mechanics lien – Creditors Rights 101

Tennessee Legislature overreacted when they repealed Tenn. Code Ann. § 66-21-108.

If you’ve spent any time on this blog, you’ve know all about Tennessee’s wrongful lien statute, Tenn. Code Ann. § 66-21-108.

It’s a fairly new statute, enacted on May 21, 2018, and I’ve called it the scariest statute I’ve seen. That’s because the statute imposes broad (and automatic) penalties on lien claimants who lose a lien challenge, with the penalties being so harsh that it could have a chilling effect on lien claims.

So, having said that, I was glad to see that the Tennessee Legislature was going to walk back some of those automatic penalties with some proposed amendments to the statute for 2019. Specially, the changes to 66-21-108 would impose a “malice” requirement and would change the “shall recover” language to “may recover.” These changes would protect the mechanic’s liens with justifiable claims, but would preserve claims against those creditors who are looking for undue (and illegal) advantage.

In the end, I was glad to see some correction to the statute, but, candidly, I also thought that the changes took basically all the teeth out of the statute. From my time fighting in Bankruptcy Court, I know that “malice” isn’t an easy concept to prove.

I also know that some creditors’ philosophy is “when in doubt, why not file a lien”? Under the old statute, if those creditors weren’t careful, they would definitely get hit with damages. I’ve seen a lot of bad liens in my time, and this statute provided a remedy that homeowners legitimately needed.

So, it was with a lot of disappointment that I’ve discovered that, rather than amending the statute, the 2019 Legislature just repealed the entire statute.

The statute was designed to solve a very real problem. As it stands right now, there are no real remedies for a property owner to recover costs and expenses when challenging a wrongful lien on their property. As a result, there’s no real disincentive to keep a creditor from recording a questionable lien.

At some point, the cost, expense, and hassle of fighting over an invalid lien isn’t worth the fight. Lien creditors know that they get incredible leverage when they record a lien, and, under now existing law, there’s not much risk to them.

Honestly, I’d rather have the original version of the statute (which made lien claimants really evaluate their claims and think twice before encumbering a person’s property) than no statute at all.

Tennessee Supreme Court provides deep analysis on elements of “novation”

The Tennessee Supreme Court issued a new opinion today, which is notable for a few different reasons.

First, it discusses a legal dispute over The Braxton, which was a luxury high-rise condo building in Ashland City, Tennessee, and which is considered by some to be one of the first big development “fails” of Great Recession Nashville.

Second, the case provides a comprehensive analysis of the law on novation.

The case is TWB Architects, Inc. v. The Braxton, LLC No. M2017-00423-SC-R11-CV (Tenn., July 22, 2019).

At its most basic, “novation” is when a party substitutes a new obligation for an existing obligation, such that, after the novation, the second obligation is the only legally binding remaining obligation. Continue reading “Tennessee Supreme Court provides deep analysis on elements of “novation””

Property Owners Can Bond Over Mechanic’s Liens under Tennessee Law

A mechanic’s / materialman’s lien on real property in Tennessee is a very powerful tool. When a contractor asserts a lien, that lien, effectively, ties up the property until the contractor’s claims are resolved.

It’s a huge bargaining chip: The property owner can’t sell, transfer, pledge, or, generally, do anything with the property until the contractor’s lien is released.

That’s likely why the Tennessee Legislature passed
Tenn. Code Ann. § 66-21-108, which imposes harsh penalties on people who file invalid liens on real property.

So, if you’re a property owner who wants to fight a mechanic’s lien, is there anything you can do to get it removed, in lieu of payment or litigation?

Yes, you can record a bond to indemnify against the lien and get it discharged. That bond process is described at Tenn. Code Ann. § 66-11-142. In essence, the bond replaces the lien and ensures payment to the contractor, in the event the lien is deemed valid.

With a bond in place, the property can be transferred, and the lien claimant proceeds against the bond for cash, which is all they wanted in the first place.

Construction Lawyers Rejoice! Tennessee Legislature Proposes Amendment to Fix the “Invalid” Lien Law

A few weeks ago, I wrote about Tenn. Code Ann. § 66-21-108, a fairly new statute that I called the scariest statute I’ve seen in long time.

This statute imposes strict liability and double / triple / quadruple penalties upon lien claimants who lose a lien challenge. As enacted, the statute didn’t draw any distinctions between good faith lien claims and fraudulent claims.

In short, if you lose any lien challenge, you lose big.

