A Virginia Mechanic's Lien Refresher, Courtesy of Jack Bays
June 24, 2013
In February 2013 the Supreme Court of Virginia handed down its decision in Jack Bays1, a mechanic’s lien lawsuit involving the landowner, several lenders, the general contractor and no fewer than eleven subcontractors. Although the decision broke no new ground with respect to the Virginia mechanic’s lien statutes, it is a good review of procedural issues and a reminder of the importance of thoroughly documenting work progress and communications with other parties in a construction project.
In this case, the landowner church’s financing efforts ultimately failed, notwithstanding the fact that construction on the $13 million project was well under way. When it was apparent the landowner would obtain no further financing, on September 28, 2007, Jack Bays, the general contractor, sent a written memorandum to all of the subcontractors informing them of delays in the financing approval process and advised them it would “stop all active work on the site until all payments are current.” Whether the general and subcontractors’ work on the job site after this date was in the nature of “demobilization” or continuing work on their respective construction contract obligations was the focus of the Supreme Court’s review of the trial court’s adjudication of the validity of the contractors’ mechanic’s liens.
Initially, the Court addressed the established jurisdictional rule that both the trustee and the beneficiary of a deed of trust are ‘necessary parties’ and must be made parties defendant in a mechanic’s lien suit. These parties must be included because they have “a substantial interest in being the given the opportunity to challenge the validity of the mechanic[s’] lien, or otherwise to litigate the elements of the lien.2 In this case, the landowner’s financing included a deed of trust in which several participating banks were described as “lenders” and which further described a “Trust Indenture” for the benefit of certain bondholders with the Glasser & Glasser law firm as trustee.3 The plaintiff in the mechanic’s lien suit joined Glasser as a party defendant but not the many bondholders. The Court rejected the argument that the bondholders were necessary parties to the litigation, holding that in the “present, limited context” of the mechanic’s lien statutes, the interests of the bondholders were adequately protected by their trustee.
The Court then turned to the appellants’ contention that Jack Bays had not filed its memorandum of mechanic’s lien in a timely manner and had improperly included in the amount claimed therein work outside the 150-day limit prescribed by statute. The Virginia statute requires a lien claimant to file its memorandum “not later than 90 days from the last day of the month in which he last performs labor or furnishes material, and in no event later than 90 days from the time such building . . . is completed, or the work thereon otherwise terminated.”4 Appellants argued that Jack Bays’ September 28, 2007 demobilization memorandum to the subcontractors marked the date on which work on the project was “otherwise terminated” under the statute, and therefore its recordation of a lien memo 92 days thereafter was untimely.
The Court noted that it was undisputed that the project was not complete on the date of Jack Bays’ September 28, 2007 memo and, further, that several subcontractors remained and performed contract work on site thereafter. Therefore, the Supreme Court held that the circuit court was not ‘plainly wrong’ in finding that Jack Bays’ 90-day time limit for filing its mechanic’s lien memorandum ran from the last day of September, 2007, not the date of its earlier demobilization memo.
Under the Virginia statute, a lien claimant is prohibited from including “sums due for labor or materials furnished more than 150 days prior to the last day on which labor was performed or material furnished to the job preceding the filing of [the mechanic’s lien memorandum].”5 In the first instance, this determination is a “factual inquiry” for the finder of fact, and the trial court held that although the date of Jack Bays’ memo did not mark the running of the 90 days for filing its mechanic’s lien memo, that date did fix the 150-day ‘look back’ period for inclusion of sums due.6 Again, the Court held that it was the appellants’ burden to show that this decision was “plainly wrong or without evidence to support it.” In addition to the trial testimony of its site superintendent, Jack Bays’ introduction of detailed invoices and an expert witness in construction accounting carried the day in the trial court. Although the factual inquiry was complicated by issues involving a stipulated sum contract agreement in contrast to a cost-plus contract, the Court upheld Jack Bays’ contention that its mechanic’s claim included no amounts for work prior to the 150-day period.
Next, the Court rejected a failure to mitigate damages argument, observing that “when it became apparent that additional funding would not be obtained, Jack Bays acted promptly and decisively.”
Although it affirmed all other findings by the trial court, the Supreme Court reversed the trial court’s order directing the landowner’s entire 22-acre tract be sold to satisfy “all of the liens.” The applicable Virginia statute ultimately enforces a mechanic’s lien by sale of the building on which work is done “and so much land therewith as shall be necessary for the convenient use and enjoyment thereof.”7 The Court noted not all liens at issue were mechanic’s liens and viewed the record as void of any evidence on whether the sale of the entire property was proper.
In summary, the Jack Bays decision is a good refresher on the procedures and proof required to prevail in a suit to enforce a mechanic’s lien and another reminder that counsel should advise a construction client to thoroughly document project work and communications with all parties in the project.