSES: 2008

(2008), available at http://www.census.gov/epcd/susb/latest/us/US--.HTM (using the industry

sector chart and comparing construction to all other listed industries).151 Id.152 See id. Using the industry sector chart, subtract the 63.3% of businesses with over

twenty employees from 100% to get the figure of approximately 37% of businesses with less

than twenty employees. Then multiply 7,043,631, representing the number of construction

workers, by .37, representing the percentage of construction employees working for

enterprises with less than twenty employees, to come out with the figure of 2,606,143. Id.153 See infraPart V.154 Cf. supraParts I.BC, III.B (showing the differing features of both bonding and gaining a

lien on a piece of property so that, it is clear that by combining the two, all parties are

protected).155 SeesupraParts II.AB.


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initial failure to secure lien waivers.156

Failure of this contractor to pay those persons supplying materialor services to complete this contract can result in the filing of a

mechanics lien on the property which is the subject of thiscontract . . . . Failure to secure lien waivers may result in yourpaying for labor and material twice.157

Such double payment would not fare well with many business owners orhomeowners like Cornelius whose dreamhome has now turned into aliving nightmare.158

The case Des Moines Furnace & Stove Repair Co. v. Lemon is instructiveon this point.159 In that case, two separate mechanics liens filed by thesame entity, a furnace supply store, were consolidated as they bothinvolved supplying furnaces to the same individual, Leroy Lemon, ownerof a heating company.160 Lemon purchased two furnaces on credit andinstalled them in two separate homes.161 Lemon then received payment

from the homeowners and never paid the furnace supply store.162

DesMoines Furnace & Stove Repair Co. filed mechanics liens against bothhomeowners, which the court upheld because the owners had remittedpayment to Lemon without ensuring that he paid for the materials used.163The homeowners only available cure to remove the mechanics lienrequired a second payment to Des Moines for the furnaces already paidfor.164The court acknowledged that under state law a party has sixty daysfrom the date the materials were supplied to file a lien, and to avoid doublepayment, the homeowner need not submit payment to a general contractorwithin that sixty day period because lien rights are already extinguished. 165The court stated, [i]t is regrettable that in the cases under considerationthe owners must pay twice, but this misfortune could have been

156 MO.ANN.STAT. 429.012 (West, Westlaw through the end of the 2013 First Reg. Sess. of

the 97thGen. Assembly). A lien waiver is [a] written and signed waiver of a subcontractors

mechanics lien rights, usu[ally] submitted to enable the owner or general contractor to

receive a draw on a construction loan. BLACKS LAW DICTIONARY 1718 (9th ed. 2009).157 429.012 (emphasis added).158 See DEPT CONSUMER AFFAIRS, A HOMEOWNERS GUIDE TO PREVENTING MECHANICS

LIENS, available at http://www.youngsair.com/sites/default/files/images/HomeownersGuideTo

PreventingMechanicsLiens.pdf (last visited Aug. 21, 2014) (explaining how a homeowner who

is not careful may risk double payment for the same job).159 56 N.W.2d 923 (Iowa 1953).160 Id.at 924.161 Id. at 92425.

162 Id. at 924.163 Id.at 924, 927.164 Id.at 92728.165 Des Moines Furnace, 56 N.W.2d at 927.


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avoided . . . .166

D. Public Policy Demanded that Owners Liability for Double PaymentEnd

For public policy reasons, many states have made efforts to limitliability such as that faced by the parties in Des Moines Furnace & StoveRepair Co.167 This limitation is in place because the typical homeowner isnot a sophisticated contractor and may not understand the ramifications ofpaying one contractor and not ensuring that payment has made its waydown the line, or chain of contracts, to the lowest-tier subcontractor ormaterialman.168 Another reason for this limitation is that homeownerscannot afford to pay for the same work twice; thus, a mechanic s liendemanding double payment may cause foreclosure of the property andultimately forced sale.169 Because states realized that this result wasunacceptable, they created protections against double payment for

homeowners.170 The ramifications of these additional state protectionsresult in a system of mechanic s liens that is eerily similar to the derivativesystem of mechanics liens, once again leaving the subcontractor exposedto increased risk.171

This fear of double payment is directly averted through the bondingschemes imposed by the federal government under the Miller Act. 172In thissituation, bonds are even more powerful because, once acquired, the lessknowledgeable homeowner will not be fearful of double payment or what

166 Id.at 92728.167 See, e.g., DLF Trucking, Inc. v. Bach, 707 N.W.2d 606, 608 (Mich. Ct. App. 2005) (holding

that where full payment was remitted by the owner of a residential property, and the ownerswears to this fact in an affidavit, no lien can attach causing the owner to pay in excess of the

original contract price).168 SeeMasten Lumber and Supply Co. v. Brown, 405 A.2d 101, 104 (Del. 1979) (explaining

how Delaware implemented 2707 to eliminate the harsh result of double liability against

residential homeowners, but that the legislatureand the courts must still remain cognizant of

the intended purpose of mechanics lien laws, which is to protect suppliers of labor and

material).169 SeeDavid T. Arena, Illinois Mechanics LiensAn Unpaid Contractors Best Friend, DI

MONTE &LIZAK,http://www.dimontelaw.com/illinois-mechanics-liens.html (last visited Aug.

