Fighting Mechanic’s Liens from the Subcontractors You Didn’t Know About – Union Fringe Benefit Funds

Fighting Mechanic’s Liens from the Subcontractors You Didn’t Know About – Union Fringe Benefit Funds

September 19, 2018

By Jeffrey A. Wieland

jaw-bp-portrait

Jeff is a shareholder in the Construction Litigation Department at the Fabyanske, Westra, Hart & Thomson law firm. He has a B.S. in Engineering Physics and a Master’s degree in Mechanical Engineering. He spent 15 years working as an engineer and project manager before becoming a lawyer. He is licensed to practice law in Minnesota, North Dakota, and several federal courts, where he typically represents contractors, subcontractors, suppliers, and owners. He can be reached at 612.359.7605 or           jwieland@fwhtlaw.com

 

 

           Mechanic’s liens serve a vital function in the construction industry – they provide payment security for those that who provide the work and materials for projects improving real property.[1] Like most people, I like to get paid for my work, so I understand why this is important. Owners, however, dislike mechanic’s liens because they can force the owner to pay for the same work twice – once to the general contractor to satisfy the contract and then again to the subcontractor or supplier to remove the mechanic’s lien.[2] There are several mechanisms to protect owners against the possibility of double liability such as notice requirements, lien waivers, and contractual indemnity provisions. But I recently had a case that exposed a potentially common situation in Minnesota in which those protections against double liability fail.[3]  My client, the general contractor, had to pay to remove a lien against the project recorded by union fringe benefit funds, even though the general had paid its subcontractor and the benefit funds did not directly provide any labor or materials to the project.

The Fact Pattern

          The fact pattern in the case was not particularly unusual.  The carpentry subcontractor on the project apparently suffered some financial distress.  The subcontractor was able to pay its workers their wages, but the subcontractor, which was a signatory to a collective bargaining agreement with the carpenters’ union, did not make contributions to the union fringe benefit funds required under the bargaining agreement.[4]  The general paid the subcontractor in full for the work performed, and the subcontractor executed corresponding lien waivers for the payments.  Later, the union fringe benefit funds served and recorded a mechanic’s lien against the project for the amount of the allegedly unpaid fringe benefit contributions, which was substantial.  Naturally, litigation followed.

How the Parties Got There

          This dispute arose on a commercial construction project.  Because it was a reasonably large, i.e. greater than 5,000 square feet, non-residential project, pre-lien notice to the owner was not required.[5]  The general contractor was not aware that the subcontractor was a signatory to a collective bargaining agreement, and the fringe benefit funds did not make their interest in the project known until very late in the game.  The first protection against double liability, notice, was thus not present.[6]

          The general contract included the usual language requiring the general contractor to defend and indemnify the owner against mechanic’s liens to the extent that the owner paid.  The owner paid the general promptly and in full.  The general contract language did not eliminate the risk of double payment liability, but it shifted that risk from the owner to the general contractor.  When the benefit funds’ lien was recorded, the owner tendered defense and indemnity of the lien to the general.  The general accepted the tender and commenced litigation to clear the owner’s title.

          The subcontract had a similar provision requiring the subcontractor to defend and indemnify the general from liens to the extent that the general paid the subcontractor.  The general had paid the subcontractor, so it tendered defense and indemnity of the lien to the subcontractor.  Like all liability shifting provisions, however, this one was only as good as the financial strength of the indemnifying party.  The subcontractor was in financial difficulty, so it did not accept the tender of defense and indemnity for the lien.  That meant that the general was still on the hook for the lien.

The Twin City Pipe Trades Opinion

          I’ll admit that when I first got the call from my client about this case, I was puzzled.  Minnesota’s mechanic’s lien statute permits those who contribute “to the improvement of real estate by performing labor, or furnishing skill, material or machinery” to record a lien against the property that was improved.[7]  The union fringe benefit funds certainly provide valuable benefits to their members, but they do not directly contribute labor, material, or machinery to a project.  So I wondered how the benefit funds could claim a mechanic’s lien.

