A New Chapter In The Relationship Of Mechanics’ Lien Law And ADR?
August 16, 2013
Many construction contracts contain dispute resolution clauses that require disputes arising out of the project to be resolved through mediation, arbitration, or a combination of both, instead of through litigation. A common question that arises in light of these dispute resolution clauses is whether, and to what extent, mechanics’ lien rights, which by statute must be enforced in court, are impacted by these provisions. On the one hand, if the parties to the contract agreed to resolve their disputes through mediation and/or arbitration, the parties’ agreement would be frustrated if the courts got involved in resolving the dispute as part of the mechanics’ lien case. On the other hand, requiring the parties to resolve their disputes through mediation and/or arbitration would leave the contractor vulnerable for a considerable period of time without the security of a lien against the owner’s property to secure payment for its work. The Maryland mechanics’ lien statute contains a two-step process for obtaining a mechanics’ lien, the first of which is a show cause hearing at which an interlocutory (or temporary) lien can be established against the owner’s property which serves to protect the contractor’s interest in the property. Thus, should the parties be required to mediate and/or arbitrate their dispute, the contractor would not be protected by the interlocutory lien, and the property could be otherwise encumbered or sold while the parties are engaged in the mediation/arbitration. In Caretti, Inc. v. The Colonnade L.P., 104 Md.App. 131, 138, 655 A.2d 64, 67 (1995), the Maryland Court of Special Appeals balanced these competing concerns by allowing a court to hold a show cause hearing and, if appropriate, enter an interlocutory lien prior to staying the case so that the parties can engage in alternative dispute resolution in accordance with the provisions of the contract.
In a recent (unpublished) case out of the United States District Court for the District of Maryland, the District Court was presented with a scenario similar to the one discussed above, but reached a different conclusion. In Kane Builders S & D, Inc. v. Maryland CVS Pharmacy, LLC, 2013 WL 2948381, Kane Builders entered into a subcontract with a construction manager hired by CVS to build a retail pharmacy on property CVS leased in Charles County, Maryland. Kane Builders’ subcontract contained a dispute resolution provision that required “[c]laims, disputes, or other matters in controversy arising out of or related to the Contract ... shall be subject to mediation as a condition precedent to binding dispute resolution.” With respect to the filing of mechanics’ liens, the subcontract provided that “[i]f a Claim relates to or is the subject of a mechanics’ lien, the party asserting such Claim may proceed in accordance with applicable law to comply with the lien notice or filing deadlines.” Kane Builders claimed that it was owed a significant amount of money on the project and proceeded to file a mechanics’ lien action in the Circuit Court for Charles County seeking a mechanics’ lien against CVS’ interest in the property. CVS removed the action to the United States District Court for the District of Maryland and sought the dismissal of the mechanics’ lien claims on the ground that Kane Builders was required to mediate its claims under the subcontract as a condition precedent to binding dispute resolution, which, it argued, included the filing of a mechanics’ lien claim. The District Court largely agreed with CVS and held that engaging in mediation was a condition precedent to the filing of the mechanics’ lien claims. However, the District Court declined to dismiss the case, rather, the District Court stayed the case pending the completion of the mediation required by the subcontract. Notably, the District Court refused to enter an interlocutory lien to protect Kane Builders’ interest in CVS’ property. The District Court read the subcontract as only allowing Kane Builders to “proceed [with the filing of a mechanics’ lien] in accordance with applicable law to comply with the lien notice or filing deadlines” but not to the extent of obtaining an interlocutory lien. In the District Court’s view, an interlocutory lien involves the adjudication of Kane Builders’ mechanics’ lien claims, which the parties agreed would not be done until after mediation.
It would appear that the result in Kane Builders is at odds with the Maryland Court of Special Appeals’ comments in Caretti, where the Court of Special Appeals allowed for the imposition of an interlocutory lien, specifically holding that that the burden of proof a claimant needs to meet in order to obtain an interlocutory lien – probable cause of success – is far less than adjudicating the merits of the dispute. While the Kane Builders case would not control in a state court mechanics’ lien proceeding, it does illustrate the complexities that can arise in the mechanics’ lien—ADR relationship, and reinforces the need to carefully review contracts, and understand the potential consequences of contractual provisions, prior to executing them.