Earlier this year, the United States District Court for the Western District of Arkansas issued an opinion that could have far-reaching implications on the state’s mechanics lien laws, holding that “profits” were not recoverable in a mechanics lien claim unless the entire construction project was completed.
In Erdman Co. v. Phoenix Land & Acquisition LLC, a property developer (Phoenix) challenged the validity of a design-builder’s (Erdman Co) contractors lien. The facts leading up to the lien filing was summarized by the court: “After a dispute…Phoenix stopped paying Erdman, and Erdman stopped work.”
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Erdman then filed its mechanics lien claim and in setting its claim amount, contemplated and included profits. The developer challenged the ability to include profits arguing that Arkansas liens may not include profits “unless the project was completed.”
Can Profits Be Included In An Arkansas Mechanics Lien?
The US District Court agreed with the developer that profits could not be included in the mechanics lien claim, saying:
Arkansas law is clear that liens on completed fixed-price contracts may include profits. Arkansas law is not clear, however, on whether the project must be completed if the lien is to include profits…law and reason counsel strongly in favor of requiring completion.
It’s important here to distinguish “fixed-price” from “cost-plus” contracts. In Arkansas, it is clear that profits cannot be included in a mechanics lien when a contract is of the “cost-plus” variety. This was settled in Hickman v. Kralicek Realty and Const. Co., where the Arkansas Court of Appeals held that since the lien statute only “gives a lien to the person who performs the labor and not to the person who hires labor performed and pays for it” it cannot be read to allow a lien for profits on a cost-plus contract. They specifically stated that the lien claim “does not extend to profits on this type of contract, only to the costs of labor and material.”
The circumstances presented in the Erdman Co case, however, confronted a different precedent. In Shaw v. Rackensack Apartment Corp. it was made clear that liens on fixed-price contracts may include profits. The question was simply whether “completion” of the project was required to entitle the claimant to those profits. The court explains why completion is required:
The point of including profits in fixed-price contracts is not specifically to credit the contactor’s profits. Indeed, if the goal of liens was to credit profits, it would be difficult to explain Arkansas’s preclusion of lienable profits in cost-plus contracts…Rather, the point of including profits in liens for fixed-price contracts is simply to give the contractor the amount for which it contracted, instead of worrying about what part of that amount was profit. Fixed-price contracts are contracts “to furnish the labor and material for a certain sum of money, and it would be wholly immaterial whether the contractor made a profit or suffered a loss.” …When a contractor completes a fixed-price project, he has earned his fixed price. If he profited, fine. If he came out behind, that’s fine too. It’s the fixed price that matters, not the profit.
Once it becomes clear that the doctrine of lienable profits in fixed-price contracts is not really about profits, it becomes equally clear that project completion is required. Profit and loss have relevance only when the project is completed; only then is the existence of profit apparent. Until completion, then, giving a lien on profits is impossible. The contractor may show a profit at 74-percent completion, but suffer a loss at 100-percent completion. In sum, for fixed-price contracts, the contact price is what matters, not the profit.
Implications When Setting The Amount of your Mechanics Lien
We’ve spoken about the dollar amount of a mechanics lien claim in the past – all of which can be perused on the “Claim Amount” tag. This is a very hairy area of law. Can you include lien costs, interest, penalties, profits, etc. etc. While setting the value of your mechanics lien claim may seem straight forward, it’s actually one of the most complex parts of a mechanics lien claim.
[pullquote style=”left” quote=”dark”]While setting the value of your mechanics lien claim may seem straight forward, it’s actually one of the most complex parts of a mechanics lien claim.[/pullquote] It’s worth keeping Levelset’s FAQs and Resources page bookmarked. Every state’s FAQs include this question: Can I Include Collection Fees, Costs, Interests or Attorney Fees in the Lien Total?
The answer is different from state-to-state. In the state of Arkansas, as we can see from this recent decision, a mechanics lien claim must be stripped to simply the costs of the labor and/or materials furnished. Any and all profits cannot be included in the lien claim except under one circumstance: You are engaged in a fixed price contract and you have completed the contract.