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Lien question - contractor bounced check


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DCG's Forum Posts: 159

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By DCG in Lago Vista, TX on 8/27/2008


Lien issue in Texas:

Homeowner writes a check to a contractor for initial materials.

That contractor then writes a check to his supplier for materials.

The materials are installed and the job is complete. The homeowner pays the contractor in full at this time.

Two weeks later: The homeowner gets a notice from a collections agency hired by the contractor's material supplier that they are filing a lien against the structure as they were not paid for materials. They were paid, but the check was bad.

The homeowner paid the contractor in full. The contractor wrote a bad check (more than covered by the homeowner).  The homeowner has a contract with the contractor and proof of payment.

Any recourse?


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By P in North, FL on 8/27/2008


Any remedies will depend on the laws in your particular area.

Homeowners have been shafted in my area. It stinks. Sometimes they don't have the extra money to pay off the liens. I think they can try to collect against their contractor's bond.


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By P in North, FL on 8/27/2008


gainesville.com/article/20080421/NEWS

Builder woes hit home

Published: Monday, April 21, 2008 at 6:01 a.m.
Builder woes
AARON DAYE/The Gainesville Sun
Gainesville, FL--041508--Two homes resident on the outskirts of what appears to be a deserted Burberry at Westchester neighborhood on Tuesday, April 15, 2008.

Six months ago, the lots in Weschester, a subdivision in northwest Gainesville, were flying off the market. Today the first wave of homeowners is beginning to wonder when the vacant lot next door will see development.

And further signs of troubling times have come as residents watch liens pile up against one of the homebuilders in the subdivision.

Brett Frye moved into his new house in Weschester in January, and was shocked to discover that a company providing building supplies to his homebuilder is seeking $3,742 in unpaid bills.

"As far as I am concerned absolutely no one has contacted me," said Frye. "I'm absolutely unaware of any liens that have been placed on my house."

Frye is one of many homeowners across the nation who have purchased or constructed new homes and now could face paying thousands of dollars to subcontractors for work they have already paid through the general contractor.

As the economy has slowed and some homebuilders have become overextended and short on cash, they have fallen behind in payments for construction - at least four major companies in the national home building market have filed for bankruptcy.

Local homebuilders say Gainesville has been shielded from that crash of inventory by not having any nationwide builders in town.

And in Weschester, one of the two homebuilders in the neighborhood on NW 43rd Street says it is financially sound and looking to the future of a great community. The other homebuilder, Watson Custom Home Builders in Jacksonville, said it is facing financial trouble.

More than 75 liens, totaling approximately $350,000 have been filed on the company's properties and homes in Alachua County.

The liens are for services including surveying, landscaping, cabinets and construction supplies that have not been paid for by the general contractor Watson.

If Watson is unable to pay off the subcontractors within a year of when the liens were filed, Florida lien laws could make it difficult for home buyers with open contracts to close on completed houses and buyers whose houses don't get completed could lose their deposits.

"That's what (president and owner) Jim Watson is really working very, very hard to do, get all of those pieces together, so we can close on these houses and finish the ones that are under construction," said Elizabeth Towers, an associate with Watson. Towers said the priority right now are houses that have been sold and moved into, but now have subcontractors seeking payment for work they did on the property through liens.

Liens prevent property from being sold, and in at least two cases in Weschester, liens have been filed on houses that have already been purchased and moved into.

In those cases, according to Florida's Construction Lien Law, if the liens don't get paid the home could be sold against the owner's will to pay for the labor, materials or other services the contractor didn't pay.

Watson is building homes in 31 subdivisions in Duval, Nassau, Baker, Clay, St. Johns and Flagler counties in Florida and Camden and Glenn counties in Georgia. Weschester is the company's only subdivision in Alachua County.

An online public records search showed the builder has had 232 liens filed since February 2008 in Duval County, 150 liens in Nassau County, 15 liens in Baker County, one lien in Clay County, 135 liens in St. Johns County and there were no liens in Flagler County.

Towers said that the company has drastically reduced staff and is seeking loans and financing.

"We are experiencing challenges and we're working from sunup to sundown," Towers said, pointing out that people are taking on different roles to get things done.

Henry Rabell, a sales representative for Bosshardt Realty who has been selling homes in Weschester, said that Watson has 35 homes under contract and 25 homes completed and occupied. Rabell said prices have been reduced and that homes are selling for about $136 per square foot.

"My concern first was what (the slowdown) would do to the overall value of the neighborhood," said Aaron Weldon, who closed on a house in Weschester last November. "Another concern we have is that Weschester is supposed to have a clubhouse and facilities for homeowners to use... We're hoping that is still in the works at some point."

Watson Custom Home Builders is responsible for about half of the 200 lots in Weschester, and Intervest Construction, Inc. (ICI Homes) is building on the other half.

Karen Sutherland, vice president of ICI Homes North Florida division, said she is aware that Watson is having problems. "They just got caught in a crunch and, unfortunately, they certainly aren't the only one and certainly won't be the last," Sutherland said. "They got to a point where they have too much inventory."

