What to Do When Subcontractors and Suppliers Ask the Owner for Payment

September 15th, 2013

Stacks of One Hundred Dollar Bills with Small House.When owners discover that their contractor has not paid subcontractors and suppliers, anxiety immediately sets in. Contractors who are not adept at running their businesses end up with cash flow problems and operate on credit. The situation then catches up with them and they stop making payments. Suddenly the owner finds himself being contacted by subcontractors and suppliers who are demanding payment.

The law in Massachusetts is clear; a subcontractor or supplier can only collect against an owner if it records a properly perfected mechanic’s lien. Then he can only expect payment to the extent that money is owed to the contractor at the time the lien is filed. That said, the owner has the right to finish the job. If there are no funds left, the subcontractor or supplier can only go after the general contractor for payment.

Mechanic’s liens in Massachusetts are complicated. They consist of two documents: a Notice of Contract and Statement of Account. After filing these documents, the sub or supplier must file suit within 90 days, or the lien is no longer valid. Contractors and construction companies frequently fail to properly perfect or record their liens. If this occurs, they may be dismissed.

Generally, in MA, liens must be filed within 90 days of when the general contractor or someone working through him was last at the job. If an owner pays subs during the period that others can still record liens, he “pays them at his peril.” For that reason, the owner should record a Notice of Termination with the Registry of Deeds. That starts the clock running and all liens must be filed within 90 days of the recording.

At that point, the owner has a decision to make. Should he file a motion to dismiss the lien because no money is owed to the general contractor, or negotiate with the sub or supplier and pay them something to dissolve the lien? Unfortunately, the answer is, it depends.

In order to have a lien dissolved, your lawyer has to file an application to dissolve the lien with the court, and schedule a hearing. The whole process may take ten hours or more of your attorney’s time. As with any matter before a judge, there is no guarantee that the decision will go your way, even if the facts are on your side.

If the sub or supplier will agree to a smaller amount to pay the general contractor’s debt, it may be worth it to pay and have him sign a release. This may be a preferable and perhaps the only option if the subcontractor still has work to do, or if additional supplies are needed from the same supplier. It is generally more expensive to hire someone new to come in and complete work that has been started by someone else.

On the other hand, the amount owed may be so large that it is more economical to fight it out in court. If money is still owed to the general contractor, then that amount will be distributed pro rata to the subs who have filed properly perfected liens. Unless one can get all of the subcontractors to agree, it is better to obtain a court order decreeing the amount owed and how it should be distributed.

It is extremely stressful for an owner when subcontractors and suppliers start knocking on his door. Given the complexity of the situation, it is advisable for an owner to contact a construction attorney to determine how to best resolve the matter.

-Andrea Goldman

http://www.goldmanlg.com/

posted by: joelrosen in BUSINESS, BUSINESS ADVICE & LITIGATION, CONSTRUCTION CONTRACTS & DISPUTES | 2 Comments

2 Responses to “What to Do When Subcontractors and Suppliers Ask the Owner for Payment”

  1. tina says:

    I have a construction loan and my contractor hasn’t been paying his subcontractors and filed liens against the property The bank will not release any more funds until he provides proof that he paid the subcontractors and the subs sign lien waivers. The contractor has received about 50% of the construction loan prior to us finding out about the subcontractor problems. The general contractor hasn’t shown any proof and he continues to say if the bank would fund more money then the liens will go away. I’m worried I’m going to end up getting sued. What are my options here? This is in Louisiana by the way.

  2. joelrosen says:

    We are licensed in MA and NH and can’t advise you on LA law. Your way forward deals with practical concerns as much as it does legal ones. I would have to look at your contract and see how the GC is doing on the milestones and completion date. My instinct would be to terminate the contract, sue the contractor, pay the subs and suppliers, and hire a new contractor to finish the job. Naturally, you will need to have a conversation with the bank to make sure they will cooperate. You need to see a LA lawyer right away. Until you get legal advice, do not pay anything more to the GC.

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