Part One on this topic of “How low?” discussed the issue of lien claims by remote claimants. These can be a surprise to an owner or contractor. Remote claims might come from suppliers and subcontractors perhaps several tiers deep on a construction project. The limitation on the rights of remote claimants turns on the definition of who qualifies as a “subcontractor” by providing a “definite” and “substantial” portion of the work under the owner’s contract. This could be providing specially manufactured materials that a “subcontractor” must have for the job. The supplier to that lower tier “subcontractor” becomes the most remote party to claim a lien.
“Surprise” liens are understandably unwelcome on any project. In Minnesota and many other states, however, there is no requirement that subcontractors and suppliers of substantial commercial construction serve a notice to make them “visible” to the owner or the general contractor. This can obviously result in the unexpected lien claims that trigger the “How Low Do They Go” disputes.
A lien from the remote supplier discussed in Part One is not the only source for a surprise lien or bond claim on commercial and public construction work. If one of the project subcontractors has failed to pay the required contributions to union fringe benefit funds, a lien or payment bond claim by fringe benefit trustees can appear—often late in the project and potentially in significant amounts. Can they do that? The answer is generally yes, they can.
The typical problem may flow from the financial failure of a unionized subcontractor at some point during the project. The general contractor probably already took a hit covering the work of that failed contractor. Now they face another obligation to pay that subcontractor’s delinquent fringe benefit payments to honor their indemnity obligations to an owner or their bond surety. The trustees and the fringe benefit funds did not, themselves, do work on site. There was likely no advanced notice of this potential claim. Yet, here it is in the form of a mechanic lien or bond claim.
Isn’t this what the Employee Retirement Income Security Act is for, or the Labor Management Relations Act? Although those federal statutes preempt certain state laws, the majority of state courts have held that neither statute preempts the ability of Fringe Benefit Trustees to file a mechanic lien or public bond claim to recover unpaid fringe benefit contributions.
The Minnesota example of this in action is Twin City Pipe Trades v. Peak Mechanical, Inc, et.al., 689 N.W. 2d 549 (Minn App, 2004). In that case, the Minnesota Court of Appeals affirmed a lower court judgment in favor of the lien of Twin City Pipe Trades Service Association, Inc. (“TCPT”) acting on behalf of two fringe benefit trusts for union employees. The applicable bargaining agreement and the trust documents effectively transferred the lien rights of the individual employees to TCPT. The Court decided that the remedial purposes of the Minnesota lien statute were best served by permitting TCP T to act on behalf of the employees.
The takeaway for the general contractor, and potentially the owner is the need to review contracts and procedures to minimize unexpected exposure. They should consider revisions that require subcontractors to indemnify and defend against claims for unpaid wages and benefits. An alternative would be to require subcontractors to obtain payment bonds which would enable the general contractor to gain coverage. Another alternative could be establishing firm deadlines for subcontractors to provide payroll records upon request or even as a condition precedent to payment; and creating systems and protocols to confirm timely payment of wages to subcontractors’ workers.
Thankfully such problems do not appear every day—but they have and do appear. There are no perfect answers but the solutions start with active awareness of the risk.