By Darrel J Bostwick
Bostwick & Price, P.C.
ABC Utah Chapter Attorney
For Utah Builders and Contractors:
After almost four and one-half years since it was first implemented, the State Construction Registry (SCR) statute has been interpreted for the first time by the Utah appellate courts in the case of Hutter v. Dig-It, Inc., Case No. 20080077. In addition, much needed clarification was provided regarding the inapplicability of the Wrongful Lien Act to mechanic’s lien cases. In the Hutter case, the Utah Supreme Court affirmed the trial court’s determination that since Dig-it had failed to timely file a preliminary notice with the SCR, Dig-it’s mechanic’s lien was unenforceable. However, the Supreme Court reversed the trial court’s determination that Dig-it’s unenforceable mechanic’s lien was a wrongful lien under Utah Code Annotated § 38-9-1 et seq.
The SCR was first enacted during the 2004 Utah Legislature’s general session. However, due to the breadth and scope of the SCR, and to allow time for programming and testing of the on-line preliminary notice system, the implementation date was delayed until May 1, 2005 for non-residential construction projects and November 1, 2005 for residential construction projects. The SCR is essentially an on-line bulletin board for subcontractors and suppliers to file preliminary notices, thereby providing owners, lenders, title companies and general contractors the information needed to see that payments are made to those subcontractors and suppliers who provide materials and services to their projects. The primary purpose of the SCR is to help avoid diverted payments on construction projects and to help subcontractors and suppliers to get paid in the first instance, without the need to file mechanic’s liens or payment bond claims. A preliminary notice file with the SCR for a particular construction project preserves a subcontractor or supplier’s right to file a mechanic’s lien or payment bond claim for work performed on the project after the effective date of the preliminary notice. If a preliminary notice is filed with the SCR no later than twenty days after the subcontractor or supplier provides its first work or materials to the project, all of that subcontractor or supplier’s work and materials receive protection under the Utah mechanic’s lien and payment bond statutes.
Since its inception, a number of subcontractors and suppliers who have failed to comply with the SCR statutes have attempted to avoid the consequences of their failure to comply with the SCR statutes by conjuring labored and illogical interpretations of the statutory language and by asserting positions that were never intended by the Utah Legislature. In the Hutter case, the Utah Supreme Court laid to rest many of those erroneous interpretations and positions. Therefore, if an owner or general contractor files at least one valid notice of commencement with the SCR for a construction project, regardless of whether it is filed as part of the building permit process or directly by the owner or general contractor, all subcontractors and suppliers providing work or materials to that project must file a preliminary notice to preserve their mechanic’s lien and payment bond rights. There is no requirement for multiple notices of commencement or for an owner or general contractor to log onto the SCR to somehow “validate” a notice of commencement filed as part of the building permit process. Further, as long as all of the relevant information that has been actually entered on the building permit is transmitted to the SCR, that will create a valid notice of commencement, even if some of the building permit application fields were left blank by the building permit applicant.
In addition, the Utah Supreme Court determined that a notice of commencement filed as part of the building permit process is valid even though the municipality does not pay a fee and no payment receipt is generated. The SCR statutes specifically authorize such filings and have taken into account the fact that no payment receipt is generated as part of the filing of a building permit based notice of commencement.
With regard to the Utah Wrongful Lien statute, there has been some confusion since its enactment about whether it applies to mechanic’s liens. The plain language of the statute exempts mechanic’s liens from its scope by stating that “This chapter does not apply to a person entitled to a lien under Section 38-1-3 who files a lien pursuant to Title 38, Chapter 1, Mechanics’ Liens.” Utah Code Annotated § 38-9-2(3). Some have argued successfully in trial courts that if a mechanic’s lien failed for any reason then it was a wrongful lien under the Wrongful Lien statutes. Even the Utah Court of Appeals seemed to agree with that position in dicta in the recent case of Foothill Park, LC v. Judston, Inc., 2008 UT App 113, ¶ 19, 182 P.3d 924, indicating that if a purported lien claimant did not have a legitimate right to file a mechanic’s lien, at the time it was filed, the purported lien claimant would be subject to the Wrongful Lien statute.
In the Hutter case, the Utah Supreme Court rejected that position. By looking back at the legislative history for the Wrongful Lien Act, as well as relying on the specific exemption for mechanic’s liens quoted above, the Court determined that the Wrongful Lien Act only applies to common law or non-statutory liens. Therefore, since all mechanic’s liens, valid or invalid, enforceable or unenforceable, are based upon a statutory right, the Wrongful Lien Act does not apply to mechanic’s lien filings.
However, care still must be taken in filing mechanic’s liens since invalid or excessive mechanic’s liens could still be determined to be a slander on the title to the real property or may be found to be an abusive lien under the provisions of the Mechanic’s Lien statutes. See, Utah Code Annotated § 38-1-25.
With the clarifications provided by the Utah Supreme Court in the Hutter case, mechanic’s liens remain a valuable and viable remedy in Utah’s construction industry. A mechanic’s lien is an extraordinary remedy that is unique to construction. No other industry enjoys such an extraordinary remedy. And, while it is good to have mechanic’s lien rights if needed, it is better to get paid in the normal course of business rather than having to file and enforce mechanic’s liens. This is particularly true in our tight economic times. With the help of the SCR and a little diligence in the payment process to avoid diversion of construction payments, many mechanic’s lien disputes can be averted.