Sunday, September 15, 2013

What to Do When Subcontractors and Suppliers Ask the Owner for Payment

Stacks of One Hundred Dollar Bills with Small House.
When owners discover that their contractor has not paid subcontractors and suppliers, anxiety immediately sets in.  Contractors who are not adept at running their businesses end up with cash flow problems and operate on credit.  The situation then catches up with them and they stop making payments.  Suddenly the owner finds himself being contacted by subcontractors and suppliers who are demanding payment. 

The law in Massachusetts is clear; a subcontractor or supplier can only collect against an owner if it records a properly perfected mechanic’s lien.  Then he can only expect payment to the extent that money is owed to the contractor at the time the lien is filed.  That said, the owner has the right to finish the job.  If there are no funds left, the subcontractor or supplier can only go after the general contractor for payment.

Mechanic’s liens are complicated.  They consist of two documents: a Notice of Contract and Statement of Account.  After filing these documents, the sub or supplier must file suit within 90 days, or the lien is no longer valid.  Contractors and construction companies frequently fail to properly perfect or record their liens.  If this occurs, they may be dismissed.

Generally, in MA, liens must be filed within 90 days of when the general contractor or someone working through him was last at the job.  If an owner pays subs during the period that others can still record liens, he “pays them at his peril.”  For that reason, the owner should record a Notice of Termination with the Registry of Deeds.  That starts the clock running and all liens must be filed within 90 days of the recording.

At that point, the owner has a decision to make.  Should he file a motion to dismiss the lien because no money is owed to the general contractor, or negotiate with the sub or supplier and pay them something to dissolve the lien?  Unfortunately, the answer is, it depends.

In order to have a lien dissolved, your lawyer has to file an application to dissolve the lien with the court, and schedule a hearing.  The whole process may take ten hours or more of your attorney’s time.  As with any matter before a judge, there is no guarantee that the decision will go your way, even if the facts are on your side.

If the sub or supplier will agree to a smaller amount to pay the general contractor’s debt, it may be worth it to pay and have him sign a release.  This may be a preferable and perhaps the only option if the subcontractor still has work to do, or if additional supplies are needed from the same supplier.  It is generally more expensive to hire someone new to come in and complete work that has been started by someone else.

On the other hand, the amount owed may be so large that it is more economical to fight it out in court.  If money is still owed to the general contractor, then that amount will be distributed pro rata to the subs who have filed properly perfected liens.  Unless one can get all of the subcontractors to agree, it is better to obtain a court order decreeing the amount owed and how it should be distributed.

It is extremely stressful for an owner when subcontractors and suppliers start knocking on his door. Given the complexity of the situation, it is advisable for an owner to contact a construction attorney to determine how to best resolve the matter.