In a case of first impression, the Michigan Court of Appeals has ruled that where an owner files a Master Deed that redefines the project as a condominium project after the Notice of Commencement was filed, the general contractor is not required by Section 132 of the Condominium Act to file separate liens against each individual condominium unit within the project. The ruling was issued on April 11, 2013 in the case of CD Barnes Associates Inc v Star Heaven LLC, ___ Mich App ___, ___ NW2d ___ (2013).
Star Heaven purchased a partially completed apartment project in February of 2005. At some point after the purchase, Star Heaven began to market the project as a “high-end condominium project.”
Star Heaven thereafter hired C.D. Barnes Associates, Inc. (“Barnes”) to finish construction of the 19 buildings, and to perform upgrades to some of the existing units and structures. However, the parties did not enter into a written contract delineating the scope of the improvement to which Barnes was contributing its labor and material.
Barnes performed its first physical improvement to the property on or about August 10, 2005. Star Heaven filed a Notice of Commencement on October 4, 2005 which utilized a metes and bounds description for the entire property.
On May 2, 2006, Barnes executed a Sworn Statement at Star Heaven’s request that represented that, as of that date, the subject property was “free from claims of construction liens.” Star Heaven recorded the Master Deed for the new condominium project on May 16, 2006. Flagstar’s loans to Star heaven closed shortly thereafter, and Flagstar recorded its mortgage on May 23, 2006.
Star Heaven paid the first 20 invoices that Barnes submitted, but Barnes’ last seven invoices totaling $360,909.11 remained unpaid. The opinion notes that Star Heaven’s explanation for the late or slow payments was always an inability to pay.
Barnes thereafter recorded nine separate claims of lien on May 8, 2008. Six of the lien claims referenced particular individual unit numbers within the project, and the three remaining claims were filed against the overall project. “Each of the three liens filed against the project referred to the last day on which Barnes provided any work to the ‘overall project’ and each used a metes and bounds description encompassing the entire property set forth in the 2005 Notice of Commencement; they did not reference the dates upon which labor or materials were provided to any individual condominium unit within the project.”
Star Heaven assigned all of its interests in the property to David Findling on December 31, 2008, for the purpose of liquidating the assets and distributing the proceeds to creditors.
Barnes filed suit seeking to foreclose on its liens under the Construction Lien Act (“CLA”) in May of 2009. Flagstar contested the priority of Barnes’ construction liens over its mortgage.
Findling subsequently filed a separate action in Ottawa Circuit Court to liquidate the property for the benefit of Star Heaven’s creditors. The sale of the subject property was to proceed as part of Findling’s case.
The parties and the trial court in Barnes’ action agreed that the purpose of that case was solely to determine the priority and amount of valid liens to be asserted against the proceeds of the property sale. The trial court ultimately concluded that the full amount of Barnes’ lien was valid, that the lien had priority over Flagstar’s mortgage, and that the lien attached to Star Heaven’s interest in the property (as then held by Findling as assignee).
Barnes thereafter moved for attorney fees under § 118(2) of the CLA and for sanctions under MCR 2.114 and MCR 2.625. The trial court granted Barnes $32,460 in attorney fees but denied its request for sanctions. It entered judgment in Barnes’ favor on August 27, 2010, declaring that Barnes’ construction lien had priority over Star Heaven’s mortgage to Flagstar and that it was “valid for the full amount claimed of $360,909.11 and attorney fees in the amount of $32,460.” Flagstar appealed, contesting both the validity and the extent of the lien claims.
Flagstar asserted that Barnes’ lien claims were invalid for two reasons. First, it claimed that they were invalid to the extent they described the subject property in metes and bounds rather than as individual condominium units. The Court of Appeals rejected this argument noting that the CLA requires Barnes’ claims of lien to reference the legal description set forth in Star Heaven’s Notice of Commencement which, as indicated above, utilized a metes and bounds description for the entire property. Barnes’ lien claims were therefore found to substantially comply with the CLA.
The Court of Appeals then considered the effect of the filing of the Master Deed – which redefined the project as a condominium project – after the Notice of Commencement was filed. It examined whether it effectively required Barnes to file separate liens against each individual condominium unit within the project pursuant to Section 132 of the Condominium Act. Noting that Barnes was not initially providing labor and materials to a condominium unit as contemplated by either Section 126 of the CLA or Section 132 of the Condominium Act because Star Heaven had not yet recorded a Master Deed designating the project as a condominium project or identifying condominium unit numbers, the Court of Appeals held that, “at the time Barnes’ lien arose under the CLA, the work performed was not ‘performed upon a condominium unit,’ so as to invoke the requirement that Barnes file separate liens on each condominium unit under § 132 of the Condominium Act.” Consequently, Barnes’ claims of lien were valid and the lien was entitled to priority over Flagstar’s mortgage interest.
