In This Issue

• AIA Documents Offer Dispute Resolution Choice
• Use Mechanic's Lien Rights to Defend Against Those Nasty Preference Claims
• Construction Attorneys in Action

AIA Documents Offer Dispute Resolution Choice

By Donald W. Gregory

For a very long time, the AIA contract documents have mandated arbitration under the American Arbitration Association ("AAA") rules. In its recent design-build contract documents, AIA has deviated from this tradition and now allows the parties to the contract greater flexibility to determine (by checking a box) whether they favor litigation or arbitration.

Parties ought to think hard about whether they want to arbitrate or litigate any dispute. Those arguments favoring arbitration typically include that it is often (but not always) less expensive and speedier than litigation, and that arbitrators are generally knowledgeable about construction. Those favoring litigation argue that they prefer the ability to appeal an adverse decision, particularly if it involves a large sum of money. Many make the decision based upon their level of confidence in the local courts, some of which can have crowded dockets. In any event, freedom of choice has entered the AIA documents arena.

Apparently AAA is considering an appeal process for arbitration disputes involving more than $500,000.00, when an appeal process is specifically drafted into the arbitration clause. ASA opposes this appeal process for fear that it will further erode the purported advantages of arbitration – a speedy and cost effective result.

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Use Mechanic's Lien Rights to Defend Against Those Nasty Preference Claims

By Larry J. McClatchey

Savvy subcontractors and suppliers understand the importance of protecting their lien rights. Two new cases highlight the importance of just having lien rights at the time of payment, even if paperwork is not filed to perfect the lien. This approach may provide a defense to a later action to recover the payment as an "avoidable preference" brought by a bankruptcy trustee.

Sometimes extraordinary collection efforts are required if an owner or general contractor has financial problems. If an owner or general contractor files a bankruptcy proceeding, subcontractors and suppliers may get a nasty surprise: a bankruptcy trustee may demand return of payments received by the subcontractor or supplier within 90 days before the bankruptcy. These are so called "preferential transfers".

A preferential transfer is a payment made to or for the benefit of the subcontractor or supplier, a creditor of the debtor, on account of work previously performed. The check cashed by the subcontractor or supplier must clear the account of the debtor within the 90 days before the petition was filed, and the payment must have been made with the debtor was insolvent. The transfer must enable the creditor to receive more than the creditor would have received through the bankruptcy distribution had the transfer not been made.

In the two recent cases, suppliers of construction materials successfully defended themselves. The suppliers argued that at the time of the payment, they had the right to file a lien but had not done so.

The first case arose in bankruptcy proceedings of 360 Networks (USA), Inc. in New York. A group of suppliers argued that they each had the right to file a lien against a construction project for materials at the time of payment from the debtor. Because of this lien right, the payment did not "prefer" them over other unsecured creditors. The bankruptcy judge agreed that the existence of these "inchoate" lien rights enabled the suppliers to successfully defeat the preference claims of the bankruptcy trustee.

The decision in the case of 360 Networks (USA) was subsequently followed with approval in the bankruptcy case of Electron Corp. in Colorado. The bankruptcy trustee brought suit to recover $14,967 from JCOR Mechanical, Inc. on the ground that JCOR had received avoidable preferences. The bankruptcy court originally rejected the argument of the supplier creditor that it would have filed a lien had it not been paid. This decision was reversed on appeal, and the supplier creditor won. The Bankruptcy Appellate Panel held that the supplier had a good defense even if the lien was not actually filed.

Each of the suppliers in these cases still had to prove that their mechanic's lien rights were valid under state law at the time they received payment. Also, the property must have sufficient value to support the lien. In other words, to use this defense, the supplier or subcontractor has to show that it had satisfied all statutory pre-requisites to perfecting a lien prior to the time they receive payment. This means that subcontractors and suppliers must take care to preserve their rights by providing a preliminary notice in states that require this. A guide to what is necessary to preserve your lien rights in each state is available from ASA in the CD/ROM publication "Lien and Bond Claims in the 50 States."

These cases again highlight the importance of taking all the preliminary steps required under state law to perfect a subcontractor or supplier mechanic's lien. Even if the lien is not filed, the fact that the right to lien existed at the time of payment may prove useful in defeating a claim to avoid the transfer. This means that the subcontractor or supplier may retain the hard-won account receivable.

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Construction Attorneys in Action

Don Gregory and Mike Madigan recently settled an errors and omissions claim against a design professional for $1.7 million at a mediation. Don Gregory, Rob Cohen and Rasheeda Khan recently settled an errors and omissions claim against a design professional for $3.2 million after two weeks of a jury trial in Dayton. The complex case involved the design of one of the world's largest fountains. Don Gregory and Eric Travers successfully tried an arbitration where the subcontractor's differing condition claim was denied in its entirety.

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Credits

Kegler, Brown, Hill & Ritter's Construction Law Newsletter is prepared by Donald W. Gregory for the Construction Law practice group.

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