"We're still there, and we're still selling. We think it's a great community and an upcoming location," she said.

Michael Sechrest, a Gainesville construction attorney with Fisher, Butts, Sechrest & Warner, said homeowners in a situation like this could find themselves paying twice for work done on their houses - once to the general contractor or home builder and a second time to the subcontractor filing a lien.

Sechrest said the onus of responsibility often falls on the customer or home buyer to protect themselves from liens.

The customer must file something called a "release of lien," which is a written statement that protects a home buyer's property from liens.

Sechrest said lien releases must be filed prior to paying the contractor, when the homeowner is notified a subcontractor is doing work on their house through a "notice to owner."

A notice to owner is a document from a subcontractor notifying an owner that the subcontractor is beginning work on their property. It is required by Florida law within 45 days of the start of services or delivery of materials.

"If they ignore the notice or don't make a proper payment, they could pay a contractor for work and then later on have to pay the subcontractor," Sechrest said.

"Most people think the builder is responsible for the subcontractor lien releases, and most builders do provide that as an administrative act to assist the owner," he said. Sechrest added that it is important for the owner to have those releases "in hand" before each payment to the contractor for a period of work.

If the consumer is buying a pre-built house from the contractor or developer, the owner should require an affidavit - a statement under oath - from the builder that there are no outstanding payments that could lead to liens.

Sechrest said that while Florida law leaves room for abuse by a general contractor, his experience has shown that contractors are honorable, and lien situations typically come about as a result of cash-flow problems in a slow economy, not nefarious intentions.

"My heart really lies with these contractors who are going out of business," Sechrest said. "Homeowners will get their equity back, but contractors very rarely get their businesses back."

Gainesville home builder Adam Bolton, president of Robinshore Inc., said that although his company has seen a slowdown, healthy companies weather the difficult times.

"A lot of the state is suffering some corrections in the marketplace," Bolton said. "Especially with pre-sold contract homes."

"Before you contract with any builder, you should do your research and make sure they are a financially sound company," he said.

And as for Weschester, the homebuilders are asking for patience as more sales are made.

"The bright news is, Bosshardt is here, and we're continuing to represent the homeowners who have bought here," said Rabell, adding that it's a great time to buy with builders dropping prices so they can sell excess inventory.

"I think this signals the bottom of the market, in my opinion, when you've got a builder capitulating" on home prices, said Rabell.


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By Michael in Cave Creek, AZ on 8/27/2008


Most states require a prelimary notice from a materialman, contractor or laborer stating that they intend to supply materials and or services to improve real property.

The preliminary notice is usually sent to the property owner (or reputed owner), general contractor (if any) and the construction lender.

When the owner receives a preliminary notice, he should carefully file it and note to which trade it pertains. For example, a preliminary notice for a ready mix concrete company would probably be associated with the foundation company or cement mason working on the property.

There are a couple of ways the property owner can protect him or herself if a preliminary notice is received. The most common is to request a lien waiver from the materialman showing he has been paid, prior to paying the contractor. If that is not appropriate, another tool that can be used is a joint check to the contractor and the materialman.

If you never received a preliminary notice, that might be a defense against a lien, it would be best to identify a local attorney who is familiar with these disputes to sort this out.

If you did receive a preliminary notice, the best course of action at this stage would be to negotiate with the contractor whom you paid and the materialman to make sure the contractor pays the materialman in negotiable funds (certified check / cash /etc.) The contractor will probably take care of it, if he is solvent and values your future business. If the contractor is insolvent, you will probably be stuck with paying the lien. 

In some states you can make claims against a residential lien recovery fund administered by the contractor licensing agency or the contractors license bond. These bonds tend to be in really small amounts and don't do much to protect more than a few consumers.  

Your situation has the risk of being a hands-on lesson in mechanics lien law. 

 


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By DCG in Lago Vista, TX on 8/28/2008


No, no preliminary notice was sent.

The materials supplier violated their own policy when they took a check and immediately supplied materials, however they're still pursuing the lien through a third-party agency.

The contractor is gone - he's in a bit of trouble for other theft of deposits and lease equipment. He's been sued, has defaulted, and will have judgments.

Again, this isn't the case of not paying a sub or not paying a sub-subcontractor - it's a supplier. I'm not sure how they have claim - or if they have claim in TX. They're pursuing a civil and criminal case against the contractor, and a lien against the owner.
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By Grant in Blacksburg, VA on 8/30/2008


This is exactly why O-B's need to receive a release of lien when you pay the contractor.

My business supplies products to contractors for use on municipal projects. I have had contractors not pay me, and I have put liens on the cities that received my products. As a supplier, when the contractor doesn't pay, you go after his bonding company AND you go after his customer. If the materials have not been paid for, then legally the materials still belong to the supplier even if the materials have already been installed by the contractor on his customer's property. Filing a lien against the customer forces the customer to also go after the contractor to put additional legal pressure on the contractor and the bonding company to force payment to the supplier. It's not pleasant for the contractor's customer, but it is just understood by all parties that this is the way things have to be done.

