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Mechanic's Lien Defense of Payment - Virginia Section 43-11

A. The Section 43-11 Notice

Section 43-11 of the Code of Virginia provides an alternative that has been largely ignored and underutilized by contractors. A subcontractor or any lower tier contractors can send a "pre-registration" notice of intention to provide labor and material to a project. This "pre" notice does generate some administrative expense and political problems, but the benefits can be impressive.

Two notices are required, as discussed below. First, a "Pre-registration" notice is sent to the owner and/or the general contractor before all labor and materials are supplied to the project. The claimant supplying a subcontractor can elect to send the notice only to the general contractor. This will not obligate the owner, but will still obligate the general contractor. After labor or materials are supplied, the claimant must provide a second notice with a statement of account and affidavit.

The potential benefits are:

1) The Section 43-11 notice can partially take the claimant out of the defense of payment system.{footnote}See section above, Defense of Payment/Owner’s Responsibility for Payment to Subcontractors.{/footnote} The owner and upstream contractors become directly obligated for payment, to the extent they are holding money at the time they receive the second notice and statement of account. The owner and general contractor essentially provide an involuntary guarantee or joint check agreement after receipt of the second notice.

2) A Section 43-11 notice will probably also provide priority over other mechanic's lien claimants. In a "partial defense of payment" situation, the 43-11 notice claimant can take the entire fund held by the owner and general contractor. Other mechanic's lien claimants will receive nothing until the 43-11 claimant is paid in full.

3) There is also an extended deadline for the Section 43-11 claim second notice. A claimant may still have Section 43-11 rights, even after the deadline for mechanic's lien filing. A claimant probably also still has Section 43-11 rights, even if the claimant has waived lien rights.

4) It is way to avoid problems and legal fees altogether. If the owner and general contractor know they are obligated, the claimant is likely to receive payment without legal assistance. The owner and general contractor are aware of the players on the project and are motivated to see payments properly applied.

In Virginia the owner and general contractor are only usually required to pay for a construction project only once.{footnote}See section above, Defense of Payment/Owner’s Responsibility for Payment to Subcontractors.{/footnote} Once they have paid in full for the project, they have a defense to any mechanic's lien filed. This is called the "defense of payment". The mechanic's lien will be invalid unless the claimant can "catch" money owed by the owner and general contractor.

The mechanic's lien is only as strong as the weakest link in the payment chain;

Owner

| ($100,000 Debt)

General Contractor

| ($10,000 Debt)

Utility Subcontractor

| ($50,000 Debt)

Supplier

In this example, the supplier's mechanic's lien will be valid only to the extent of $10,000. This is called a "partial defense of payment." If a second supplier also files a lien for money owed by the same sub, the two suppliers will share pro-rata in the $10,000 fund. The further removed from the owner, the more chance the claimant will have a problem.

The claimant must file a mechanic's lien and give notice to the owner and general contractor while they are still holding money. This is the true deadline for a mechanic's lien filing. Many frustrated suppliers have carefully followed the 90-day time limit for filing in the courthouse, only to have the lien fail because of a defense of payment. The Virginia Code Section 43-11 notice is a mechanism to avoid the defense of payment problem. This notice allows a supplier to opt out of the defense of payment system and obligate the owner to pay a second time.

A contractor may still have rights under Section 43-11, even if mechanic's lien rights have been waived or even if it is too late to file a mechanic's lien. A Section 43-11 notice has similarities with a mechanic's lien, but nothing is filed in the land records and it may not be necessary to perform a title search. This means that a Section 43-11 notice is usually less expensive than a mechanic's lien.

One of the most interesting possibilities is that a mechanic's lien claimant that had also sent a Section 43-11 notice would have priority over other mechanic's lien claimants.{footnote}Schrieber, Sons & Co. v. Citizen Bank, 99 Va. 257, 38 S.E. 134 (1901).{/footnote}

Although this statute is quite old, there is very little Virginia Supreme Court case law interpreting §43-11.{footnote}Penrod & Stauffer Bldg. Systems v. Metro Printing & Mailing Servs., Inc., 229 Va. 150, 326 S.E.2d 662 (1985); Shenandoah Valley R.R. Co. v. Miller, 80 Va. 821 (1885). {/footnote} This means that there is uncertainty how this mechanism works. Much of what is stated here is the opinion of the writer and will not necessarily be the opinion of any court deciding the same question.

The subcontractor or any lower tier contractors must "give notice in writing to the owner or his agent or the general contractor, stating the nature and character of his contract and probable amount of his claim." This notice should be sent by certified mail{footnote}Va. Code Anno. § 43-14.1 (Michie 1950).{/footnote} before (or possibly soon after) the subcontractor begins work.{footnote}Stiegleder v. Allen, 113 Va. 686, 75 S.E. 191 (1912); Staples v. Adams, Payne & Gleaves, Inc., 215 F. 322, 327 (4th Cir. 1914); Robinson v. Herrell Construction Co., 7 V.C.O. 308 (1986).{/footnote} A suggested form for this notice is supplied at Appendix 21. The claimant is not accusing anyone of bad credit or failure to pay. The notice describes the "nature and character of the contract" and the "probable amount of the claim." In short, what the claimant will supply, to whom, and how much. This notice must, however, go certified mail return receipt requested or be served by the sheriff.