          The union benefit funds rely on a Minnesota Court of Appeals opinion that appears to say they can record mechanic’s liens against projects.  In Twin City Pipe Trades Service Association, Inc. v. Peak Mechanical, Inc.,[8] a union benefit fund claimed a mechanic’s lien to collect unpaid fringe benefits for its union members that worked on the project.  The trust agreement for the benefit fund appointed the fund as “the representative of the union employees in any ‘legal proceeding, including the filing of mechanic’s liens on any property where Employees of a delinquent Employer have furnished labor, and for the additional purpose of acting as such representative in any court foreclosure proceeding to enforce payment of the lien.’”[9]  The Court held that the language in the collective bargaining agreement was analogous to an assignment of mechanic’s lien rights from the union employees to the fund, so the fund could stand in the shoes of the employees and claim a mechanic’s lien.[10]  The union benefit funds now routinely use mechanic’s liens to try to collect delinquent fringe benefit payments.

          The Twin City Pipe Trades opinion is a good example of bad policy resulting from a judicial opinion that tries to address more than the question before it.  The issue that was actually litigated in the case was whether the union benefit fund could claim a lien in its own name without designating the individual employees who actually performed the work.[11]  That is a question that revolves around how strictly the requirements regarding lien statements are enforced.[12]  In Minnesota, as in most other states, courts apply two different standards in mechanic’s lien cases.  There is a natural tension in mechanic’s lien law between the need to protect unsuspecting third parties from claims and the underlying purpose of the mechanic’s lien remedy, which is to make sure that the people who do the work get paid.[13]  The courts address that tension by strictly enforcing requirements related to formation of the lien, while liberally construing the rest of the lien statute.[14]  In the Twin City Pipe Trades, the issue was whether the requirement in Minn. Stat. § 514.08 subd. 2 that the lien statement set forth the name of the claimant should be subject to strict or liberal interpretation.

          The Twin City Pipe Trades court decided that this was a question that should be analyzed under a liberal construction of the statute.

The inquiry of whether some name was used is distinct from whether the right name was used; the former is subject to a strict construction because it is essential to create the lien.  But the issue of whether the right name is used relates not only to the lien’s validity but also to the lien’s protective scope.  The scope of a lien’s protection determines the availability of relief and, in this case, the availability of funds for the workers’ welfare and pensions.  An interpretation of the scope of protection, within the framework of the statutory language, generally receives a remedial or more liberal interpretation.[15]

          The court appears to be saying that leaving the claimant line blank on the mechanic’s lien statement would be fatal to the lien, but as long as some name is given, the court will look for a way to uphold the lien.  Effectively, the court took a narrow technical question and opened the statutory lien remedy to a new class of claimants.[16]

          The Twin City Pipe Trades court based most of its analysis on a U.S. Supreme Court case, United States ex rel. Sherman v. Carter,[17] and its progeny, that analyzed whether union benefit funds could file bond claims on behalf of their members.[18]  The Carter decision held that the funds could file bond claims on behalf of their members so that the remedial purpose of the bond remedy could be satisfied.[19]  On its face, looking to that line of cases makes sense because bonds and mechanic’s liens are similar remedies.  The problem is that the Carter decision is from 1957, before Congress passed ERISA, which now governs benefit funds.  While the Twin City Pipe Trades court acknowledged that ERISA governs union benefit funds, it did not analyze the effect that ERISA has on the funds’ standing to record mechanic’s liens.[20]

          ERISA contains a broad pre-emption clause.[21]  Congress put the broad pre-emption clause into the Act because it intended ERISA to be a comprehensive regulatory framework, providing a nationally uniform set of obligations and remedies for benefit plans.[22]  In layman’s terms, ERISA trumps state laws.  And mechanic’s liens are created and controlled by state laws.

          The issue of ERISA pre-emption may not have been raised to the Twin City Pipe Trades court, but it should have been.  The First, Second, Third, Fifth, and Ninth Circuits have considered whether ERISA benefit funds may use state mechanic’s lien statutes.  They all held that mechanic’s lien remedies are not available to the benefit funds on ERISA pre-emption grounds.[23]  The courts reached their holdings following two main lines of reasoning.

