About two weeks ago, the Supreme Court of Nevada seriously strengthened mechanics liens in the state. Nevada has a checkered history regarding mechanics liens. In the past we’ve seen the state leave mechanics liens subordinate in priority battles, but we have also seen the state provide leeway regarding material suppliers’ liens. In Cashman Equip. Co. v. W. Edna Assoc., Ltd, Nevada fortified construction’s most important remedy, the mechanics lien.
Mojave was hired to work on the construction of the new Las Vegas City Hall as a subcontractor for electrical work. Mojave hired Cam, a middle tier subcontractor, to serve as a go-between for Cashman, a lower tiered contractor. This hierarchy is important to remember, and in actuality, Cam was only hired to fulfill employment requirements imposed on Mojave.
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When Cashman completed its work on the project, Mojave wrote a check to Cam which was supposed to be passed along to Cashman. Mojave’s check cleared and the payment went to Cam’s account. In exchange for the subsequent check to Cashman, Cashman provided Cam with an unconditional lien waiver. Cam then provided a check to Cashman, but stopped payment on it before Cashman actually received the funds. Cam took the money and ran, leaving Cashman empty handed, save for the unconditional waiver it had just signed.
Cashman filed a lien anyway. Luckily, mechanics liens in Nevada are not easily waived. The case went to trial where the court found that Cashman was entitled to funds, but only to the extent that Cashman was not responsible for Cam’s failure to pay. Using equitable fault, the court determined that Cashman was 67% responsible for the loss and that Mojave was 33% responsible. The court adjusted its award accordingly, and reduced the damages to one third of the original award. Cashman appealed the decision to the Supreme Court of Nevada.
Supreme Court of Nevada
We have previously discussed the fact that even attorneys struggle with lien law. While the court came to the correct decision in this case, it did struggle with terminology at times. Regardless, the result in this case was very fair, and laborers in Nevada will be happy to know that the Supreme Court of Nevada has their back.
The Court first ruled on the effect of the unconditional waiver. The main difference between unconditional and conditional waivers is pretty obvious. Unconditional waivers eliminate all lien rights, while conditional waivers waive rights only when certain circumstances are met. Because of the enormous forfeiture of rights, it could not be more important to know when to use an unconditional lien waiver. The actual condition of conditional waivers, almost invariably, is that payment is received. Because they are not directly tied to payment, parties should always be extremely careful when signing an unconditional waiver. However, Nevada, like some other states, restricts the use of unconditional waivers. Those restrictions can be found here.
The Supreme Court found that while Cashman unconditionally waived its lien rights and accepted a check for payment, because the check bounced, Cashman’s waiver should be deemed null and void under Nevada law. The Court cited NRS 108.2457(5)(e), which states:
“Notwithstanding any language in any waiver and release form set forth in this section, if the payment given in exchange for any waiver and release of lien is made by check, draft or other such negotiable instrument, and the same fails to clear the bank on which it is drawn for any reason, then the waiver and release shall be deemed null, void and of no legal effect whatsoever and all liens, lien rights, bond rights, contract rights or any other right to recover payment afforded to the lien claimant in law or equity will not be affected by the lien claimant’s execution of the waiver and release.”
Essentially, this means that even if a party “unconditionally” waives any rights to a lien in exchange for payment, if that payment does not reach them, the waiver of rights is completely null and void. Further, the Court reasoned that enforcing the waiver would be against public policy, citing a decision where the court refused to enforce a pay-if-paid clause for the same reason. The Court also determined that payment from Mojave (higher tier sub) to Cam (middle tier sub) did not constitute payment to Cashman (lower tier sub).
The Supreme Court of Nevada reinforced the idea that unconditional waivers in the state are not completely unconditional. While we may think of unconditional waivers as absolute, some states, including Nevada, disallow them in certain situations. The Court also established that equitable fault has no place in assessing damages for mechanics liens in Nevada, as well as any other security interest foreclosure. Lastly, the Court ruled as to impossibility of payment by a surety. The Court found that a middle tier subcontractor taking off with proceeds before paying a lower tiered subcontractor was not an unforeseen possibility, noting that this situation is one of the very reasons that payment bonds exist. Therefore, a contractor such as Cashman would have a viable claim on a higher tiered subcontractor’s payment bond. While they were made whole in the end, I’m sure the business manager for Cashman will be wary of checks.
We have spilled plenty of (virtual) ink on this subject, so if you would like more information, check out our Ultimate Guide to Lien Waivers. For more on mechanics liens in Nevada, head over to the Nevada tag on the blog, or stop by our Nevada Lien Law FAQs.