Another suggested form for this notice is also supplied at Appendix 21. This is a "combination notice" which should comply with Section 43-11 and the notice to the Mechanic's Lien Agent.{footnote}See section above, Prefiling Before Construction Notice To The Mechanic’s Lien Agent.{/footnote} Like a mechanic's lien agent notice, the Section 43-11 notice must be sent very early in the project. Both notices require very similar information; accordingly it should be possible to use a unified form to hit two birds with one stone.

It may be possible for a subcontractor or lower tier contractor to satisfy the requirements for the first Section 43-11 notice in the form of a "marketing letter" that will not irritate customers and may even be useful as a marketing tool. An example of such a letter may state only:

We at Excavating Subcontractor, Inc. are pleased to announce that we have been awarded the subcontract from General Contractor, Inc. to perform the excavating portions of your project, including basement excavation, rough and final grading. Our subcontract is in the amount of $7,000.00. We are pleased that General Contractor has the confidence in us to perform this contract. Please contact General Contractor or this company immediately if you have any questions or problems with the excavation work performed.

This would seem to "give notice in writing to the owner . . . stating the nature and character of his contract and probable amount of his claim" as required by Section 43-11. This marketing letter can be sent before any labor and materials are supplied, with less chance of irritating customers or other upstream contractors. It is not necessary to state that anyone is in default or that there are apprehensions about payment. The notice must still state the "probable amount of the claim" and be sent certified mail. At least one lower court has ruled that a Section 43-11 notice must state clearly that it is sent for the purpose of imposing personal liability on an owner pursuant to Virginia Code Section 43-11.{footnote}English’s, Inc. v. McCrickard, 7 V.C.O. 218 (1984). {/footnote} The safest course would be to send a more formal notice that meets this requirement and identifies Section 43-11 of the Code of Virginia, like the examples shown at Appendix 21.

The Claimant must send the second notice within 30 days after completion of the entire project. The subcontractor or any lower tier contractors must send this second notice "before the expiration of thirty (30) days from the time such building or structure is completed or work thereon otherwise terminated." This can be much later than a mechanic's lien deadline of 90 days after completion of the claimant's work. The second notice must contain a "correct account, verified by affidavit." This notice should also go certified mail to the owner or upper tier contractors.

The greatest limitation on the 43-11 notice will be the status of accounts at the time the second notice and statement of account is received by the owner and/or general contractor. Accordingly, the claimant will want to send this second notice as soon as there is any sign of trouble or as soon as all labor and materials are provided. Although the second notice is not "due" until 30 days after the entire project is complete, the claimants Section 43-11 rights will erode with each payment that the owner makes to a general contractor and each payment that the general contractor makes to a sub. If a claimant is concerned, it may be advisable to send multiple second notices and statements of account, with each delivery. There is no apparent prohibition to sending multiple statements of account.

The owner also has priority for costs of completion, if a subcontractor is terminated or abandons the project. The owner has the right to complete the project if the general contractor defaults. "Any bona fide agreement for deductions by the owner because of the failure or refusal of the general contractor to comply with his contract shall be binding on such subcontractor . . . ."{footnote}Va. Code Anno. § 43-11.{/footnote} The owner's costs of completion "shall have priority over all mechanic's liens . . . ."{footnote}Va. Code Anno. § 43-16; Nicholas v. Miller, 182 Va. 831, 30 S.E.2d 696 (1944). {/footnote} These concepts can collide. An owner may ignore or forget the second 43-11 notice and make payments, without insuring that they are applied to the claimant. This would violate Section 43-11 obligation and create personal liability of the owner. The general contractor may later default or abandon the project. The increased costs of completion may be large enough to eradicate any debt and the misapplied payments. Is the owner obligated to pay again?

A Section 43-11 notice is less drastic than a mechanic's lien and is less likely to disrupt the construction project. The Section 43-11 notice does not need to be recorded in the land records, will not cloud title to the property or disrupt financing. This can be an advantage if a contractor wishes to preserve rights or freeze payments to a general contractor, but does not wish to sour relations with an owner. An owner may actually want a Section 43-11 notice, if the owner and/or subcontractor are concerned about default or the creditworthiness of the general contractor. A supplier to a subcontractor may also elect to send a 43-11 notice only to the general contractor, avoiding disruption with the property owner. Once the notice has been received, the owner or general contractor has a basis to insist that payments be made by joint check. This may save future trouble.

Upon receipt of a Section 43-11 notice, an owner should probably not despair or get angry. Like a notice sent to a mechanic's lien agent, this notice provides the owner with information concerning the identity of persons supplying labor or materials to the project and the amount of their contracts. The owner will have the burden of making sure these persons are paid. The owner will only have to pay for the project once, however, as long as a mechanism is set up to make sure payment gets to all persons sending notice. The owner will not be damaged, and the risks of mechanic's liens from the claimants are eliminated.

 

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