My concern was that this would have a chilling effect on Tennessee lien claims. Honestly, I was going to be nervous every time I filed a future mechanic’s lien, no matter how good my factual and legal basis was. You just never know what can happen in Court.

So, it was no surprise when I saw that House Judiciary Committee Chair Rep. Michael Curcio, R-Dickson, and Sen. Todd Gardenhire, R-Chattanooga, introduced a bill this week that was drafted by the Tennessee Bar Association’s Construction Law Section to fix this.

This proposed legislation HB875/SB682 adds a “malice” requirement when imposing penalties. Specifically, the big change comes in subpart (a), which provides:

“…a real property owner who prevails in an action challenging the validity of a lien, and establishes, by clear and convincing evidence, that the person claiming the lien has acted with malice, including in a libel of title proceeding, may recover: …”

I’m disappointed that I wasn’t able to use this statute on somebody, but it’s a small price to pay in order to avoid somebody using it on me.

Tenn. Code Ann. § 66-21-108 is the Scariest Statute I’ve Seen in a While (and I can’t wait to use it)

On May 21, 2018, the Legislature enacted a law related to real property lien disputes with some real teeth. (When I say “teeth,” I’m picturing the movie poster for Jaws.)

That statute is Tenn. Code Ann. § 66-21-108.

The law provides that, if a real property owner prevails in challenging a lien, the owner “shall recover” all of the following:

The owner’s reasonable attorney’s fees; AND
Reasonable costs incurred by the owner to challenge the validity of the lien; AND
Liquidated damages in an amount equal to ten percent (10%) of the fair market value of the property not to exceed one hundred thousand dollars ($100,000); AND
Any actual damages incurred by the owner.

What’s significant about this statute is all the punishments it awards a party losing a lien dispute. It creates a statutory basis for attorneys fees (remember, Tennessee is an “American Rule” state) and also creates a statutory basis for pretty hefty liquidated damages (remember, Tennessee courts don’t favor liquidated damages provisions).

And, in case that’s not enough, don’t overlook that this statute imposes these double penalties on a “strict liability” basis, meaning that there needs to be no showing of bad faith. Instead, all that the property owner needs to do is: (1) prevail; and (2) ask for all these damages.

So, if you’re the property owner, you’ll love this statute. If you’re a contractor or represent lien claimants, I suspect you’re going to think twice (and maybe more) about this statute every time you file a lien claim.

General Contractors, Subcontractors, Subs, and All Those Other Terms

Old habits die hard.

Growing up in Memphis, I knew our local college as “Memphis State.” Then, in 1994, the name changed to “University of Memphis.” But, guess what everybody still calls it? Memphis State.

In 2007, Tennessee’s mechanic’s lien statutes were drastically overhauled. Lots of things changed, but one of the most noticeable was in terminology.

Before 2007, everybody made distinctions between “general contractors” (i.e. those contractors who have a direct contractual relationship with the owner of the real property) and “subcontractors” (those contractors who do not have a direct contract with the owner).

After 2007, those terms changed. Now, the terms are “prime contractor” and “remote contractor.” Tenn. Code Ann. § 66-11-101 (12) and (14) provide those definitions.

The difference in rights is significant.

A prime contractor has a lien that lasts a one year after the work is finished or materials are furnished and that lien doesn’t require any special demand or lien to be recorded in order to preserve those rights (warning: this is a drastic oversimplification).

A remote contractor has more hoops to jump through and limitations on its lien rights. Tenn. Code Ann. § 66-11-115 describes those “hoops,” which include a requirement to serve a notice of non-payment to all parties (See Tenn. Code Ann. § 66-11-145) and to record a Notice of Lien (See Tenn. Code Ann. § 66-11-112).

So, in the end, just because everybody talks about general contractors and their subs, don’t think that the change in the laws was purely cosmetic.

Not all tenants are agents of their landlords, says Tenn. Code Ann. § 66-11-102(d)

When a mechanic’s lien claimant sits down with their attorney to file a mechanic’s lien on real property, the attorney generally leads with the same, initial question: Was your contract directly with the owner or did you deal with a general contractor? The lien laws can take drastically different paths, based on the answer.

But, what if the contractor says: Neither, I dealt with the tenant.

In that case, it depends.

In the past, I’ve generally included a broad allegation that the tenant acted as the owner’s agent for the improvements, based on a few old common law cases.