          The first line of reasoning is that ERISA § 502, codified at 29 U.S.C. § 1132, provides the exclusive remedies available under ERISA.[24]  The Supreme Court has carefully studied the intent of Congress in this area.

In sum, the detailed provision of § 502(a) set forth a comprehensive civil enforcement scheme that represents a careful balancing of the need for prompt and fair claims settlement procedures against the public interest in encouraging the formation of employee benefit plans.  The policy choices reflected in the inclusion of certain remedies and the exclusion of others under the federal scheme would be completely undermined if ERISA-plan participants and beneficiaries were free to obtain remedies under state law that Congress rejected in ERISA.  The six carefully integrated civil enforcement provisions found in § 502(a) of the statute as finally enacted … provide strong evidence that Congress did not intend to authorize other remedies that it simply forgot to incorporate expressly.[25]

          Or put more succinctly, “we have held that state laws providing alternative enforcement mechanisms also relate to ERISA plans, triggering pre-emption.”[26]  The federal courts of appeals have followed that guidance (as they must).  In Plumbing Indus. Bd., the Second Circuit held that ERISA has exclusive remedies, and “states are not free to add or subtract additional remedies to the mix, even if doing so would be helpful to the interests of plan beneficiaries or participants.”[27]  The Fifth Circuit was even more terse in addressing whether benefit funds could use the mechanic’s lien remedy.  “Federal remedies are provided.  Mechanics’ lien rights are omitted.”[28]

          The second line of reasoning that courts have used to find that union benefit funds cannot use the mechanic’s lien remedy is that ERISA dictates who has payment obligations to the benefit plans under the statute.  The Third Circuit quoted from ERISA’s legislative history.  “[ERISA] places the obligation for funding and the penalty for underfunding on the person on whom it belongs – namely, the employer.”[29]  The court noted that if the employer does not make the required contributions, ERISA authorizes civil actions to enforce the statute, but it does not permit the funding burden to be shifted to other parties.[30]  Similarly, the Second Circuit stated, “[W]e held that ERISA, by specifying who must fulfill the employer’s obligations to pay benefits, impliedly provides that parties not so specified need not do so.  A state is not free to designate new obligors for an employer’s ERISA obligations.”[31]

          If benefit funds are permitted to file mechanic’s liens to collect payments, they are shifting payment obligations under ERISA from the employers of covered employees to the property owners who hire the employers.  Nearly everyone would agree that making sure that benefit funds get the money they need to ensure that their participants can enjoy retirement, health, and training benefits is a good policy goal.  But Congress also worried about unintended consequences of expanded obligations under ERISA.  For example, if union benefit funds could shift payment obligations from employers to unsuspecting property owners through mechanic’s liens, then owners would have a powerful incentive to disfavor union employers.  So Congress very carefully considered and enacted the remedies that may be used to enforce ERISA obligations and pre-empted any law or regulation that would alter that enforcement scheme.  Use of a mechanic’s lien is one of those prohibited enforcement mechanisms.  The Twin City Pipe Trade opinion does not address any of those complicated issues, leaving the union benefit funds’ use of mechanic’s liens in Minnesota open to attack.

Practical Considerations

          There are a number of practical considerations that come into play when union benefit funds claim mechanic’s lien rights.

          Most owners require lien waivers from the general and its subcontractors and suppliers as a condition of payment.  My research has revealed, at least anecdotally, that Minnesota’s union benefit funds refuse to provide lien waivers.[32]  That can cause a situation in which the owner or the general refuses to make further progress payments if they know that a collective bargaining agreement signatory is on the project.  That is reasonable because without lien waivers from everyone who could claim a lien, the owner and general are vulnerable to double liability for the same work.  That could create a cash flow problem for the contractors on the project.  The subcontractors that employ union tradespersons are most likely to suffer from that cash flow interruption because they have payrolls to make.  As more owners and generals become aware that union benefit funds may exercise mechanic’s lien rights on their projects, I expect more payment disputes caused by the lack of lien waivers from the benefit funds.