21, 2014) (stating that a properly attached lien can force the sale of the property subject to the

lien in order to satisfy the amount owed).170 SeeDLF Trucking, 707 N.W.2d at 608 (discussing the Construction Lien Act, which states

in pertinent part of subsection 1 that [a] claim of construction lien shall not attach to a

residential structure, to the extent payments have been made. . . .) (emphasis added).171 See id.(holding that plaintiffs lien cannot attach).172 See 40 U.S.C. 3131 (2006) (preventing the filing of a mechanics lien in exchange for the

right to file a claim on the defaulting partys payment bond).


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the general contractor is doing with the dispersed funds.173The owner nolonger needs to be the keeper of funds for the subcontractors andmaterialmen.174Any failure of the general contractor to pay subcontractors

and materialmen is cured through action on the bond held by the generalcontractors suretyand not by filing a lien on the project.175By institutinga bonding scheme similar to that of the Miller Act, the owner and thesubcontractors or materialmen are protected against the defaulting generalcontractor.176

V. To Balance the Risks of All Parties Involved, States Should Adopt a

Miller-Act-Like-Approach Coupled with the Direct System ofMechanics Liens

A. The Bonding Required by the Miller Act Benefits Both Owners andSubcontractors

The Miller Act provides a substitute to typical mechanics liens becauseit enables contractors to go after the payment bond secured by thedefaulting party at the time of contract.177 [I]t has long been establishedthat the [Miller] Act should be liberally construed in favor of thematerialman [and therefore the subcontractor].178This was the mindset asfar back as 1906.179 Bonding on construction projects is clearly not a newconcept.180 With the Miller Act, the federal government created the idealway to protect both itself and the subcontractor alike.181 This protection

173 Cf.id.(preventing the government from having to pay for the same work twice because

the subcontractors mode of recovery is with the third-party surety and notthe owner).174 ContraDes Moines Furnace & Stove Repair Co. v. Lemon, 56 N.W.2d 923, 927 (Iowa

1953) (holding that within the sixty-day period following materials being supplied or work

performed, the owner must be extremely careful of the amount of money released to the

general contractor because all other lien rights will not be lost).175 See supraPart III.B.176 See infraPart V.A.177 See 40 U.S.C. 3131.178 Byrne & Costello, supra note6, at 288.179 United States ex rel.Hill v. American Sur. Co., 200 U.S. 197, 20203 (1906).

The courts of this country have generally given to statutes intending to

secure to those furnishing labor and supplies for the construction of

buildings a liberal interpretation, with a view of effecting their purpose to

require payment to those who have contributed by their labor or material

to the erection of buildings to be owned and enjoyed by those who profit

by the contribution of such labor or materials.

Id.180 See supraPart III.A.; see alsoHill, 200 U.S. at 197, 20203.181 FULLERTON,supranote10,at 480.


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worked so well for the federal government that states followed suit andinstituted their own Miller Acts known as Little Miller Acts.182Due to thesuccess of these Little Miller Acts, which play a large role in our national

economy, states should implement similar statutes for private constructioncontracts to ensure the protection of all the parties involved.183

Private developers have also discovered the benefits of bonding andavoiding having their property encumbered by angry subcontractors.184Although known to the private developer, requiring payment andperformance bonds are still at the discretion of the project owner. 185 Onereason that private developers do not require bonds is their acquisitioncosts.186Typically, when an owner like Cornelius requires a bond, the priceof the bond will be built directly into the cost to complete the project. 187Although the owner is left covering the cost of the bond, he is paying forthe peace of mind and sense of security that he will never be subject topaying twice or having his property encumbered, so long as he fulfills his

portion of the contract.188

Another issue that arises with bonding is the effect of the bondingrequirement on small and financially troubled companies.189 In order to

182 See, e.g., Atlantic Sea-Con, Ltd. v. Robert Dann Co., 582 A.2d 981, 984 (Md. 1990)

(stating that the Maryland legislature mimicked the Miller Act in creating the Maryland Little

Miller Act in 1959 and interpretations of the states Miller Act should look to articles

interpreting similar sections of the federal Miller Act); Trio Forest Prods., Inc. v. FNF Constr.,