In 2007, the legislature enacted Tenn. Code Ann. § 66-11-102(d), which restricted the lien claimant’s ability to assert a lien “unless the lessee is deemed to be the fee owner’s agent.”

This new statute requires a far more detailed showing from mechanic lien claimants. In determining whether the tenant acted as the owner’s agent, the statute states that “the court shall determine whether the owner has the right to control the conduct of the lessee with respect to the improvement…” Further, the Court “shall consider” the following four factors:

Whether the lease requires the lessee to construct a specific improvement on the fee owner’s property;
Whether the cost of the improvement actually is borne by the fee owner through corresponding offsets in the amount of rent the lessee pays;
Whether the fee owner maintains control over the improvement; and
Whether the improvement becomes the property of the fee owner at the end of the lease.

So, to be clear, it’s no longer of simply alleging that a tenant was the owner’s agent. Instead, there is now a clear(er) statutory framework that must be followed.

Simply having a landlord tenant relationship isn’t enough to impute agency for lien purposes. This statute appears to require that the tenant truly acted at the direction of the landlord.

While there haven’t been any Tennessee cases on this statute, legal commentaries have described this as setting a fairly high burden on parties claiming a lien. This may reflect the fairly conservative nature of the Tennessee legislature, but, given the specific text, I’m betting our courts will enforce it as written.

Holding a Car Pursuant to a Mechanic’s Lien Doesn’t Violate the Automatic Stay

Generally, if you’re a creditor and you have possession of a bankrupt debtor’s possessions, you have to give it back when they file bankruptcy. But not always.

Today, I’m talking about mechanic’s liens.

As you’ll remember in Tennessee, Tenn. Code Ann. § 66-19-101 allows a mechanic to assert a lien for repairs performed on a vehicle, and, in order to preserve the super-priority perfection in the vehicle, the mechanic has to retain actual, physical possession of the car.

But, what about when the customer files bankruptcy, and the demand to turnover the vehicle comes from a Bankruptcy Attorney, alleging a violation of the automatic stay?

Bankruptcy Courts say that the mechanic can still hold on to the car.

Certain actions are excepted from the automatic stay, including “any act to perfect, or to maintain or continue the perfection of an interest in property to the extent that the trustee’s rights and powers are subject to such perfection under section 546(b)” 11 U.S.C.A. § 362(b)(3). Section 546(b) limits a trustee’s avoidance powers under 11 U.S.C.A. § 549 with respect to “the maintenance or continuation of perfection of an interest in property … [i]f a law … requires seizure of such property … to accomplish such perfection, or maintenance or continuation of perfection of an interest in property[.]” 11 U.S.C.A. § 546(b). Statutory liens such as mechanics liens fall within the scope of this exception.

That’s a lot of legal citations, so here’s the take away: if the repairman holds a statutory mechanics lien upon the vehicle for the repairs done, then the retention of the vehicle–even after the Bankruptcy Case is filed–does not violate the automatic stay.

In that case, the Debtor must either propose to pay the lien, fight it, or give up the car. Good news for mechanics.

Remote Contractors Can’t Assert a Materialman’s Lien on Residential Property in Tennessee

In this booming economy, there’s money in real estate, and the contractors who went broke in the Great Recession are back on top. So, let’s talk for a moment about mechanic’s and materialman lien laws, i.e. the Tennessee laws that allow an unpaid contractor to assert a lien claim on the real property that is improved by his labor and materials.

If you’re a contractor and you provide labor and materials to a real property project, you can always assert a lien on the property, right? Well, like many things in the legal world, the real answer isn’t that easy.

Here’s a quick exception to keep in mind.

First off, are you a “remote contractor” or a “prime contractor”?

A contractor who contracts directly with the owner is a “prime contractor.” A “remote contractor” is anyone who provides material, services, equipment or machinery in furtherance of an improvement pursuant to a contract with a person other than an owner (i.e. a subcontractor who is brought on to the project by the general contractor).

Under Tennessee’s lien laws, remote contractors may not assert liens on what is defined as “residential real property.” Tenn. Code Ann. § 66-11-146(a)(1) defines “residential real property” as a dwelling unit in which the owner intends to reside. There’s an exception under Tenn. Code Ann. § 66-11-146(b)(2) for situations where the owner is operating as a de facto general contractor (in which case the remote contractor has contracted with the owner, so the remote contractor is really a prime contractor).

So, yes, lien laws are a great way to protect contractors and ensure that their debts are paid. Just not on residential projects.