          The benefit funds typically calculate a contractor’s payment obligations based on the number of hours worked by each worker.[33]  Those hours are reported periodically by the contractor to the funds.  That reporting may not accurately track hours against projects, which can make it difficult for the funds to accurately allocate liability for unpaid benefit contributions to specific projects.  Also, the reporting period may not be synchronized with the project.  Under-reporting to the funds of hours worked is usually only detected by audits, which necessarily lag behind the reporting period.  That can cause problems for the funds because mechanic’s liens have rigid filing deadlines.  The benefit funds may not discover that a contractor has not been making required contributions until after the lien deadlines have expired.

          Perhaps the biggest practical difficulty with benefit fund liens is the amount of the lien.  The amount that a contractor is required to contribute to the benefit funds is a function of the number of hours worked.  On most projects, the benefit funds are not going to have a contractual agreement with the owner.  The funds are going to have contractual agreements with the contractors or subcontractors through their collective bargaining agreements.  Under Minnesota law, that means that the amount of the lien “shall be for the reasonable value of the work done, and of the skill, material, and machinery furnished.”[34]  The benefit funds are administrative bodies; they are not on the projects day-in, day-out.  They do not know what work is being done by any given worker at any given time.  They only know the number of hours worked.  That is not the same thing as “the reasonable value of the work done.”  That means that benefit fund liens can be attacked for overstatement.[35]  The number of hours actually spent by union laborers also has no necessary relation to the contractual price the subcontractor may have promised the general.

So What Should Contractors and Owners Do?

          First, knowledge is power.  So contractors and owners should find out if anyone on their projects is required to contribute to union benefit funds.  It is a violation of the National Labor Relations Act to discriminate against anyone based on union affiliation.[36]  Simply asking the question, however, is not discriminatory.  Having that knowledge allows the owner or contractor to take appropriate steps to protect against liens from the benefit funds.  Those steps also have the salutary effect of making sure that the required contributions are being made to the benefit funds.  You should talk with your attorney to find out if your solicitation documents, contracts, and procedures are correctly protecting you, while avoiding potential problems with the National Labor Relations Board.

          Second, contractors and owners should treat the benefit funds just like any other party that may have lien rights on the project.  Contractors and owners have obligations to pay for work and materials received, but they also have a right to demand lien waivers for payments made.  If the benefit funds refuse to provide lien waivers, then the resultant payment interruptions may well drive some collective bargaining agreement signatories out of business, which would be unfortunate.

          Third, if your project is hit with a lien from one of the benefit funds, talk to a knowledgeable construction attorney right away.  You may have any number of defenses.  Liens can be invalidated for lack of notice, not being timely, not being properly served or recorded, or for overstatement of amount.  You may have indemnity and defense rights from another party on the project through your contracts.  You could also attack the lien on ERISA pre-emption grounds.

          This is an issue that is important to the entire Minnesota construction industry.  It is absolutely imperative that workers have secure training, healthcare, and retirement benefits.  But exposing owners and contractors to double liability through mechanic’s liens from the benefit funds is bad for the industry, and ultimately, bad for the employees that the funds are trying to protect.

This article is a general discussion only and does not constitute legal advice or representation.

 

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[1] See London Constr. Co. v. Roseville Townhomes, Inc., 473 N.W.2d 917, 919 (Minn. Ct. Atpp. 1991) (“The essential purpose of the mechanic’s lien statute is to protect those who furnish material or services for the improvement of another’s property.”)

[2] This is less of an issue in North Dakota, which has a peculiar mechanic’s lien statute.

[3] My description of the case will omit some details and nuances for both client privacy and brevity purposes.

[4] The union fringe benefit funds provide training, health, and retirement benefits to eligible participants.

[5] See Minn. Stat. § 514.011 subd. 4c.

[6] One of the objectives of this briefing paper is to raise awareness of this issue so that other owners and contractors are at least aware that this type of situation can arise so that they can take steps to protect themselves.

[7] Minn. Stat. § 514.01.

[8] 689 N.W.2d 549 (Minn. Ct. App. 2004).

[9] Id. at 549.

[10] See id. at 555-56 (“By authorizing TCPT to enforce mechanic’s liens on their behalf, the employees effectively transferred their legal rights to file lien statements authorizing TCPT to do so in its own name.”).

[11] See id. at 550-51.

[12] See id. at 551.

