Virginia Supreme Court Hands Down Decision on Mechanic's Lien Claims
by John Rinaldi
A few recent changes in Virginia Mechanic's Lien Law will affect both developers and contractors. Two of the changes are statutory; the other comes in the form of a decision handed down by the Supreme Court of Virginia.
The first statutory change provides that an unlicensed contractor cannot claim a mechanic's lien if a valid contractor's license or certificate is required for the work performed. The change also requires that the Memorandum for Mechanic's Lien include the license or certificate number of the contractor claiming the lien, the date the license or certificate was issued, and the date it will expire. If no license or certificate number is included, the Memorandum for Lien must certify that a license or certificate was not required for the work in question. The statute includes a carve-out stating that any inaccuracy in the license information will not bar the perfection of the mechanic's lien if the contractor can otherwise be reasonably identified in the records of the Board for Contractors. This carve-out is to prevent a mechanic's lien from being declared invalid if the contractor simply has a typographical error or other mistake in reciting the license number in the Memorandum for Lien.
The other statutory change makes it a Class 5 felony to maliciously file a fraudulent mechanic's lien knowing that such lien is false. Class 5 felonies are punishable by a term of imprisonment of not less than one year nor more than ten years, and/or confinement in jail for not more than twelve months and a fine of not more than $2,500. While this new provision of the Virginia Code may make certain unscrupulous contractors think twice before filing a questionable Memorandum of Lien, it will probably be difficult to prove that the contractor filing an invalid lien did so "maliciously" and with knowledge that the lien was false. As a practical matter, it may be difficult to convince local prosecutors to pursue crimes of this nature unless the facts are particularly egregious.
The Virginia Supreme Court's recent decision regarding mechanic's lien claims arose out of the construction of the New Life Anointed Ministries International Church in Woodbridge. Jack Bays, Inc., acted as the general contractor and employed numerous subcontractors. Unfortunately, New Life came up short in its ability to pay Bays, which ultimately led to a mechanic's lien for nearly $6 million in addition to multiple mechanic's liens filed by the various subcontractors. After the Prince William County Circuit Court ruled in favor of the mechanic's lien claimants, the lender on the project appealed to the Supreme Court of Virginia.
The Supreme Court made a number of clarifying rulings with respect to mechanic's lien claims. Most significantly, the Court clarified the time in which a contractor may file a Memorandum of Lien. Generally, a contractor must file a Memorandum of Lien within 90 days after the last day of the month in which the contractor did work, but in no event later than 90 days from the date that work is "otherwise terminated." In this case, even though Bays stopped work more than 90 days before filing its Memorandum of Lien, the subcontractors continued to do some contract work, and some demobilization work, after Bays notified New Life that it was no longer going to work on the project. The Supreme Court held that because the contractors continued to work on the project, the work was not "otherwise terminated" on the day Bays stopped work. Therefore, Bays had additional time in which to file its Memorandum of Lien.
The court also clarified provisions of the 150-day rule, which potentially invalidates any liens that include work done more than 150 days from the last day on which the lien claimant performed work. What is most notable about this case is that the Court determined that the "last day of work" for purposes of filing a lien might, in some circumstances, be different from the "last day of work" for purposes of the 150-day rule. The Court also held that the "last day of work" might be different for each contractor and subcontractor, depending on the circumstances.
While the Court's opinion does not announce any sweeping changes in Virginia Mechanic's Lien Law, it does clarify numerous "gray areas" and issues that prior decisions regarding mechanic's liens have failed to address. As the saying goes, Virginia mechanic's liens "are very easy to file, but damn near impossible to enforce." In this particular case, the contractor and subcontractors were able to enforce their liens. More significantly, however, this case demonstrates how a mechanic's lien can bring a project to a halt if the lien claim is not dealt with quickly and appropriately. The liens in question were all filed in December 2007. The Supreme Court issued its opinion regarding the liens in February 2013 — five years and two months after the liens were initially filed. The project sat dormant the entire time. What's more, the Supreme Court remanded the case to the Circuit Court for further proceedings and for the Circuit Court to take the steps necessary to sell the property to satisfy the liens. So, the parties still had not come to a final resolution of the case after more than five years of litigation.