Flagstar’s second argument in this regard was that Barnes’ Sworn Statement of May 2, 2006 – wherein Barnes represented that the property was “free from claims of construction liens,” but did not state that it was “free from the possibility of construction liens” – failed to substantially comply with the requirements of the CLA. Flagstar essentially asserted that the defects in the Sworn Statement rendered it invalid, and thereby invalidated Barnes’ claims of lien. The Court of Appeals noted that Flagstar was not claiming that the sworn statement was inaccurate or that it failed to advise Star Heaven of the information that the CLA requires to be included in a sworn statement, but that Flagstar was asserting only that the omission of the “possibility” language from the Sworn Statement was material. The Court of Appeals quickly rejected this argument based on existing statutory and case law.
Flagstar also took issue with the extent of Barnes’ lien claims in its appeal. First, it argued that the trial court should have limited Barnes’ claims of lien to work and material actually provided to each unit within 90 days of the filing of the claims of lien. Noting the lack of a written contract between the parties, the Court of Appeals observed that, “[a]ll of the evidence presented below indicated that Barnes was retained, on a time and materials basis, to serve as the general contractor for the entire project being undertaken at the property by Star Heaven. Thus, ‘the improvement’ to which Barnes was supplying its labor and/or material was in furtherance of the entire project.” [Emphasis supplied.] It therefore affirmed the trial court’s conclusion that Barnes’ claims of lien were timely filed and encompassed the entire project – not just each unit that received labor and material within 90 days of the filing of the claims of lien.
Flagstar’s second argument as to the extent of Barnes’ lien claims was that the trial court should have reduced the amount of the lien for work and materials provided to units that were subsequently sold. The Court of Appeals rejected that argument as well, noting that a construction lien “attaches to the entire interest of the owner . . . who contracted for the improvement, including any subsequently acquired legal or equitable interest” pursuant to Section 107 of the CLA. [Emphasis supplied.] Since Barnes’ lien attached to Star Heaven’s entire interest in the property as described in the Notice of Commencement – which included the entire project – the Court of Appeals held that trial court had been correct in refusing Flagstar’s request to reduce the amount of the lien.
Finally, Flagstar took issue with the trial court’s award of attorney’s fees. The Court of Appeals affirmed the attorney’s fee award, but held that the trial court erred when it combined the awarded attorney fees with the amount of the construction lien because Section 107 of the CLA prohibits a construction lien from exceeding the amount the property owner owes on the contract with the claimant. It therefore held that, “the award of attorney fees is not properly added to the amount of a construction lien, but must instead be awarded by way of a judgment separate from the lien itself.”
(Disclaimers)
Star Heaven purchased a partially completed apartment project in February of 2005. At some point after the purchase, Star Heaven began to market the project as a “high-end condominium project.”
Star Heaven thereafter hired C.D. Barnes Associates, Inc. (“Barnes”) to finish construction of the 19 buildings, and to perform upgrades to some of the existing units and structures. However, the parties did not enter into a written contract delineating the scope of the improvement to which Barnes was contributing its labor and material.
Barnes performed its first physical improvement to the property on or about August 10, 2005. Star Heaven filed a Notice of Commencement on October 4, 2005 which utilized a metes and bounds description for the entire property.
On May 2, 2006, Barnes executed a Sworn Statement at Star Heaven’s request that represented that, as of that date, the subject property was “free from claims of construction liens.” Star Heaven recorded the Master Deed for the new condominium project on May 16, 2006. Flagstar’s loans to Star heaven closed shortly thereafter, and Flagstar recorded its mortgage on May 23, 2006.
Star Heaven paid the first 20 invoices that Barnes submitted, but Barnes’ last seven invoices totaling $360,909.11 remained unpaid. The opinion notes that Star Heaven’s explanation for the late or slow payments was always an inability to pay.
Barnes thereafter recorded nine separate claims of lien on May 8, 2008. Six of the lien claims referenced particular individual unit numbers within the project, and the three remaining claims were filed against the overall project. “Each of the three liens filed against the project referred to the last day on which Barnes provided any work to the ‘overall project’ and each used a metes and bounds description encompassing the entire property set forth in the 2005 Notice of Commencement; they did not reference the dates upon which labor or materials were provided to any individual condominium unit within the project.”
Star Heaven assigned all of its interests in the property to David Findling on December 31, 2008, for the purpose of liquidating the assets and distributing the proceeds to creditors.
Barnes filed suit seeking to foreclose on its liens under the Construction Lien Act (“CLA”) in May of 2009. Flagstar contested the priority of Barnes’ construction liens over its mortgage.
Findling subsequently filed a separate action in Ottawa Circuit Court to liquidate the property for the benefit of Star Heaven’s creditors. The sale of the subject property was to proceed as part of Findling’s case.
