Lien Waiver Mistakes by Supplier Construction

Recently, the Nevada Supreme Court decided Simmons Self-Storage v. Rib Roof, Inc., and while this case is especially notable for clarifying material suppliers’ rights to file mechanics liens without proving that the delivered materials were actually used in the project (and deftly overturning more than 50 years of precedent), it is also provided interesting insight into other aspects of Nevada mechanics lien law. A particularly interesting portion of the decision dealt with lien waiver mismanagement.

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Important Background

“unconditional lien waivers from Rib Roof . . . were subsequently produced, signed, and provided . . . in an apparent attempt to induce payment.” The mechanics liens at issue were filed by Rib Roof, Inc., a manufacturer and supplier of steel products. The GC on several related projects contracted with Southwest Steel (“Southwest”) to supply steel for the construction of same. Southwest, in turn, contracted with Rib Roof, Inc. to fulfill the obligation to supply steel to the 6 properties on which work was being performed. Delivery of the steel to one of the properties went completely unpaid, and the deliveries to the other 5 properties were only partially paid. Despite still owing Rib Roof approximately $1,000,000, Southwest requested unconditional lien waivers from Rib Roof, which were subsequently produced, signed, and provided by Rib Roof in an apparent attempt to induce payment.

The lien waivers did not have the intended effect; Rib Roof remained only partially paid, and subsequently filed mechanics liens against the 6 properties claiming the approximately $1,000,000 still owed. With complete payment not forthcoming, Rib Roof initiated an enforcement action to foreclose on each of the 6 properties subject to one of the mechanics liens. Satisfactory surety bonds were posted for 4 of the 6 properties, prompting Rib Roof to amend its complaint to dismiss the lien foreclosure actions against those properties, and replace their mechanics liens with claims against the surety bonds.

The Lien Waiver Discussion

Since Rib Roof provided at least two unconditional lien waivers and releases to Southwest, why were the subsequently filed mechanics liens valid? Lien waivers exist for a specific purpose, to waive the right to file a lien for a specific amount; and, while lien waivers are mismanaged and/or used improperly to intimidate lower-tiered parties into giving up lien rights, they can serve a legitimate purpose in managing and streamlining payment on construction projects.

In Simmons, the lien waivers were determined to be invalid, and did not preclude Rib Roof from filing, and foreclosing on, multiple mechanics liens. To see why the court reached that decision, more background – and a brief overview of the law of agency – is required.

At the center of the dispute regarding the lien waivers, and whether or not they were valid, was the Rib Roof employee who prepared and signed the documents. Before materials were delivered to any of the 6 properties, Rib Roof provided notices of intent to furnish materials to several parties involved in the project. One of these notices contained a provision noting that the person signing the notice on behalf of Rib Roof (bookkeeper Trish Cartwright) could bind Rib Roof in future documents related to Rib Roof’s right of lien. That notice, however, lacked an authorizing signature from a Rib Roof officer.

When Southwest requested the lien waivers, despite still owing approximately $1,000,000 to Rib Roof, Rib Roof’s CFO and corporate secretary directed Ms. Cartwright to prepare those forms. Ms. Cartwright’s job as bookkeeper included accounting duties, evaluating lien release requests, and preparing lien release forms, she was aware, however, that she did not have the authority to sign the lien waiver forms herself as company policy mandated that only corporate officers could do so. Despite this, it was Ms. Cartwright who signed the lien waivers requested by Southwest.

The requirements to waive a lien right in Nevada are set forth by NRS 108.2457(1) which states that:

Any written consent given by a lien claimant that waives or limits his lien rights in unenforceable unless the lien claimant:

(a) Executes and delivers a lien waiver and release that is signed by the lien claimant or his authorized agent in the form set forth in this section; and

(b) In this case of a conditional waiver and release, receives payment of the amount identified in the conditional waiver and release.

As the waiver provided by Rib Roof was unconditional, section (b) did not apply. Therefore, Rib Roof’s argument that the waiver was unenforceable to suspend its lien rights hinged on its representation that Ms. Cartwright lacked authority to bind Rib Roof when signing the lien forms – that she wasn’t an authorized agent of the claimant as required by NRS 108.2457(1)(a).

The court ultimately decided that Ms. Cartwright was not an agent capable of binding Rib Roof to the lien release because she lacked both actual and apparent authority to do so. The court gave much weight to the facts that Cartwright admitted that she lacked authority to execute the lien waiver forms, the notice that purported to give her authority to bind Rib Roof in matters related to mechanics liens lacked an authorizing signature, and that despite the CFO requesting her to prepare the waiver documents he never suggested that she “could, or should” sign them herself. Because of these facts, the court determined that Cartwright did not have actual authority to bind Rib Roof.

But, what about apparent authority? Apparent authority is:

“that authority which a principal holds his agent out as possessing or permits him to exercise or to represent as possessing, under such circumstances as to estop the principal from denying its existence”.

Mere reliance on the acts of the purported agent is not enough, there must be some sort of knowledge of, and acquiescence to, them by the principal. In this case, while it is probably true that Southwest relied on both the signed notice claiming to give Cartwright the authority to bind Rib Roof in lien related documents, and the subsequent lien waivers signed by Cartwright, there was no evidence that Rib Roof itself knew of and acquiesced to those acts. While this ultimately worked out in the correct manner despite the lien waiver mismanagement (Rib Roof was, after all, owed $1,000,000 for material they actually provided) it could have very easily gone the other way – and that decision would have been hard to argue with, as well.

Lien Waivers Shouldn’t Even Be An Issue

The rub here is that despite justice winning out in this instance, this is a completely manufactured issue. There is an easy way to avoid running into these type of problems, and it comes down to avoiding lien waiver mismanagement with good lien internal waiver exchange processes. This entire situation could, and should, have been avoided by the use of conditional waivers, rather than unconditional waivers. A conditional waiver still waives the lien right (like the higher party wants) but does so only upon the actual receipt of the payment owed. This makes too much sense to be as big a sticking point as it appears to be in this industry. Providing an unconditional waiver prior to receiving payment is poor receivables management, it throws away having a secured position on the project for nothing. A conditional waiver, on the other hand, does not effect the right to lien (and thus does not effect the claimant’s secured position) until payment has been made. And at that point, the lien right is unnecessary.

In this case, if the pretty reasonable conclusion that Cartwright could have bound Rib Roof to those lien waivers was reached, Rib Roof would have lost the ability to file liens to protect payment of (at least some of) the $1,000,000 owed to them. Lien waivers have an important role to play in overseeing of payment on construction project, but correct use is essential. Not every company will be as fortunate as Rib Roof was in this instance of lien waiver mismanagement.

Court Saves Material Supplier From Lien Waiver Mismanagement
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Court Saves Material Supplier From Lien Waiver Mismanagement
Lien Waiver supplier mismanagement Lien waivers can serve a purpose in payment management when used appropriately. The NV Supreme Ct. recently saved a supplier from lien waiver mismanagement.
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