The Surprising Case of a Preliminary Notice That Wasn’t

January 2019 Edition

by R. Russell O’Rourke, Esq., Meyers, Roman, Friedberg & Lewis, LPA

Can you serve a preliminary notice too early? In Ohio there is an unfortunate court of appeals case that says YES! The case that misinterprets the Ohio statutory law and truly harms subcontractors and suppliers is the 2010 12th District Court of Appeals case for Warren County, Halsey, Inc. v. Isbel. The ASA Subcontractors Legal Defense Fund did not have an opportunity to write an amicus, or “friend-of-the-court,” brief in this case.

Halsey has been largely ignored by the courts until last year when the trial court in Pursuit Commercial Door Solutions, Inc. v. Moosally Construction, Inc., applied Halsey to deprive a subcontractor of its lien rights for serving its preliminary notice prior to the first date of its work on the project.

The Notice of Furnishing (“NOF”) as it is called in Ohio and many states, preliminary notice in some others, are basically all the same—a subcontractor or supplier provides notice that they are supplying labor and/or materials for the project to the project owner and perhaps the prime contractor. The point: to assure that there are no “secret” mechanic’s liens, those liens where the owner or the contractor was unaware of the existence of the lien claimant prior to the filing of the lien. Had they been given notice, perhaps the owner and/or the contractor could have assured that they were paid on time.

On what date in the process are you required to “give” this notice? That depends on your state statute. Ohio’s statute, Ohio Revised Code §1311.05(A) is specific, “… at any time after the recording of the notice of commencement [“NOC”] … but within twenty-one days after performing the first labor or work or furnishing the first materials …” The Notice of Commencement is to be filed, “Prior to the performance of any labor or work or the furnishing of any materials for an improvement on real property which may give rise to a mechanics’ lien …” ORC §1311.04(A)(1).

Generally, the NOC is filed on or about the first day of work on the project. So it is very clear, once the project is underway and the owner and the contractor should be paying attention to the project and related paperwork the sub or supplier can serve its NOF, but if it wants full lien rights it MUST serve it within 21 days of its first performance of work or supply of materials to the project site. Subject to some exceptions, a late NOF will reduce the possible lien claim by the labor performed or materials supplied on those days prior to 21 days before the NOF was served.

The point is to assure that the owner and the contractor are aware of your presence on the project so they can take steps to assure that you are paid and that they receive appropriate lien waivers to protect themselves against liens.

The construction project in Halsey was a single family residential project for the homeowner. No NOFs are permitted in this type of project in Ohio, but specific homeowner protection section of the Ohio Mechanic’s Lien statute apply. Nonetheless, the overzealous Halsey served an NOF.

ORC §1311.011(5) provides that if the homeowner’s lender pays the contractor based on the contractor’s affidavit that he or she has paid all subs and suppliers in full that in the absence of “gross negligence” the lender is insulated from liability and an after-filed mechanic’s lien will be void. The statute provides one specific exception being, “After receipt of a written notice of a claim of a right to a mechanic’s lien by a lending institution, failure of the lending institution to obtain a lien release from the subcontractor, material supplier, or laborer who serves notice of such claim is prima-facie evidence of gross negligence.” Halsey did not make such a written notice of claim, but having served its NOF, tried to rely on the NOF as that notice.

The Halsey court actually expanded the definition of gross negligence by holding at ¶17 that, “Since Halsey did not perfect a valid notice of furnishing, it cannot assert a prima-facie case for gross negligence under R.C. 1311.011(B)(5).” Meaning, if you dissect that sentence, that if Halsey had properly served (which it did) its NOF then it made its prima facie case that the lender was grossly negligent leaving it to the lender to defend to prove otherwise or be liable to Halsey.

While the court did that, it found that the NOF could be served too early giving the lender a pass on liability due to gross negligence. The facts of Halsey are that Halsey mailed its NOF on May 14 then first furnished its material on May 15. The lender received its copy on May 17 (it is unusual as in Ohio the lender is not one of the parties to be served with an NOF). Pursuant to ORC §1311.19(B) service of the NOF is considered complete upon mailing by certified mail, making the service one day before the first delivery of the materials—although you now know that such “early” service is anticipated by ORC §1311.05(A).

If the Halsey court’s goal was to protect the lender, all it needed to do was to determine that an NOF does not substitute for a written notice of claim. Instead, even though there was no NOF required or permitted on the subject project at ¶12 the court quoted ORC 1311.05(A), but eliminated several vital words. Specifically, it looked at the words that a NOF must be served, “… within twenty-one days after performing the first labor or work or furnishing the first materials …” However, it ignored the first half of the sentence that provides for the earliest, rather than the latest time an NOF could be served, “… at any time after the recording of the notice of commencement …”

As an aside, to make the legislative intent even more clear, the statute provides an NOF form that is satisfactory to use which concludes by stating, “The labor, work, or materials were performed or furnished first or will be performed or furnished first on ________ (date).” Clearly, the words “or will be” anticipate that the NOF can be served before the first date that the sub or supplier was on the project. Also, what is the point of finding that a notice was served too early? The point of the notice is to, well, give notice to someone that something is about to happen. Because the NOC has already been filed, the owner and the contractor should already be looking out for NOFs to arrive so they should be prepared to receive and process them properly to protect themselves.

Making the decision even worse, the court did not give any weight to ORC §1311.22, which provides that the Ohio Mechanic’s Lien law is “to be construed liberally to secure the beneficial results, intents, and purposes thereof; and a substantial compliance with those sections is sufficient … to give jurisdiction to the court to enforce the same.”

The Pursuit case is strikingly similar to Halsey, except that it was a commercial project. The trial court relied on Halsey also making the same mistake of missing the beginning of the statutory provision letting the subcontractor served its NOF at any time after the filing of the NOC.

The Pursuit court has the opportunity to fix an improper decision and protect subcontractors from the harm caused by the Halsey case. Where the whole point of the “notice” is to give notice in time for the owner or the contractor to act to protect themselves of the possibility of having to pay twice, you have to ask, “what is the harm suffered if the owner was served a few days early?”

Check with your construction lawyer to determine if your state has any problematic court decisions that could cause your company the same harm.

Russell O’Rourke, Esq., is a partner with Meyers, Roman, Friedberg & Lewis, LPA, Cleveland, Ohio, where he serves as chair of the Construction Group. As legal counsel for The Builders Exchange and Home Builders Association, O’Rourke’s 30-plus years of active involvement in construction industry trade associations—understanding both the requirements of the law and the business savvy to successfully operate within the industry—have allowed him to serve in the roles of client and industry advisor, advocate and leader. His active engagement has also translated into driving and contributing to legislative issues for the benefit of the construction industry, recognizing the issues that are most important to his clients and advising them of various approaches and resolution options using good business judgment. O’Rourke represents contractors, subcontractors, suppliers, homebuilders and remodelers throughout all stages of the process—“cradle to grave”—bidding, contract negotiation, change orders, claims and claims avoidance, mechanics’ liens, bond claims and dispute resolution. He can be reached at (216) 831-0042, Ext. 153, or rorourke@meyersroman.com.

 

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