Arecent decision from Ohio’s 12th District Court of Appeals (covering Brown, Butler, Clinton, Clermont, Fayette, Madison, Preble and Warren counties) highlights one of the many technicalities involved in the proper perfection of lien rights and sends a warning to potential lien claimants. While that decision is not on solid footing, in the future, lien claimants should not serve a Notice of Furnishing until they provide services, materials, or
equipment to a project.
Ohio’s lien law provides a deadline for lien claimants (a class that varies depending on the type of job) to provide notice that they are supplying work, equipment or materials to a project. Generally, for a public project, a second- or lower-tier subcontractor or supplier (but not a laborer) must provide a Notice of Furnishing within twenty-one days of the first day they provide work, materials, or equipment. See Ohio Rev. Code §1311.261. For a private project, a first- or lower-tier subcontractor or supplier (but again, not a laborer) must comply with the same deadline. See ORC §1311.05(A). A Notice of Furnishing is not required on residential
See ORC §§1311.05(E).
How it went down
In Halsey, Inc. v. Isbel (May 10, 2010), 2010 Ohio 2052, a material supplier on a private residential construction project filed a lawsuit against the homeowners, the general contractor and the construction lender to recover its outstanding contract balance. The court dismissed the homeowners because they had paid the general contractor in full. The supplier, Halsey, alleged that the bank was grossly negligent in disbursing funds to the general contractor, Isbel, without obtaining a lien release from Halsey. ORC §1311.011(B)(5) provides a cause of action for gross negligence against
a lender in some circumstances:
[A]fter receipt of a written notice of a claim of a right to a mechanic’s lien by a lending institution, failure of the lending institution to obtain a lien release from the subcontractor . . . who serves notice of such claim is prima-facie
evidence of gross negligence.
In response to the bank’s motion for summary judgment, Halsey argued that its Notice of Furnishing served as proper written notice under ORC §1311.011(B)(5). Although the validity of Halsey’s mechanic’s lien was not an issue before the court because the court had dismissed the homeowners, the court stated that the lien claim was invalid because Halsey served its Notice of Furnishing before it supplied materials. Halsey at ¶14.
To support this ruling, the court relied on ORC §1311.05(A), which provides that a “subcontractor . . . shall serve a notice of furnishing . . . within twenty-one days after . . . furnishing the first materials.” The court also cited Buy-Rite Lumber Co. v. Bank One, Akron, N.A. (9th Dist. 1991), 81 Ohio App.3d 74, 76-77. However, the Buy-Rite case addresses the gross negligence statute and holds that a letter delivered to a lender before work commences is not adequate notice of an actual claim. Buy-Rite does not address whether ORC §1311.05(A) obligates lien claimants to serve a Notice of Furnishing only after they first provide work, materials, or equipment; indeed, Buy-Rite does not discuss ORC §1311.05 at all.
The Halsey court then addressed whether Halsey’s Notice of Furnishing provided adequate notice under the gross negligence statute. It assumed, without any analysis, that a Notice of Furnishing could serve as the “written notice of a claim” required by ORC §1311.011(B)(5). Based upon its holding that the Notice of Furnishing was invalid, and again citing Buy-Rite, the court held that Halsey’s premature notice also could not support its gross negligence claim. Halsey at ¶ 17. While this is in keeping with Buy-Rite as to the timing of the notice (i.e. a notice provided before work is performed is a premature, and thus invalid under §1311.011(B)(5)), it was not necessary for the court to address the timing of the Notice of Furnishing. Another statute makes it clear that a Notice of Furnishing cannot serve as notice under §1311.011(B)(5):
[T]he receipt of a notice of furnishing by a lender imposes no duty upon the lender by implication or otherwise with respect to the disbursement of any loan proceeds or the payment to any subcontractor, material supplier, or any other person. ORC §1311.05(A). Furthermore, because a Notice of Furnishing is not required on a private residential project, and the lender gross negligence statute applies only to residential projects, it does not make sense to tie perfection of such a notice to perfection of a gross negligence claim. A Notice of Furnishing is not even required when a residential lender exercises its right under ORC §1311.04(O) to require a Notice of Commencement. See ORC §1311.05(E).
Even though there are problems with the rationale and holding in Halsey, on projects where a Notice of Furnishing is required, lien claimants should serve their Notice of Furnishing on or within 21days of the first day that they start work or first deliver material or equipment. Furthermore, subcontractors and suppliers on private residential projects who wish to perfect a claim under the gross negligence statute should provide the lender with another form of notice, such
as a letter or a mechanic’s lien affidavit, after their
payment claim has matured. BXM
Jones and Dixon are attorneys at FranzWard,