The parties and the trial court in Barnes’ action agreed that the purpose of that case was solely to determine the priority and amount of valid liens to be asserted against the proceeds of the property sale. The trial court ultimately concluded that the full amount of Barnes’ lien was valid, that the lien had priority over Flagstar’s mortgage, and that the lien attached to Star Heaven’s interest in the property (as then held by Findling as assignee).
Barnes thereafter moved for attorney fees under § 118(2) of the CLA and for sanctions under MCR 2.114 and MCR 2.625. The trial court granted Barnes $32,460 in attorney fees but denied its request for sanctions. It entered judgment in Barnes’ favor on August 27, 2010, declaring that Barnes’ construction lien had priority over Star Heaven’s mortgage to Flagstar and that it was “valid for the full amount claimed of $360,909.11 and attorney fees in the amount of $32,460.” Flagstar appealed, contesting both the validity and the extent of the lien claims.
Flagstar asserted that Barnes’ lien claims were invalid for two reasons. First, it claimed that they were invalid to the extent they described the subject property in metes and bounds rather than as individual condominium units. The Court of Appeals rejected this argument noting that the CLA requires Barnes’ claims of lien to reference the legal description set forth in Star Heaven’s Notice of Commencement which, as indicated above, utilized a metes and bounds description for the entire property. Barnes’ lien claims were therefore found to substantially comply with the CLA.
The Court of Appeals then considered the effect of the filing of the Master Deed – which redefined the project as a condominium project – after the Notice of Commencement was filed. It examined whether it effectively required Barnes to file separate liens against each individual condominium unit within the project pursuant to Section 132 of the Condominium Act. Noting that Barnes was not initially providing labor and materials to a condominium unit as contemplated by either Section 126 of the CLA or Section 132 of the Condominium Act because Star Heaven had not yet recorded a Master Deed designating the project as a condominium project or identifying condominium unit numbers, the Court of Appeals held that, “at the time Barnes’ lien arose under the CLA, the work performed was not ‘performed upon a condominium unit,’ so as to invoke the requirement that Barnes file separate liens on each condominium unit under § 132 of the Condominium Act.” Consequently, Barnes’ claims of lien were valid and the lien was entitled to priority over Flagstar’s mortgage interest.
Flagstar’s second argument in this regard was that Barnes’ Sworn Statement of May 2, 2006 – wherein Barnes represented that the property was “free from claims of construction liens,” but did not state that it was “free from the possibility of construction liens” – failed to substantially comply with the requirements of the CLA. Flagstar essentially asserted that the defects in the Sworn Statement rendered it invalid, and thereby invalidated Barnes’ claims of lien. The Court of Appeals noted that Flagstar was not claiming that the sworn statement was inaccurate or that it failed to advise Star Heaven of the information that the CLA requires to be included in a sworn statement, but that Flagstar was asserting only that the omission of the “possibility” language from the Sworn Statement was material. The Court of Appeals quickly rejected this argument based on existing statutory and case law.
Flagstar also took issue with the extent of Barnes’ lien claims in its appeal. First, it argued that the trial court should have limited Barnes’ claims of lien to work and material actually provided to each unit within 90 days of the filing of the claims of lien. Noting the lack of a written contract between the parties, the Court of Appeals observed that, “[a]ll of the evidence presented below indicated that Barnes was retained, on a time and materials basis, to serve as the general contractor for the entire project being undertaken at the property by Star Heaven. Thus, ‘the improvement’ to which Barnes was supplying its labor and/or material was in furtherance of the entire project.” [Emphasis supplied.] It therefore affirmed the trial court’s conclusion that Barnes’ claims of lien were timely filed and encompassed the entire project – not just each unit that received labor and material within 90 days of the filing of the claims of lien.
Flagstar’s second argument as to the extent of Barnes’ lien claims was that the trial court should have reduced the amount of the lien for work and materials provided to units that were subsequently sold. The Court of Appeals rejected that argument as well, noting that a construction lien “attaches to the entire interest of the owner . . . who contracted for the improvement, including any subsequently acquired legal or equitable interest” pursuant to Section 107 of the CLA. [Emphasis supplied.] Since Barnes’ lien attached to Star Heaven’s entire interest in the property as described in the Notice of Commencement – which included the entire project – the Court of Appeals held that trial court had been correct in refusing Flagstar’s request to reduce the amount of the lien.
Finally, Flagstar took issue with the trial court’s award of attorney’s fees. The Court of Appeals affirmed the attorney’s fee award, but held that the trial court erred when it combined the awarded attorney fees with the amount of the construction lien because Section 107 of the CLA prohibits a construction lien from exceeding the amount the property owner owes on the contract with the claimant. It therefore held that, “the award of attorney fees is not properly added to the amount of a construction lien, but must instead be awarded by way of a judgment separate from the lien itself.”
(Disclaimers)
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