Ridge Sheet Metal Co. v. Morrell

ROSALYN B. BELL, Judge. Ridge Sheet Metal Company, Inc., a subcontractor, was denied a mechanic’s lien for work done on a new residence of John and Lynn Morrell. Ridge appealed the denial of the lien. The Morrells contracted with Hunter Associates, Inc., prime contractor, for the erection of a single family private residence on land that they owned.

The full contract price was set at $125,000. The parties utilized a standard American Institute of Architects (A.I.A.) contract. Under that contract, periodic progress payments were to be made by the Morrells to Hunter based on applications for payment. The contract provided that 80 percent of the amount claimed and certified as work completed would be paid over to Hunter while a 20 percent balance would be retained.

Article 6 of the contract defined final payment as the entire unpaid balance including the retainage and provided for this payment to be made when the work had been completed and the contract had been fully performed. Hunter began work on April 22, 1985, and the Morrells, by checks drawn by the lending bank payable to the owner and the contractor, 1 made periodic progress payments in accordance with the contract. In response to an invitation to bid by Hunter, Ridge proposed to install a heat pump for $4,175. Approximately one-half of this amount was due on completion of the rough-in and duct work and the balance was due on completion of the job.

The bid was accepted and a contract was entered into between Ridge and Hunter on June 17, 1985. ³⁶⁷ The rough-in and duct work was completed and on June 28, 1985, Ridge billed Hunter $2,085 for the first payment under the contract. On July 26, the Morrells made the scheduled progress payment to Hunter. By the latter date, Hunter had been paid 80 percent of the amount applied for, or $74,659.13. The Morrells, through the lending bank, held $18,664.78 as retainage.

Hunter experienced financial difficulties and ceased work shortly after receiving the last progress payment. It had not paid Ridge the $2,085 to which Ridge was entitled. As a result, the Morrells received from Ridge on August 22 a Notice to Owner or Owner’s Agent of Intention to Claim a Lien. Thereafter, Ridge filed a Petition to Establish Mechanic’s Lien.

The Morrells refused to pay Ridge. At trial, to establish it qualified for a lien, Ridge offered testimony through its vice president that it had performed the rough-in and duct work in accordance with the contract. 2 The date of the last work by Ridge was July 17. The vice president also stated that Ridge had not received any money from Hunter or the Morrells for that work. The Morrells opposed the establishment of a mechanic’s lien arguing that they had already paid Hunter all that they were required to pay, that the contract was never completed and thus they were entitled to keep the retainage.

John Morrell admitted that the work the prime contractor performed was substantially in keeping with the payment applications and that before endorsing progress checks to the prime contractor, he went to the job site to confirm that the work had been done. 3 Twenty percent of the progress ³⁶⁸ payments was held back and all billings had been paid. 4 The president of Hunter, James Hunter III, corroborated Morrell’s statement that Hunter had received all four progress payments and that 20 percent was held back as retainage. The Morrells introduced into evidence two letters from James Hunter addressed to them. One letter was dated August 11, 1985 which authorized the Morrells to employ another contractor and expressed apologies for not completing the work. The second letter dated September 11, 1985 stated that “John Morrell owes Hunter Assoc, no money----” Hunter conceded at trial that this was true despite the 20 percent outstanding retainage.

At the conclusion, the court denied the lien, ruling that the Morrells owed no money to Hunter and, even though they held the retainage, they were not indebted under the contract as required under the mechanic’s lien statute to establish a lien. On appeal Ridge argues two points in challenging the denial of the lien: “1. Should the retainage held by Appellees be considered in determining whether full payment has been made at the time the Notice of Intention to Claim a Lien is received? “2. Should the retainage held by Appellees be considered in determining whether Appellees are indebted under the contract?” Preliminarily we will set out the previous and current statutory framework for mechanic’s liens as applicable to this situation. ³⁶⁹ STATUTORY FRAMEWORK Prior to 1982, the purpose behind the mechanic’s lien law was clear.

The mechanic’s lien law, codified at Md. Real Prop. Code Ann., § 9-101 et seq. (1974,1981 Repl. Vol.) was enacted to protect subcontractors (mechanics) and material-men.

Reisterstown Lumber Co. v. Reeder, 224 Md. 499, 507 , 168 A.2d 385 (1961). In general, the law was “designed to encourage construction by ensuring that those who contribute[d] to a project [were] compensated for their efforts.” Barry Properties, Inc. v. The Fick Bros. Roofing Co., 277 Md. 15, 18 , 353 A.2d 222 (1976). Specifically, the law sought to “protect materialmen who are not in a position to protect themselves if the owner negligently pays the [prime] contractor without first ascertaining that the materialmen have been paid.” Dickerson Lumber Co., Inc. v. Herson, 230 Md. 487, 491 , 187 A.2d 689 (1963).

