In this blog, presented by SunRay Construction Solutions and Chad I. Michaelson, Partner, Meyer, Unkovic & Scott LLP, find out in detail about what contractors, subcontractors, and suppliers in Pennsylvania must do once they file their mechanics lien to ensure that they get paid successfully.
Lien – Judgement – Money
So, what is the process of getting the money you are owed? Technically, there are three steps involved – the preliminary notices that you need to file, the lien itself, and then the judgement which is what allows you to collect the money. However, the judgment is also just a piece of paper which means that there is an additional step which is what turns the judgement into actual money. Read on as we explain in detail about these steps.
Notices, Liens, and Judgments
If you are a subcontractor or a supplier, then there are several steps that you will need to follow as per the lien law in Pennsylvania. And, if you do not have a direct contract with the project’s owner, you must file the preliminary notice. Here are some of the key steps that you must take:
a. Subcontractors and suppliers must serve the owner with preliminary notice of intent to lien within five months after you complete. Although in Pennsylvania, you have six months to follow a lien, you will need to file the preliminary notice 30 days before filing your lien. Remember that this notice is not a lien, so if you serve the notice but don’t follow up and actually file the lien within six months, then you don’t have a lien.
b. Once your lien is filed, the next step is to prepare and file a mechanics lien claim. There are very specific requirements about what goes in the mechanics lien claim. Once the claim is prepared and properly filed, it should be served to the project's owner.
c. Once the claim is filed and served, keep in mind that filing the claim only imposes a lien and not a judgment.
The difference between a lien and a judgment is that a lien is just a claim on the property. It is like a recording of a mortgage wherein if somebody wants to sell the property, they will see that they cannot sell it without first dealing with the mortgage. So, when you file the claim, there will be a lien recorded; however, it does not impose an obligation on the property owner to pay you anything.
Lien = Leverage
Although a lien does not get you the right to payment, it does create leverage.
a. A lien is typically just the contractor’s side of the story, and it is highly likely that the owner will challenge the claim.
b. However, even before the parties get involved in the legal proceedings, the mere existence of the lien will have a significant impact on the owner’s financing and on the general contractor’s right to payment under its contract. Owners who are working under construction loans may not be able to take draws or general contractors who are applying for periodic payments may not be able to do so unless they satisfy the owner that they have paid all their subs and suppliers and that there is no lien.
c. The process of trying to get a judgement and then collecting on the judgment is a long and costly process which the owner is aware of. So, when you file a lien, the cost and time required to litigate further helps in creating a leverage for the lienholder.
The basic idea is to get paid based on the filing of the lien and not have to go through the entire litigation process of enforcing the lien.
Mechanics Lien Complaint
The next step in the process is to file a mechanics lien complaint. So, once you have filed and served your lien and you have a valid lien on the property, the next step that you need to take to turn that lien into a judgement that you can use to get the money is to file a lawsuit which starts with a complaint.
The mechanics lien complaint states that you have filed a mechanics lien, it has been properly served, this is the amount due, and you want the Court to turn that into a judgment.
a. The mechanics lien complaint must be filed within two years after you file your mechanics lien claim. So, you will have some time to negotiate a resolution before you go ahead and file a lawsuit.
b. One key thing to remember is that the mechanics lien complaint proceeds just like a typical lawsuit. So, once you file the complaint, the other party will have 20 days (about 3 weeks) to file an answer or file objections. If they file an objection, you will need to go to the court to address it, and it can take up to 90 days (about 3 months) to get resolved.
Next step is the discovery phase where documents are exchanged, or depositions are taken to establish the contents of the claim. Once this is done, there may be other motions filed to dismiss the case. Finally, you will proceed to an actual trial where you will need to prove your claim in front of the judge.
After the trial, if the verdict is in your favor, then the other party has the right to appeal. So, as you can see, the entire process is quite lengthy and costly. Another key point to remember is that the lien law does not include an attorney fees provision. So, even if you are awarded the complete amount of your claim, it does not mean that you are entitled to the attorney fees amount.
Let us say you have a lien, and the owner is willing to pay 80% of it. This is where you need to take the above points in to consideration and decide whether you are okay with receiving the 80% now or spending more than that on the judgement to get the full lien amount.
c. There is also a possibility of the owner filing ‘preliminary objections’ to the claim or the complaint. The preliminary objection is a way for the owner or the general contractor to say that you have made some mistake in your lien. Now, the lien laws are tricky, and you must do exactly what the statute says. Even a minor mistake can make your lien invalid. These preliminary objections are common and one thing to keep in mind is that as per the lien law, there is no time limit as to when these preliminary objections can be filed.
Typically, if you file a lien immediately, then you have about six months to make changes or file a new lien if you are made aware of the preliminary objections well in advance. However, if you are past the deadline, then you cannot make certain amends to the filed lien, such as you cannot change the name of the property, you cannot change the name of the party with whom you have the contract, you cannot increase the lien amount, etc.
These preliminary objections can be quite problematic, which is why you must ensure that you get everything right in the first time itself.
Another reason you do not want to litigate your lien claim besides attorney fees is because lien litigation has some limitations. Typically, the mechanics lien law is intended to protect contractors and suppliers. Unlike an ordinary civil suit, a mechanics lien gets you a lien immediately because of which it also includes some limitations.
a. The judgement is provided only for the value of labor and materials. Although this is what the bulk of your claim would be, sometimes it may also include other claims. For example, the Pennsylvania Contractor and Subcontractor Payment Act is an important remedy for contractors and subs.
b. Known as CASPA (Contractors and Subcontractors Payment Act), it states that if the owner or the general contractor does not make the payment in accordance with the contract, they are required to pay interest and potential attorney fees. However, you cannot include CASPA remedies in a complaint to enforce a lien. You will have to file a separate civil action where you allege a breach of construction contract and seek amounts that are due plus your CASPA damages.
c. The owner cannot assert counterclaims but can set off against lien amount. So, if the owner has any back charges against you, they can use those claims to set off against your lien amount and reduce the amount that you might be able to lien or get a judgement.
Judgment is Just Paper
The last step here, after you have gone through litigation and managed to reduce your lien claim to a judgment, is to get paid. Once you get the judgement, you must collect it. What you need to remember is that the judgment is just a piece of paper. It is just recorded in the Court of the county where it is entered and states that the general contractor or the owner owes you a certain amount of money.
To get that judgment turned into money, there are a full set of laws and rules that you will have to follow.
a. There will be no final judgment until all the appeals are exhausted.
b. You will need to find the fixed assets and get them converted into cash.
c. The enforcement of a judgment is also a very time-consuming and expensive process.
Based on the above considerations, you can understand why filing a lien and the leverage it brings puts you in a sort of settlement position which you must seriously consider. In principle, you may file a lien because you are owed a specific amount for the work you did; however, if the reality is that the owner or the general contractor cannot or is refusing to pay, then you need to consider the time and money involved in getting that specific amount back. In some cases, you may end up spending more and recover much less than what is owed to you.
It all comes down to making a sound and smart business decision. If you think that you can resolve your lien without going through the entire litigation process, then you should do that, and if you think litigation is the answer, then you should proceed accordingly.
Just remember that filing a lien is not a judgement and it does not entitle you to get money in your pocket. It is a longer process which involves the assistance of an attorney and lots of time, money, and resources.