A SUBCONTRACTOR’S SURVIVAL GUIDE: COLLECTING YOUR MONEY

1. E. Andrew Cole, J.D.(301) 838-3218 directecole@steinsperling.com Eduardo S. Garcia, J.D.(301) 838-3326 directegarcia@steinsperling.com Matthew J. Pavlides, J.D.(301) 838-3213 directmpavlides@steinsperling.com A SUBCONTRACTOR’S SURVIVAL GUIDE: COLLECTING YOUR MONEY APRIL 30, 2019

2. AGENDA • Mechanics’ Liens in Maryland • Court Options in Maryland • Upcoming Seminar: A Subcontractor’s Survival Guide: Contracting and Employment

3. Mechanics’ Liens in Maryland

4. The Maryland Mechanics’ Lien Md. Code Ann., Real Prop. §9-101, et.seq.

5. What is a mechanics’ lien? • A mechanics’ lien is a claim against the property for work done for or about the property. • These proceedings are against the property (in rem) and the judgment obtained is against the property. It does not preclude an appropriate in personam action.

6. Historical Background of Mechanics’ Lien Law in Maryland • This remedy was first created by statute in 1791, and remained relatively unchanged until 1976. • Barry Properties, Inc. v. Fick Brothers Roofing Company, 277 Md. 15 (Md. 1976). The Court of Appeals held that the law was unconstitutional because it did not give the property owner notice and an opportunity to be heard. • As a result, in 1976, the Maryland General Assembly enacted a new mechanics’ lien statute with four significant changes:

7. Four Significant Changes • No lien until owner has notice and an opportunity to be heard. • Effective only from the time it is judicially established. • Priority dates from the date the lien is judicially established. • Bona Fide Purchasers (BFPs) without notice are protected. • The difference in timing means that a mechanics’ lien in Maryland has a much lower priority than in states with an inchoate lien. Thus, it is important to act quickly if you see issues in getting paid.

8. Definitions • Building – “Building” includes any unit of a nonresidential building that is leased or separately sold as a unit. • Contract – “Contract” means an agreement of any kind or nature, express or implied, for doing work or furnishing material, or both, for or about a building.

9. Definitions, continued • Contractor – “Contractor” means a person who has a contract with an owner. • Land – “Land” means the land to which a lien extends under this subtitle or the land within the boundaries established by proceedings in accordance with the Maryland Rules. “Land” includes the improvements to the land.

10. Definitions, continued • Owner – “Owner” means the owner of the land except that, when the contractor executes the contract with a tenant for life or for years, “owner” means the tenant. • Subcontractor – “Subcontractor” means a person who has a contract with anyone except the owner or his agent.

11. Property Subject to Mechanics’ Liens • Buildings • New construction verses buildings that are repaired, rebuilt or improved • What is a “building”? • Waterlines, sanitary sewers, storm drains, and streets in development • Machines, wharves, and bridges • Condominiums • Single unit verses each unit in condominium

12. Exemptions • Bona Fide Purchasers for Value See Himmighoefer v. Medallion Industries, 302 Md. 270 (Md. 1985); York Roofing, Inc. v. Adcock, 333 Md. 158 (Md. 1993). • “Spec” houses and “presold” houses.

13. Exemptions, Continued • Public Buildings – no mechanics’ lien available • Tenant improvements in Shopping Centers or Other Multiple Tenant Building • Singe Family Dwellings • Residential exception

14. Persons Who Have Lien Rights • Everyone providing labor and materials for new construction or repair and improvement work (subject to the 15% rule) have lien rights. There is no known limit to a lien claim by remote subcontractors, sub-subcontractors, and suppliers. • BUT, be aware of your corporate and licensing status! See Baltimore Street Buildings v. Stewart, 186 Md. App. 684 (Md. Ct. Spec. App. 2009).

15. How Do You Get a Mechanics’ Lien? • Remember: this is a two-part process: • Notice; and • Petition to establish (and enforce).

16. Part 1 - Notice • Notice (Part 1) • Who? Must notify the owner of the property. • When? Notice must be given in writing within one hundred twenty (120) days – NOT 4 months – after the last day you performed work or furnished materials pursuant to the contract.

17. Part 1 - Notice • Content of Notice • Must be in writing and under oath. • Contain a physical description of the property. • Contain a description of the work done and materials furnished. • Must state the time when the work was done or the materials were furnished. • Must state the total amount earned under the undertaking to the date of the notice and the amount that remains due and unpaid. • Must state the name of the person or entity for whom the work was done or to whom the materials were furnished.

