SCHEME TO BOOST CHARGES FOR OWNER TO PAY WAS BAD FAITH

OWNERS’ RISK OF LIENS FROM LOWER TIER MATERIAL SUPPLIERS – GET SUPPLIER’S LIEN WAIVERS

FACTS

Massachhusetts Appeals Court interprets Mechanics Lien claims. Bruno v Alliance Rental Group Mass App Ct (August 2023)

PARTIES

• Owner Bruno
• Contractor Ivestor
• Subcontractor Alliance

AGREEMENTS

Bruno was the landowner and developer of a subdivision project in North Reading.  The Contractor Ivestor, leased construction equipment (an excavator and a loader) from Subcontractor/supplier Alliance. 

Owner agreed with Contractor, that when the job was done, the Owner would turn over two lots to the Contractor.

Subcontractor gave a huge loan to the Contractor – which the Owner knew nothing about.  Contractor never paid back anything on the loan to the Subcontractor.

The Subcontractor’s heavy equipment lease to the Contractor was grossly more than market rates and the monthly charges had no time limits. The Subcontractor equipment sat on the project for years, often unused. The Contractor never paid the Subcontractor anything for the monthly rental charges.

NONPAYMENT AND LIENS

The Owner paid the Contractor, but the Contractor did not pay the subcontractor /equipment supplier. The Subcontractor filed a $700,000 lien against the project for the monthly charges for the entire time (3-4 years) the equipment sat on site. The supplier Alliance sought to make Bruno legally liable for the equipment rental debt.

The Owner terminated the Contractor, never gave the two lots, and sued to discharge the liens; Alliance sued to enforce them

At a jury-waived trial – the judge decided to shrink the lien amount – no charge for time when equipment was unused.  The judge awarded market rental rates rather than contract rates for the time the rental equipment was used. The Judge ruled the open rental agreement at inflated rates was unscrupulous collusion and bad faith.

The Appeals Court took the case to declare the following rules about lien law:

ISSUE 1 – LIENS ARE NOT LIMITED TO TIME EQUIPMENT WAS USED

Liens apply to a person who, under a written contract, furnishes rental equipment.  The Mass statute does not limit liens to periods of actual use – the exact words of the law govern.  The statue does not authorize judges to draw lines for non-use, making some lien amounts unrecoverable

ISSUE 2 – LIEN FILED IN TIME HERE, JUDGE RULES

Liens must be filed within 90 days “after the last day a person entitled to enforce a lien furnished rental equipment”. The judge heard evidence and ruled the filing was on time.

ISSUE 3 – DID THE SUPPLIER KNOWINGLY OVERSTATE THE AMOUNT OF ITS CLAIM?

A lien can be challenged if the amount claimed is “knowingly overstated”.  Here, the rental agreement was a written supply contract, and the claim was based on it  – so there was no relief based on intentionally overstating the amount.

ISSUE 4 – WAS MONEY ‘DUE AND OWING’ WHEN THE LIEN WAS FILED?

Liens are limited to the amount the Owner owes to the Contractor when the lien gets filed. Here, there was an unfulfilled agreement by the Owner to give the Contractor two lots in the subdivision. An appraiser said those were worth $900,000 – so the lien was not invalidated for that reason.

ISSUE 5 – SUBCONTRACT LEASE RATES SET TO RUN UP COSTS WAS BAD FAITH

The Contractor took a huge loan from the equipment supplier;  the lease agreement had exorbitant rates. The Contractor never repaid the loan or any of the rental charges.  The Supplier kept the equipment idle on site for long periods of time taking no steps to shrink the rental charges. Neither side paid or pressed for payment, letting the costs run up and setting the table for the lien.  The trial judge found, and the Appeals Court agreed that the structure of this subcontract was unscrupulous, violating MGL c 93A (Massachusetts law prohibiting bad faith business conduct.)

The Appeals Court validated the existence of the supplier’s lien but sent the case back to the trial judge to redetermine 93A damages in light of the interpretation requiring payment of liens that the judge found were deceptively created.  Judge was invited to reconsider and enhance the Owner’s 93A claim for damages.

COBB COMMENTARY

Liens are based on statutes. Lien claims are strictly interpreted considering those laws. Liens must be filed in time, there must be money owed from the Owner to the Contractor at the time of the filing, the claimed amount can be challenged.

The Owner here should have insisted on lien waivers from this lower tier major supplier with each requisition payment.

Mechanic’s liens act as an attachment against title to real estate, their purpose is to provide security to contractors, subcontractors and suppliers for the value of their work and materials provided for improving Owner’s real estate. Project lenders demand that Owner/Developers keep mechanic’s liens off the work.