Inc., 893 P.2d 1, 2 (Ariz. Ct. App. 1994) (stating that in interpreting the Arizona Little Miller

Act, state courts need not give deference to federal interpretations of the federal Miller Act).183 Seesupra Part V.A.; see also supra notes143154 and accompanying text.184 SeeSUR.INFO.OFFICE,THE IMPORTANCE OF SURETY BONDS IN CONSTRUCTION (2009),

available at http://www.sio.org/pdf/importanceof.pdf; see, e.g., Rivier College v. St. Paul Fire &Marine Ins. Co., 187 A.2d 799, 806 (N.H. 1963) (holding that the indemnity bond held by the

general contractor operated as a performance bond, thereby requiring the insurance provider

to pay all subcontractors left unpaid by the general contractors default).185 SUR.INFO.OFFICE,supra note184.186 Cf.Typical Performance Bond Costs, VIKING BOND SERVICE,http://www.performance

suretybonds.com/typical_performance_bond_cost.htm (last visited Aug. 21, 2014) [hereinafter

VIKING] (Rates for Performance Bonds can vary depending on the qualification of the

Contractor, as well as type and size of the contract. . . . The average rates and costs can range

from 1% [to] 5%.).187 Dan Donohue & George Thomas, Construction Surety Bonds in Plain English, ATTNY,

http://www.attny.com/gci32djd.html (last visited Aug. 21, 2014) (Premiums rise along with

the penal sum of the bond, and the owner ultimately pays these costs in the contract price.).188 See id. (Nonetheless, the owner has an interest in setting the bond penal sum high

enough to provide the desired protection to the project.); cf. 40 U.S.C. 3131 (2006)

(preventing the perfection of a mechanics lien on federal property).189 SeeVIKING,supra note186 (stating that the rate given to a company is dependent on its

performance history and financial stability).


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facilitate a program that requires bonding on private projects, thegovernment, through an agency such as the Small Business Administration(SBA), may need to step in and assist those start-ups and other

companies that cannot satisfy bonding companies requirements.190

TheSBA has already begun offering programs tailored to assist organizationsin this manner.191 The SBA minimizes a suretys fear by covering apercentage of the bond for a small, financially troubled company.192Thuswhen Cornelius demands a payment bond prior to issuing the contract toHarrys for the construction of his dream home, Harrys will haveassistance.193

B. Combining the Miller Acts Bonding System and the DirectMechanics Lien System Will Protect All Parties Involved

As much as the Miller Act protects against general contractor default, itfails to protect the parties who have contracted with the government (there

is no protection against government default).194For this reason, states mustuse a combination of bonding and mechanics liens to protect each partyfrom the other parties potential default.195 The owners are protectedbecause the contractors are working on credit , so they only pay for what iscompleted.196The general contractors are shielded from default because thesubcontractors work for them on credit while the generals also have lienrights against the owner that are indisputable, being in direct privity with

190 SeeWhat SBA Offers to Help Small Businesses Grow, SBA,http://www.sba.gov/content/

what-sba-offers-help-small-businesses-grow (last visited Aug. 21, 2014) (SBA can help

facilitate a loan for you with a third party lender, guarantee a bond, or help you find venture

capital. Understanding how SBA works is the first step towards receiving assistance.).

191 Id.(referencing the SBA Surety Bond Guarantee Program).192 Conn. Econ. Res. Ctr., Surety Bond Guarantee ProgramSBA, CERC, http://products.cerc.

com/brinfo.nsf/0/ED60BC09125B6D3D85256A480073401C (last visited Aug. 21, 2014).

The U.S. Small Business Administration (SBA) can guarantee bonds for

contracts up to $5 million, covering bid, performance and payment bonds

for small and emerging contractors who cannot obtain surety bonds

through regular commercial channels. SBA's guarantee gives sureties an

incentive to provide bonding for eligible contractors, and thereby

strengthens a contractor's ability to obtain bonding and greater access to

contracting opportunities.

Id.193 See supranotes186189 and accompanying text.194 SeeByrne & Costello, supranote6,at 287 (stating that a supplier making improvements

on private property may file a lien, but public policy does not allow such liens on public

property).195 See infratext accompanying notes196198.196 See supra text accompanying notes 37.