18. Part 1 - Notice • Delivery of Notice • Registered or Certified Mail, return receipt requested; • Personally delivered to the owner by the claimant or his agent; and/or • Posting within 120 days with a witness • If the Notice is not properly drafted and/or delivered, you could loose your lien rights. • You cannot amend the property description or to increase amount of lien.

19. Tips to Timely, Efficiently, & Accurately Prepare Your Notice • Make sure your contract has the correct name and address of the owner and the general contractor. • Make sure your contract has a legal description of the property and, at a minimum, should have the correct street address of the property and a description of the type of structure on the property. • Keep your documents in order and complete, including all change orders (which should be in writing and signed by everyone).

20. Tips to Timely, Efficiently, & Accurately Prepare Your Notice • Keep copies of permits. They usually have important information (e.g., legal description of the property, tax I.D. numbers, etc.) • Maintain daily records and logs of the dates and work you performed on the job. • Know the amount of your claim.

21. Part 2 - Filing an Action to Establish a Mechanics’ Lien • Even though you have sent notice, you still do not have a lien. In order to get a mechanics’ lien, you must file an action in the Circuit Court where the property is located within 180 days after the last date on which the work has been performed or the materials furnished pursuant to the contract. This means 180 days of the completion of work by the claimant, not within 180 days of the completion of the whole building. • You must include all owners of the property as a party in this action.

22. Part 2 - Filing an Action to Establish a Mechanics’ Lien • Contents of your Petition to Establish and Enforce Mechanics’ Lien: • Must be under oath and include the name and address of the claimant/plaintiff and the owner/defendant; • Must describe the nature or kind of work done or the kind and amount of materials furnished; • Must include the time when the work was done or the materials furnished; • Must include the name of the person for whom the work was done or to whom the materials were furnished;

23. Part 2 - Filing an Action to Establish a Mechanics’ Lien • State the amount claimed to be due (less credit(s), if any); • Provide a description of the land, including a statement whether part of the land is located in another county; • Provide a description that is adequate to identify the building; and • If you are a subcontractor, facts showing that notice was properly given.

24. Part 2 - Filing an Action to Establish a Mechanics’ Lien • In addition, your Petition to Establish a Mechanics’ Lien also must be accompanied by: • An affidavit by you or some person acting on your behalf that sets forth the facts upon which you claim that you are entitled to a lien; and • Papers constituting the basis of the lien, unless their absence is explained in an affidavit.

25. What happens after you file a Petition to Establish a Mechanics’ Lien • The Show Cause Order • The Circuit Court will issue a Show Cause Order that: • Directs the owner to show cause within 15 days from the date of service why a lien should not attach for the amount described in the petition; • Notifies the owner that he may appear at the time stated in the order and present evidence on his behalf or may file a counter-affidavit at or before that time; • Notifies the owner that if he fails to appear and present evidence and/or a counter-affidavit, the Circuit Court may admit your facts and enter a lien that will attach to the property.

26. The Show Cause Hearing and Possible Outcomes • If there is no genuine dispute of material facts: The Circuit Court could enter a final order that attaches the lien as a matter of law if it finds that, based on the pleadings, affidavits, admissions on file, and the evidence, if any, that there is no genuine dispute as to any material fact. • If there is no dispute as to any portion of the claim: The Circuit Court can enter a final order as to that portion.

27. The Show Cause Hearing and Possible Outcomes • If the Circuit Court determines that the claimant has failed to establish a right to a mechanics’ lien, then the Circuit Court will enter a final order denying the lien for cause shown. • Interlocutory (temporary) Lien: If the Circuit Court determines from the pleadings, affidavits, and admissions on file, and the evidence (if any) at the Show Cause hearing, that there are genuine disputes of fact, and that a lien should not attach or should not attach in the amounts claimed, as a matter of law, BUT finds there is “probable cause” to believe the mechanics’ lien claimant may be entitled to a lien, the Circuit Court may enter an “interlocutory lien” which temporary establishes a lien during the pendency of the litigation.

28. Enforcement of the Lien • Once the lien is established, the lien claimant must file a petition in the original proceeding to enforce the lien or to execute on any bond given within one year after the date on which the action to establish the lien was instituted.

