Liens IV

X. RESIDENTIAL CONTRACTOR LICENSING.

1. Unlicensed persons who knowingly violate the Residential Contractor Licensing law lose their Mechanic's Lien rights.
• This does not affect material suppliers and properly licensed contractors.
• William is a concrete contractor who does not have a residential contractor or remodeler license because he considers himself a "specialty contractor" who usually only works in masonry. Katherine and her husband hire William to install new foundation blocks, insulate the outside basement walls, install a drain tile and do other concrete work, along with repairing a rear deck and stairway. William and Katherine get into an argument about halfway through the job, William quits, files a Mechanic's Lien and starts a lawsuit. At trial, William argues that about "95%" of the job was masonry, but he did admit putting up sheetrock on some walls, installing a window, a door, shelving, cabinets and a stairway. Close does not count and William does not have Mechanic's Lien rights. The moral of the story: never do work outside your specialty unless you have a contractor/remodeler license.

XI. MISCELLANEOUS.

1. Contract for Deed.
• If you are doing work for a contract vendee (purchaser), your Mechanic's Lien will not attach to (be a lien against) the vendor's (seller) interest if the seller is not aware that the work is being done. The seller must have actual notice that you are doing work.
• Michael is selling a restaurant to William on a Contract for Deed. Michael wants to change the "theme" of the restaurant to a coffeehouse. William is generally aware that Michael is going to make improvements, but has no idea who is doing the work or the extent of the improvements. Michael hires Central to do the work. The work gets done, Michael opens the restaurant and goes broke within a few months. Central is not paid, files a Mechanic's Lien and starts a lawsuit against Michael and William. Since William had only a "general awareness" that Michael was making improvements to the property, and no idea who was doing the work, the Mechanic's Lien is not valid against William's interest. The same result would happen if William were the landlord and Michael were a tenant.
• The seller can prevent Mechanics' Liens from attaching to the seller's interest in the property by sending the contractor/subcontractor notice that he will not be responsible for payment for the improvement or by posting a notice on the property.
• Make sure that the seller is aware of your work. If you see such a notice on the property or receive a notice stating that the owner will not be responsible for payment for the work, stop working until you are satisfied that you will get paid.
2. Payment into Court.
   After a lawsuit to foreclose the Mechanics' Lien is commenced, the owner or a mortgagee can pay the amount of the lien, plus interest and attorney fees into Court, and have the Lien released from the property. The Mechanics' Lien then "attaches" to the money held in the Court.
3. Contractor Theft.
   If an owner pays a builder for work done on the owner's property, and the builder fails to pay the subcontractors, the builder can be fined up to $3,000.00 and jailed for up to one (1) year.
   • A builder must pay the subcontractors before he pays himself or takes his profit.
   • Either the owner or subcontractor should send the builder written notice of the unpaid work and balance due. If the builder does not respond or pay within 15 days, the law assumes this money was used for purposes other than payment of the subcontractors.
   • Either the owner or subcontractor may ask the city or county attorney in which the property is located to enforce this law.
   • This is also grounds for suspension or loss of a Residential Contractor's License.
   • Williams Builders, Inc. is a corporation whose only shareholder, member of the Board of Directors and president is William. William Builders, Inc. is hired by the Mark family to remodel their home. Mark gives William a $5,000.00 down payment check payable to William Builders, Inc. William promptly heads to the casino and looses all the money in one fast night. William starts the work, purchases lumber and other materials on credit, and hires the electrician to do the work. At the end of the job, there is not enough money to pay everyone, but William has his profit and walks away. The Marks go to the local county attorney who brings a charge against William under the contractor to theft statute. In Court, William defends saying that the corporation contracted with the Marks, and he is only the president and officer, of the corporation. The Court finds William guilty as an "aider and abetter," along with the corporation of a crime, and of conspiracy (William conspired with the corporation) to commit theft.
4. Leasehold Improvements.
• Generally, the interest of a lessor (Landlord) who does not have knowledge of the improvement is not subject to a Mechanic's Lien.
• A Mechanic's Lien does not attach to the lessor's interest if the work constitutes a "repair", as opposed to an improvement.
• If the work was performed in connection with "trade fixtures", the lessor's interest is not subject to a Mechanic's Lien.
• "Trade fixtures" may include tables, decorations, special lighting, refrigerators, built-ins, etc.
5. Amount and Extent of Lien.
• The total of all liens on a property is reduced by the amount of money the owner pays the contractor prior to receiving a subcontractor's Pre-Lien Notice.
• Liens are limited to:
• 80 acres.
• In the case of homesteaded agricultural land, 40 acres.

