Lien Law Update 06-97

By: James C. Busch

On June 17, 1997, the Georgia Court of Appeals in the case of Maverick Materials, Inc. vs. Kauffman, addressed one of the finer points of lien law. This ruling was a change from the generally accepted position regarding proper allocation of funds requirements on property owners.

In the Maverick case, the Kauffmans entered into a contract for the construction of a house for $182,000.00. The contractor, Mike Rice Construction, abandoned the project after receiving $135,000.00 of the contract price. Mr. Rice submitted an affidavit stating that only $59,928.00 of the total $135,000.00 paid was properly applied or allocated to labor and materials for the house. The Kauffmans then spent $123,974.00 to complete their home.

The Kauffmans’ claim payments in excess of the contract price provided them with a defense to the claim of lien. The Georgia statute on point states “In no event shall the aggregate amount of liens exceed the contract price of the improvements made or services performed.” When the contractor, like in the Maverick case, abandons the project, “the cost of completing the work is to be deducted from the contract price in order to ascertain the amount up to which the subcontractors may claim liens and if such deductions, together with payments previously made to the contractor, equal or exceed the entire contract price then the subcontractors and materialmen have no lien, since there is nothing due under the contract…the owner is required to show that sums paid to the contractor were properly appropriated to materialmen and laborers or the contractor’s statutory affidavit concerning such indebtedness had been obtained.”

The court went on to state that payment of some of the contract price when not properly applied does not relieve the owner for the amount of the subcontractor’s and materialmen’s liens remaining unpaid, so long as the liens are within the limits of the contract entered into between the owner and the contractor. However, the owner is entitled to credit against lien claims for any sums paid to the contractor which is properly applied to bills for labor and material.

The court went on to hold that it does not matter if the owner pays additional costs for completion before or after lien claims have been filed so long as the owner can prove the cost of completion and can produce a valid contractor’s affidavit or show to subcontractors, materialmen and laborers. However, this court has stated it is the owner’s responsibility to see to it that the payments which he makes on the construction contract price are properly disbursed by the contractor to those having valid claims for labor and materials and, in establishing his defense to the foreclosure, he has the burden of showing that this was done.

The key new law which has resulted from this case is the fact that this court has chosen to distinguish between payments made to the contractor for disbursement and payments made by the owner to complete the project after the contractor has abandoned the work.

The result of this case is that suppliers must be more aware of the status of their customers and the timeliness of their liens. Once again, the status of the enforceability of a lien has become a fact sensitive issue, which must be determined on a case by case examination. This case confirms that the sooner one files their lien, the better off one is as a creditor. However, this case gives new life to property owners to not properly allocate funds, but still avoid liability to suppliers by making payment of the contract price.

Mr. Busch is an attorney specializing in commercial and construction litigation for Busch, Reed, Jones & Leeper, P.C. in Marietta, Georgia