29. Maryland Trust Fund Statute • Md. Code Ann., Real Prop. §9-201, et.seq. • Attaches personal liability to officers, directors, and employees of contractors and subcontractors who use funds earmarked for subcontractors and suppliers for purposes other than to pay these subcontractors and suppliers. • Money paid under a contract by an owner to a contractor or by the owner or contractor to a subcontractor for work done or materials furnished shall be held in trust by the contractor or subcontractor, as trustee, for those subcontractors who did work or furnished materials, or both, for the purpose of paying these subcontractors. • If the contractor has been paid and does not pass these monies on to the subcontractors and suppliers with whom he contracted, there may be personal liability on the part of any officer, director, or managing agent of the general contractor who had direction or control of the money held in trust.

30. Maryland Trust Fund Statute • Md. Code Ann., Real Prop. §9-201, et.seq. • The statute applies to any contract subject to the Maryland Little Miller Act as well as property subject to the mechanics’ lien code. • It does NOT apply to: (a) contracts for the construction and sale of a single family residential dwelling; (b) a home improvement contract by a contractor licensed under the Maryland Home Improvement Law; or (c) a Federal construction project.

31. Maryland Prompt Payment Statute • Maryland “Construction Contracts” or “Prompt Payment Statute” Md. Code Ann., Real Prop. §9-301, et.seq. • In Maryland, every contractor or subcontractor who does work or furnishes material under a contract shall be entitled to prompt payment. • If the contract is with the owner and the contract does not provide specific dates or times for payment, the owner must pay the contractor undisputed amounts within 30 days after an occupancy permit is granted or the owner takes possession of the property. • If the contract does provide specific dates for payment, then the owner must pay the undisputed amount within 7 days after the time specified in the contract. • This does NOT apply to a contract between a contractor and the State, a county, a municipal corporation, a board of education, or a public authority or instrumentality.

32. Maryland Prompt Payment Statute • Maryland “Construction Contracts” or “Prompt Payment Statute” Md. Code Ann., Real Prop. §9-301, et.seq. • If the contract is not with an owner, the contractor or subcontractor shall pay undisputed amounts owed to its subcontractors within 7 days after receipt by the contractor or subcontractor of each payment received for its subcontractors’ work or materials. • The teeth in the Prompt Payment Statute is that the Court can award interests, costs, and attorney’s fees. If the Court finds that an owner or contractor has violated a prompt payment statute, the court can order payment and award interests and costs. Moreover, if the Court finds that the owner or contractor acted in bad faith by failing to pay undisputed amounts, then the Court may award reasonable attorney’s fees. Exceptions: This statute does not apply to the construction and sale of a single-family dwelling, work performed under the Custom Home Protection Act or a home improvement contract by a contractor licensed under the Maryland Home Improvement Law.

33. Court Options in Maryland

34. Representation for Businesses In Maryland, a registered business entity is required by law to be represented by an attorney in any Court proceeding, unless the claim is in Small Claims Court. Md. Code Ann., Bus. Occ. & Prof., § 10-206

35. The “American Rule” Each party is responsible for paying its own attorney’s fees, unless specific authority granted by statute or contract allows the assessment of those fees against the other party

37. Maryland Trial Courts: • District Court • Small Claims Court- Limit of $5,000.00 in monetary recovery • Claims below $15,000.00 in requested monetary damages have no right to a jury trial • Circuit Court • Jury trials are exclusively available in the Circuit Court

38. Available Remedies District Court Maximum monetary recovery limited to $30,000.00 Replevin – Recovery of Property Circuit Court No limit on monetary recovery Injunction – Court Order directing someone’s conduct

39. Available Discovery District Court Interrogatories Circuit Court Interrogatories Request for Production of Documents Request for Admissions Depositions

40. Trial Options District Court Trial is usually scheduled within three (3) months of initial filing Generally limited to a one (1) day trial and duration of less than two and a half (2.5) hours Circuit Court Trial is usually scheduled approximately one (1) year after initial filing Trial duration varies - may last several days or weeks

41. Appeal Options District Court An appeal from the Small Claims Court is heard de novo, which means there is a new trial in the Circuit Court An appeal for cases outside of Small Claims Court is based on the record in the Circuit Court Circuit Court An appeal from the Circuit Court is based on the record at the Court of Special Appeals

42. Collections Options District Court • Garnishments • Wages • Bank Accounts • Writ of Execution against Property • Discovery In Aid of Enforcement Circuit Court • Garnishments • Wages • Bank Accounts • Writ of Execution against Property • Discovery In Aid of Enforcement

43. Upcoming Seminar • Upcoming Seminar: A Subcontractor’s Survival Guide: Contracting and Employment • May 29 - 7:30 a.m.-10:00 a.m. • Same Location