XII. CONSTITUTIONAL LIENS.

1. Generally, a money judgment will not attach to a homestead and the homestead cannot be sold to satisfy a judgment.
• EXCEPTION: A homestead can be sold to satisfy a judgment where the judgment debt arouse out of an improvement to the homestead.
2. If you do not have Mechanics' Lien rights, but you have a direct contract with the owner, you can sue the owner of the property and ask that the home be sold to satisfy your bill.
• If you are a subcontractor, you do not have a contract with the owner. If you do not have Mechanics' Lien rights, you will not be able to directly sue the owner and obtain a Constitutional Lien.
• Under very special circumstances, a subcontractor may be entitled to recover from a property owner by showing that the owner was "unjustly enriched" by the work.
3. There are a number of disadvantages of a Constitutional Lien vs. a Mechanics' Lien.
• The priority of the Constitutional Lien is determined after the lawsuit when the Judgment is docketed, not when the first work is done on the property.
• There is no protection in the event the owner files bankruptcy.
• You will not be able to collect attorney's fees or a higher rate of interest.
4. A Constitutional Lien is still better than no lien. At a minimum, you may be able to force the owner to sell his home if he refuses to pay.
5. The following language may be used in Small Claims Court, for example, to get a constitutional lien:
• "I am owed $________________ for materials and/or labor used in the construction/remodeling of defendant's homestead. Any judgment awarded in this case should be a specific lien against defendant's homestead. The legal description for defendant's homestead is as follows: . . ."

XIII. UNJUST ENRICHMENT/CONVERSION.

1. The Mechanic's Lien law was recently amended to allow subcontractors to recover money against a homeowner who has been "unjustly enriched" by the subcontractor's work. "Unjust enrichment" means that one person should not be permitted unjustly to enrich themselves at the expense of another. This would not apply where the homeowner has paid the contractor, and the contractor failed to pay the subcontractor. The homeowner, in that case, has already paid for the labor or materials.
• A recent Minnesota Court of Appeals decision denied a claim for "unjust enrichment" where the contractor failed to provide a Contract for Deed seller with a Pre-Lien Notice. The Court said "an unjust enrichment claim does not lie merely because one party benefits from the other's efforts or obligations; rather 'it must be shown that a party was unjustly enriched in the sense the term unjustly could mean illegally or unlawfully.'" The Court went on to say that absent evidence that a property owner committed a fraudulent or illegal act, just because a contractor improved property does not mean that, absent a Mechanic's Lien, that a Contract for Deed seller has to pay for the work if they did not actually know about the work or authorize the work.
2. A Minnesota Court of Appeals decision allowed a material supplier to recover against a property owner under a theory of "conversion" where the property owned used trusses delivered for the first contractor. The first contractor started the work and ordered the trusses from the lumber yard. The first contractor then went broke and failed to pay the suppliers. The lumber yard failed to give the pre-lien notice, and, therefore, did not have a Mechanic's Lien. The Court of Appeals decided that because the owner used the trusses in connection with the construction with the second builder, that the owner had "converted" the property and was liable to the lumber yard for payment.

XIV. PRIORITY.

1. If the mortgage is filed with the County Recorder/Registrar of Titles before the first visible improvement on the ground, the mortgage is prior to all mechanic's liens.
• Survey and engineer work do not count.
• If at the time the mortgage is filed the mortgage company has actual notice of you and your work, your lien will be prior to the mortgage.
• Example: Architect or engineering.
• If work is done prior to the recording of the mortgage, all mechanic's liens are prior to the mortgage.
• All mechanic's liens have equal and coordinate priority, except in the example of "B" above.
2. If your mechanic's lien is subordinate to the mortgage, you have the right to purchase the property by redeeming it from the mortgage foreclosure sale.