Contractor Enjoys Decisive Win in Noteworthy Construction Lien Case

Posted by: Hilger Hammond On: 29th April 2014 | one response.

1221951_27660008 - CopyBy Aileen Leipprandt

Perseverance pays off.

Such was the lesson learned by a general contractor pursuing a lien foreclosure claim on condominium property. In a comprehensive 21-page opinion addressing numerous aspects of the Michigan Construction Lien Act and its interplay with the Michigan Condominium Act, the Michigan Court of Appeals affirmed a contractor’s construction lien rights. C.D. Barnes Associates, Inc. v Star Heaven, LLC et al (April 2013). In October 2013, the Michigan Supreme Court declined to hear further appeals in the case.

This case arises out of a failed construction project undertaken by the developer, Star Heaven, LLC, for which Flagstar Bank provided mortgage financing and Barnes served as the general contractor. When Star Heaven acquired the site, the site consisted of 19 partially completed apartment buildings. Star Heaven hired Barnes to finish construction. Barnes began work in the summer of 2005; a few months later, Star Heaven recorded a Notice of Commencement (NOC), using a metes and bounds property description. In May 2006, Barnes provided Star Heaven with a sworn statement indicating that the property was “free from claims of lien.” Shortly thereafter, Star Heaven recorded a Master Deed, redefining portions of the property as a condominium. Flagstar Bank then recorded a mortgage against the property, well after the first day of physical improvement. The project eventually failed leaving Barnes owed $360,000. Barnes recorded 9 liens against the property – 6 liens identified specific condo units; 3 liens used the comprehensive metes and bounds legal description from the 2005 NOC.

In the ensuing lien foreclosure action, Flagstar contested the priority and validity of Barnes’ liens. The trial court rejected each of Flagstar’s arguments and ruled in favor of Barnes. Flagstar appealed. In a detailed analysis, the Court of Appeals for the most part affirmed the trial court’s ruling.

First, the Court of Appeals held that Barnes’ sworn statement substantially complied with the Lien Act even though the language did not precisely mirror the statutory language that the “property is free from …the possibility of construction liens.” Furthermore, the sworn statement was not the equivalent of a lien waiver and did not extinguish the right to claim a lien.

Second, the court analyzed the interplay between the Construction Lien Act and the Condominium Act. Even though the Condo Act may have required Barnes to use individual unit descriptions in its claims of lien, the Lien Act required Barnes to use the legal description in the NOC; therefore, the form of Barnes’ liens, using the metes and bounds legal description, substantially complied with the Lien Act and was appropriate.

Third, again assessing the competing requirements of the Lien Act and Condo Act, the appellate court concluded that Star Heaven’s recording of the Master Deed after the NOC was recorded did not require Barnes to record separate liens against each individual condo unit. The appellate court noted that both the Condo Act and the Lien Act provide that a lien for work done on a condominium unit attaches only to that unit. However, when Barnes began construction (and correspondingly, when Barnes’ lien rights arose under the Lien Act), Barnes was providing improvements to a project defined by the metes and bounds description in the NOC, not a condominium.

Fourth, Star Heaven hired Barnes to serve as general contractor for the entire project, not on a unit-by-unit basis. Therefore, Barnes was not required to separately lien each unit. Because Barnes did not have to record separate liens, Barnes’ liens were timely filed within 90 days of its last improvement to the project, as opposed to an individual unit. Likewise, Barnes’ liens attached to Star Heaven’s interest in the entire project, not just those units that Barnes improved within 90 days of recording its liens.
Fifth, even though some of the units that Barnes liened had been sold, Barnes was not required to apportion or reduce its lien amount by the value of improvements provided to these sold units. Instead, Barnes could satisfy its entire lien out of the remainder of the interest held by the developer in the property at the time Barnes recorded its liens.

Finally, Barnes was entitled to a judgment directly against Flagstar Bank for those attorney fees Barnes incurred related to Flagstar’s contest of Barnes’ liens.

The comprehensive Court of Appeals decision represents a decisive victory for contractors and serves as controlling authority for future cases. The lesson learned – it is critically important on condominium projects to understand and comply with the technical requirements of the Construction Lien Act vis-à-vis the Condominium Act.