[13] See, e.g., Dolder v. Griffin, 323 N.W.2d 773, 779-80 (Minn. 1982) (discussing rationale for the two standards used in legal analysis of mechanic’s lien issues).

[14] See id.

[15] Twin City Pipe Trades, 689 N.W.2d at 551-52 (emphasis in the original).

[16] See Minn. Stat. § 514.01.

[17] 353 U.S. 210 (1957).

[18] See Twin City Pipe Trades at 552-555.

[19] See Carter at 220.

[20] See Twin City Pipe Trades at 553.

[21] See 29 U.S.C. § 1144(a) (“[T]he provisions of this subchapter and subchapter III shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan described in section 1003(a) of this title and not exempt under section 1003(b) of this title.”).

[22] See New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645, 656-57 (1995) (“We have found that in passing § 502(a) [of ERISA], Congress intended ‘to ensure that plans and plan sponsors would be subject to a uniform body of benefits law; the goal was to minimize the administrative and financial burden of complying with conflicting directives among States or between States and the Federal Government …, [and to prevent] the potential for conflict in substantive law … requiring the tailoring of plans and employer conduct to the peculiarities of the law of each jurisdiction.’”) (quoting Ingersoll-Rand Co. v. McClendon, 498 U.S. 133, 142 (1990)).  ERISA § 502 is codified at 29 U.S.C. § 1132.

[23] See EklecCo v. Iron Workers Locals 40, 361, & 417 Union Security Funds, 170 F.3d 353 (2nd Cir. 1999); Plumbing Indus. Bd., Plumbing Local Union No. 1 v. E.W. Howell Co., Inc., 126 F.3d 61 (2nd Cir. 1997); McCoy v. Mass. Inst. of Tech., 950 F.2d 13 (1st Cir. 1991); Sturgis v. Herman Miller, Inc., 943 F.2d 1127 (9th Cir. 1991); Iron Workers Mid-South Pension Fund v. Terotechnology Corp., 891 F.2d 548 (5th Cir. 1990); McMahon v. McDowell, 794 F.2d 100 (3rd Cir. 1986).  But see Southern Cal. IBEW-NECA Trust Funds v. Standard Indus. Elec. Co., 247 F.3d 920 (9th Cir. 2001) (holding that California bond claim statute not pre-empted by ERISA).

[24] See Ingersoll-Rand Co. v. McClendon, 498 U.S. 133, 485 (1990) (“Congress intended § 502(a) to be the exclusive remedy for rights guaranteed under ERISA.”).

[25] Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 54 (1987) (internal quotation marks omitted).

[26] New York State Conf. of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645, 658 (1995).

[27] Id. at 68.

[28] Iron Workers Mid-South Pension Fund v. Terotechnology Corp., 891 F.2d 548, 554 (5th Cir. 1990) (quoting with approval Carpenters Southern Cal. Admin. Corp. v. El Capitan Serv. Co., 243 Cal.Rptr. 132, 135 (Cal. Ct. App. 1988)).

[29] McMahon v. McDowell, 794 F.2d 100, 106 (3rd Cir. 1986) (quoting S.Rep. No. 93-383, 93d Cong., 1st Sess. 24.).

[30] See id. at 106-07.

[31] Plumbing Indus. Bd. at 68 (internal citations omitted).

[32] They will, however, typically issue a letter upon request stating that a particular contractor is current in its payment obligations based on current information.  That leaves a loophole for the benefit fund to still make a claim if later information shows that the contractor did not make all required payments.

[33] The amount of the required contribution to the benefit fund is specified in the collective bargaining agreement.  The contribution rate is usually tied to the employee’s basic pay rate or based on classification and seniority.

[34] See Minn. Stat. § 514.03 subd. 1(b).

[35] See Minn. Stat. § 514.74 (“In no case shall a lien exist for a greater amount than the sum claimed in the lien statement, nor for any amount, if it be made to appear that the claimant has knowingly demanded in the statement more than is justly due.”) (emphasis added).

[36] See 29 U.S.C. § 158(a)(3).

 

 

This discussion is generalized in nature and should not be considered a substitute for professional advice. © 2018 FWH&T

 

 

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