For the first Guest Post Friday of 2014, we welcome Mark Cobb. Mark (@cobblawgroup) is the founding partner of the Cobb Law Group, a construction law firm with two offices serving the State of Georgia. Mark represents various types of construction professionals including project owners and general contractors, but his practice has a significant focus on the needs of subcontractors and suppliers. He is a member of the ABA Forum on Construction Law and regularly speaks at construction law seminars. In addition, he is a co-author of a book on Subcontractor Law to be published by the ABA (American Bar Association) in spring 2014. He also teaches in the MBA program at Thomas University. Mark received his J.D. from Washington and Lee University School of Law and is admitted to practice in Georgia and Alabama.
Last week, the 152nd Georgia General Assembly began its final legislative session, and several items on the table concern the construction industry. One important piece of legislation, which is beneficial to Georgia lien claimants, happens to be based upon a Virginia statute. Sen. Lindsey Tippins (R-Marietta) has introduced S.B. 269 which, if passed, would give materialmen’s liens priority over a deed to secure debt by requiring distributions from a foreclosure sale to first be used to satisfy the liens.
Materialmen’s Lien History:
As those who study the history of materialmen’s liens already know, construction liens are entirely an American common law invention. Lien mythology began with the building of our capital city in the District of Columbia. Since our Founders built a city from scratch, incentives had to be given to builders and tradesmen to encourage them to participate in such a massive undertaking in a remote location by a fledgling government without a credit history! Thus, in 1791, Thomas Jefferson and James Madison convinced the Maryland General Assembly to enact the first mechanics’ lien statute. This provided contractors and materialmen with a “lien” against the new buildings in case the government defaulted on its payment. That way, the claimants would have collateral to secure them for the money they were owed. This incentive worked well for the new capital and eventually, all 50 states enacted some version of mechanic’s liens statutes including Georgia.
Materialmen’s Lien Equitable Theory:
Construction liens are very unique and very beneficial to the construction industry. Ultimately, those working on construction projects bring value to the real estate on which they work. An unimproved parcel has increased value when a contractor constructs a building on the site. Similarly, each sub-contractor and supplier contributes to this increase in value. Consequently, basic lien theory allows for unpaid contractors and suppliers to place their lien against the improved property and, if necessary, foreclose their lien through a Sheriff’s sale to recoup the amount of money they are owed. Needless to say, these benefits increase the likelihood that a construction professional will get paid for its work.
Different Creditors have different rights:
Contractors and suppliers are not the only ones who may have an interest in the real estate. Usually mortgage companies or construction lenders have already claimed a security interest in the real estate which they are financing, and that security interest includes (i) an interest in the property on the date the security interest was granted, but (ii) it also includes a security interest in the improvements that may be made to the property in the future. A construction lender, for example, may finance a project and receive a security interest to the real estate where the project is to occur as well as on the future improvements. As the project progresses, however, payment disputes may erupt and a contractor or material supplier may subsequently file a materialmen’s lien against the project thereby securing a lien against the improvements. Because the materialmen’s lien is later-in-time than the construction lender’s claim, Georgia law grants priority to the first creditor. Consequently, there are two different scenarios in the event one of the two parties foreclosed upon its lien:
- If the materialmen lien claimant foreclosures upon its lien, then the Sheriff’s sale must result in an amount to pay-off the superior creditor (in this case the construction lender) and then the remaining proceeds are used to pay the materialmen’s lien claimant which is very difficult and very expensive to undertake; or
- If the construction lender forecloses upon its lien, then all subordinate interests (including the materialmen’s lien claimant) are essentially dissolved, and the construction lien claimant will not receive any payment for the work or products supplied; thus, the construction lender receives the benefit of the improvements without paying those who provided the work and materials.
Sen. Tippins has drafted S.B. 269 in an effort to address the inequality that the current creditor-priority scheme has created. S.B. 269 is modeled substantially on Va. Code Ann. § 43-21 and allows the construction lender and the materilamen’s lien claimant (in the example above) to share their priority. In other words, the construction lender would have priority over the other claimant “only to the extent of the value of the land, exclusive of subsequently erected buildings, structures or improvements…” The materialmen lien claimant, in turn, would have priority “upon the building, structures, or improvements subsequently erected thereon….” The proposed legislation would provide a more equitable arena for contractors and suppliers who are not paid for their hard work. To view a copy of the proposed Georgia legislation, please click here.
Those of us who follow and support the construction industry are very excited about this pending legislation. The lender’s lobby, however, has taken a very firm stance in opposition to S.B. 269 so it will be a battle between the two groups and their legislators so we will have to watch the movement of this bill as it goes forward.