ASA and ASA of Ohio Ask Appeals Court to Overturn Decision Allowing Prime Contractors to Waive Subcontractor Mechanic’s Liens Without Subs’ Assent
ALEXANDRIA, Va. — On March 6, 2012, the American Subcontractors Association and ASA of Ohio asked a state appeals court to reverse a trial court’s decision that, if allowed to stand, would allow general contractors to effectively waive their subcontractors’ lien rights without the subcontractors’ agreement.
In an amicii curiae brief filed with the 10th Appellate District Court of Appeals of Ohio, ASA and ASA of Ohio argued that the Franklin County Common Pleas Court mistakenly ruled in the case of KeyBank National Association, et al., Plaintiffs-Appellees, v. Columbus Campus, L.L.C., et al., Defendants-Appellees that project subcontractors had subordinated their lien rights to a mortgage because their subcontracts included a boilerplate flow-down clause binding the subcontractors to the prime contract and providing that the subcontractors assumed toward the contractor, “with respect to the Subcontractors’ work, all of the obligations and responsibilities that the Contractor … has assumed toward the Owner.”
In the underlying case, an owner entered into five construction agreements with general contractors to build a continuing care retirement community. The general contractors agreed to subordinate their lien rights as well as those of “all Subcontractors (and each of their respective subcontractors and suppliers)” to any “rights of any lender having a lien against all or any portion of the Project, from time to time.” The general contractors entered into individual agreements with subcontractors. The owner filed a notice of commencement and then entered into a lending agreement with the lenders to finance the project. Due to non-payment, the general contractors and subcontractors filed mechanic’s liens. The lenders sued, and the trial court granted the lenders’ lien priority over the subcontractors’ mechanic’s liens.
ASA and ASA of Ohio asked the appellate court to reject the lenders’ argument that the subcontractors agreed to subordinate their liens through a subcontract provision that purportedly “flows down” a lien subordination agreement contained in the prime contract, which the subcontractors did not sign and which was not incorporated into the subcontract. The associations argued that the trial court misinterpreted the subcontract’s flow-down provision contrary to its plain language, to accepted principles of contract interpretation, and to Ohio law that requires subordination agreements to be properly executed.
“If this Court decides that the Subordination Clauses are enforceable against the Subcontractors, lenders all across Ohio will require their inclusion in every bank-funded construction project,” ASA and ASA of Ohio wrote. “Any subcontractor hoping to work in the State of Ohio would be required to accept these terms and essentially waive their lien rights, and their right to be paid for their labor, on all financed, i.e. larger, construction projects. Even during better economic times, non-payment on one large project could bankrupt a subcontractor. This would have a catastrophic effect on the construction industry in Ohio, and the hundreds of thousands of employees that work for construction companies in this state.”
ASA and ASA of Ohio further noted that, even if the lien subordination agreements contractually “flowed down” to subcontractors, the lenders did not follow the process set forth in Ohio law for their lien to take priority over the subcontractors’ liens. “The trial court … erred in finding the lenders had an equitable right to subordination,” ASA and ASA of Ohio argued. “Ohio statutes provide the lenders with an adequate remedy to gain priority, a remedy the lenders chose not to use, and the lenders could have taken simple steps which they failed to do. Nothing was ever done to require the subordination of the subcontractors to subordinate their mechanic’s lien rights.”
“No one could argue that the Subordination Clauses are unambiguous,” ASA and ASA of Ohio pointed out. “It is the age-old rule in Ohio that when an agreement does not contain required, essential terms and is otherwise ambiguous, the contract is unenforceable because there was no meeting of the minds and no mutual assent.”
ASA and ASA of Ohio also told the appeals court that the trial court’s decision preventing subcontractors from exercising their lien rights runs afoul of Ohio law that guarantees subcontractors lien rights when a subcontract contains a pay-if-paid provision. “Affirming the trial court’s decision will destroy Ohio’s Mechanic’s Lien Law for all subcontractors, contractors, and material suppliers working on financed projects,” ASA and ASA of Ohio warned.
ASA member attorneys R. Russell O’Rourke and Daniel J. Myers, both of O’Rourke & Associates, Co., LPA, Cleveland, Ohio, prepared the brief for ASA and ASA of Ohio. ASA’s Subcontractors Legal Defense Fund paid the fees associated with the filing. The SLDF supports ASA’s critical legal activities to protect the interests of all subcontractors and is funded solely by contributions. SLDF funds are invested in precedent-setting cases across the country. To learn more about this case and the SLDF, visit www.sldf.net.
ASA of Ohio is a chapter of ASA that assists its member firms through government and industry advocacy and education resources.
Founded in 1966, ASA amplifies the voice of, and leads, trade contractors to improve the business environment for the construction industry and to serve as a steward for the community. ASA’s vision is to be the united voice dedicated to improving the business environment in the construction industry. The ideals and beliefs of ASA are ethical and equitable business practices, quality construction, a safe and healthy work environment, and integrity and membership diversity.