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the owner.197 The subcontractors are protected because, upon ownerdefault, they may file a lien; and upon general contractor default, they maygo after the general contractors bond.198 The numerous parties and

variables involved in a construction project make the situation such that nosingle piece of legislation is perfectprotecting all parties involved.199

Since 2007, municipality defaults have been on the rise, skyrocketingbeyond levels anyone thought possible.200Many people invest in municipalbonds, and although they have yet to default in large numbers, states havealready had to cut funding to municipalities and soon, states may also riskdefault.201 It is not unrealistic to imagine a situation where a governmententity begins a construction project that runs over budget and results in thegovernment entity lacking the funds necessary to complete the project,thereby risking default to the parties under contract.202

For example, Jefferson County in Alabama filed for Chapter 9municipality bankruptcy in 2010, mainly because of its excessively

expensive sewer system mocked as a Taj Mahal project, [suchbankruptcies] have picked up, too.203 One can easily see such defaultsputting the contracting parties at risk.204Although these defaults have not

197 See supra Parts I.B, I.D, II (explaining mechanics liens in order to understand that the

general will never be subject to the defense of payment because the general uses the defense

when the owner already paid the general funds that are due to parties further down the

contracting chainsubcontractors).198 See, e.g., R.I.GEN.LAWS 34-28-4 (West, Westlaw through amendments through chapter

534 of the 2013 Reg. Sess.) (providing for direct lien rights within 200 days of supplying labor

or materials). Cf.40 U.S.C. 3131 (2006) (requiring payment and performance bonds on any

project for the federal government in excess of $100,000).199

Jason T. Strickland, An Essential Brick and Its Chip: A Refresher on Payment Bond ClaimsUnder the Miller Act and the Little Miller Act, WARDANDSMITH(May 24, 2011), http://www.

wardandsmith.com/articles/payment-bond-claims-under-the-miller-act (stating that under the

Miller Act, owners, or government entities, go after the performance bond of defaulting

contractors, and subcontractors go after the payment bond of defaulting contractors).200 SeeMichael Connor,More U.S. Cities Set to Enter Default Danger Zone, REUTERS (Apr. 17,

2012, 4:43 PM), http://www.reuters.com/article/2012/04/17/usa-defaults-outlook-idUSL1E8E

N2V520120417 (highlighting various municipality defaults around the nation, and explaining

the various causes that led to the dramatic situations).201 Cf.id.(presenting the idea that municipality defaults are continually rising due to state

belt-tightening, which means states are also feeling the squeeze leaving them vulnerable to

default).202 See infra text accompanying note203.203 Connor, supranote200.204 See William Selway,Jefferson Countys Journey From Sewer-Bond Scandal to Settlement:

Timeline, BLOOMBERG (Sept. 16, 2011, 1:41 PM), http://www.bloomberg.com/news/2011-09-

16/jefferson-county-alabama-s-path-from-scandal-to-debt-settlement-timeline.html

(explaining how, in September, 2008, Jefferson County was declared to be in default under


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yet hit the construction companies, the Miller Act, or any deviation thereof,will not protect these contractors in that situation.205This is likely becausethe creators of the Miller Act never envisioned an America where

municipality defaults were occurring, and although still not commonplace,206 the numbers do not lie: Bond defaults were $25.355 billion in2011, or nearly five times the value of defaults in 2010, according toLehmann. In 2012s first quarter, defaults totaled $1.245 billion, or morethan double the $522 million of last years first quarter.207 Miller Actpayment and performance bonds will not protect the contracting parties ifone of these bankruptcies and resulting defaults reaches so far as toprevent government bodies from paying construction companiesperforming work under government contract.208

Such defaults are exactly what the mechanics lien is designed tocureensuring payment to those who have supplied materials or laborupon an owner default.209 Once states require a Miller Act-like bonding

scheme, they also should revert back to the direct system of mechanic sliens because the added protections for project owners against doublepayment will no longer be required.210 This reversion will eliminate thedefense of payment, which will result in more comprehensive protection tosubcontractors and materialmen for non-payment by defaulting ownersand general contractors.211

CONCLUSION

The inherent make-up of a typical construction project allows forvariance and risk. The parties involved bid on contracts well in advance ofthe performance date, leaving extended lead time for cost fluctuations andeconomic changes. From the earliest time in our nations history, effortswere made to stabilize the risky nature of construction projects by way of

agreements covering the $3.2 billion of sewer bonds for failing to make $46 million of

principal payments).205 SeeStrickland, supra note199;see also supraPart III (explaining the origins and goals of

the Miller Act, mainly, the fact that federal property is not subject to a lien due to sovereign

immunity).206 See Connor, supra note200 (stating that Chapter 9 municipality bankruptcy filings have

doubled from 2010 to 2011 going from six to thirteen respectively).207 Id.(showing the possibility of government financial failure).208 SeeStrickland, supranote199 (showing the drawbacks of a system designed to act when

default of government bonds was not of real concern).

209 See supra Part I.B.210 Cf. Miller Act, 40 U.S.C. 3131 (2006) (providing a remedy in the defaulting partys

payment bond).211 See supra Part I.C.


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paonessa: the mechanic’s lien — are you protected?

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