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. (Picture 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:

  1. The owner’s reasonable attorney’s fees;
  2. Reasonable costs incurred by the owner to challenge the validity of the lien;
  3. 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
  4. Any actual damages incurred by the owner.

What’s significant about this statute is all the punishments it creates for 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 appears to impose 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) that’s it.

So, if you’re the property owner, you’ll love this statute. If you’re a contractor or represent lien claimants, you’re probably going to think about this statute when you file any 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.

 

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.