I've been thinking about a few paperwork protections I may work into my O-B project.

1. No payment for materials without a release of lien or a two-party check that includes the supplier.

2. No payment for labor without a signed release from the contractor that there were no accidents or injuries during the pay period. (This prevents someone getting injured on their own time during the weekend and coming to the job site the following week and then claiming a workplace injury and filing a claim against you.) Many general contractors require their employees to sign such a statement every Friday when they are paid.

Anyone have other ideas of this nature to share than can help protect an O-B?

Regards,

Grant


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By Michael in Cave Creek, AZ on 8/31/2008


The practical ways for an O-B to protect himself from materialman's liens in order of desirability are:

1. Buy the material yourself and pay for it. It avoids markup too. -- My favorite!!!

2. Get a lien waiver from the materialman. Getting one from the materialman's (contractor) customer does nothing to protect you. Chasing this paperwork can be a pain.

3. Do a joint check: you may not be popular with your subs if you go this route -- but it is effective.

The customs and practices of residential work are different than commercial work. An O-B who is trying to keep the budget tight will probably be using a lot of good individual tradesmen. They typically are not much for signing a bunch of paperwork. They do the work and they get paid at the curb at least once a week.

The larger residential contractors will have their own proposal language. You will probably find that most of them are not interested in negotiating that too much. Perhaps you can ask for a certificate of insurance and get it, but if you ask them to sign a public works style owner centric contract that is 50 pages long, they will probably look at you funny, wish you luck and run. They can spot a customer who might be difficult to work with from a mile away. Some telltale signs: 

1. Works in the public works field or large commercial construction

2. They admit they have engineering or law degrees

3. Presents a multi-page list of requirements or contract documents

4. Is building their first house.

5. It's their own house. 

6. They have an extra-particular spouse.

Remember the highest dollar trade working on your house may only have a $20K or $30K scope. Try to learn the residential work customs in your area and do a great job selecting your people and there will be a 90% chance that there will be no need for fancy contract documents. If a tradesperson messes up, the practical solution is to find a new tradesperson, not to sort it out in court years later.

 

 


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By DCG in Lago Vista, TX on 9/2/2008


A release of lien from the contractor would have done absolutely no good. The contractor was fully paid. 

A release of lien from *all* material people? Yikes. My electrician, plumber - they use a combination of in-stock stuff and ordered components at their discount rate. Some suppliers won't work with end consumers at all. After all, I may be paying retail for a part that my contractor pays wholesale on... It's not in the contractor (or suppliers) best interest to deal with the consumer.

From my perspective, contractors have a lot less risk than homeowners when building...


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By Kenneth in Lees Summit, MO on 9/3/2008


There are some good lessons to be learned here about asking your subcontractors for lien releases from their "major" suppliers. I did it, and in the end it served to protect me:

1) My plumber, I showed up at his supply house and paid for all the supplies directly. I also received this lien release immediately. Sure, he had some minor items and fittings that were not on this order, and there was a plumbing supply house around the corner as well as a big box and no, I didn't get lien releases from them. I figure they didn't know where their counter sales were going to be installed, and for the volume and price of materials it wasn't worth it.

2) For my other "major" subcontractors, I paid attention to their suppliers. Let's use my ICF subcontractor for example, besides just the subcontractor himself, he needed to buy materials, concrete, and a concrete pump. I paid attention to names on the doors of those three "large" suppliers, and you can bet I received lien releases from all three of them as well as my ICF subcontractor. He also purchased some materials from Lowe's since it was convenient, and I neither asked nor received lien releases from Lowe's because this was minor, counter sales, and again not relevant.

3) Sometimes I explained to my subcontractors that I needed those lien releases prior to final payment, and it was their responsibility to provide them. Other times, I simply called the suppliers directly and asked if they had been paid; if the answer was affirmative I asked if I could fax a lien release over and have it signed. In every case, I received my lien release back by the end of the day.

4) For large quantity materials I purchased myself, if they were counter sales then I didn't worry about it. For delivery, I walked out of the store with a lien release the day I ordered the materials. The bank wanted to know that materials I was installing myself were paid for as well, and a lien release is easier for the bank to comprehend than a stack of receipts.

5) Let me tell a story to illustrate the importance of this. One of my subcontractors had a large amount of material delivered, and he wasn't at the site when the material was delivered (not uncommon). The delivery driver refused to leave the material without payment, obviously he had a previous issue or dispute with this subcontractor. I called the subcontractor, explained the situation, explained that I had construction loan checks with me, and also explained that I would purchase the materials and deduct it from his first draw. He agreed, and truthfully I never had a problem with him supplying lien releases from his major suppliers (and yes, I paid VERY close attention to them).

You should always get lien releases from the major suppliers, not just the subcontractors. In my state (MO), the owner actually has certain protections against frivolous mechanics liens from subcontractors, but this doesn't extend to their suppliers, making it even more important to get them.


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