The theory behind the law was that because the owner reaped the benefit of the materials and had ultimate control of the funds, the owner should serve as a second source of payment if the owner negligently paid out money to the prime contractor. Hill v. Parkway Industrial Center, 49 Md.App. 676, 678 , 435 A.2d 472 (1981), cert. denied, 292 Md. 376 (1982); Bounds v. Nuttle, 181 Md. 400, 406 , 30 A.2d 263 (1943). Since the law was designed to protect subcontractors and materialmen, the Court of Appeals repeatedly ruled that it was to be interpreted in the most liberal and comprehensive manner in favor of mechanics. E.g., T. Dan Kolker, Inc. v. Shure, 209 Md. 290, 296 , 121 A.2d 223 (1956).

Courts, however, had “no power to extend the law to cases, beyond the obvious designs and plain requirements of the statute.” Freeform Pools, Inc. v. Strawbridge Home for Boys, Inc., 228 Md. 297, 301 , 179 A.2d 683 (1962). Although a significant change occurred in the law in 1982, as Chief Judge Gilbert recently repeated, it is still to be interpreted in favor of mechanics and suppliers. Cabana, Inc. v. ³⁷⁰ Eastern Air Control, Inc., 61 Md.App. 609, 619 , 487 A.2d 1209 , cert. denied, 302 Md. 680 , 490 A.2d 718 (1985). The law was amended in 1982, obstensibly to affect the liability of a homeowner to a subcontractor who performed work on a personal residence.

Chapter 251 of the Laws of Maryland 1982, effective July 1, 1982, was enacted “[f]or the purpose of limiting the liability of an owner to a subcontractor for work performed and materials rendered by the subcontractor on a single family dwelling erected on the owner’s land for his own residence, to the extent that the owner has rendered payment to the [prime] contractor____” Prior to the amendments in chapter 251, the mechanic’s lien law codified at § 9-104(a) provided in pertinent part: “(a) Notice required to entitle subcontractor to lien. —A subcontractor is not entitled to a lien under this subtitle unless, within 90 days after doing the work or furnishing the materials, he gives written notice of his intention to claim a lien____” Chapter 251 added an important provision to § 9-104(a). Section (a)(2) now states that a subcontractor who performs work on>a single family residence is not entitled to a lien unless the subcontractor gives proper notice within 90 days and “the owner has not made full payment to the contractor prior to receiving” notice of the subcontractor’s intent to claim a lien. Md.Real Prop.Code Ann. § 9-104(a)(2) (1974, 1981 Repl.Vol., 1986 Cum.Supp.). (Emphasis supplied.) Prior to the amendment of the law in 1982, section (f) of § 9-104 stated: “(f) Payments by owner to contractor after notice. —On receipt of notice [of intent to claim lien] given under this section, the owner may withhold, from sums due the contractor, the amount the owner ascertains to be due the subcontractor giving the notice.

If the subcontractor giving notice establishes a lien in accordance with this subtitle, the contractor shall receive only the difference ³⁷¹ between the amount due him and that due the subcontractor giving the notice.” The law now specifies at § 9-104(f)(3): “(3) Notwithstanding any other provision of this section to the contrary, the lien of the subcontractor against a single family dwelling being erected on the land of the owner for his own residence shall not exceed the amount by which the owner is indebted under the contract at the time the notice is given.” (Emphasis supplied.) These new provisions and the effect of these additions on owner liability to a subcontractor when a prime contractor breaches the contract with the owner have yet to be construed. “INDEBTED” UNDER THE CONTRACT Appellant latches onto the phrases “full payment” in § (a)(2) and “indebted under the contract” in § (f)(3) and suggests that the use of the varying language implicates two different meanings. Appellant posits that § (a)(2) was enacted to cover the situation where the prime contractor fully performed under the contract and the owner paid out all monies due, i.e., the full contract price. In such a case, since “full payment to the contractor” had been made by the owner prior to receiving the subcontractor’s lien notice, the owner is not liable to the subcontractor for a mechanic’s lien. Conversely, the provision in § (f)(3), appellant continues, covers the situation where the prime contractor has breached the contract through work stoppage prior to completion of construction and prior to paying subcontractors.

In that case, while the owner is not liable to the contractor to make “full payment,” the owner would still be “indebted under the contract” and thus liable to the subcontractor. Appellant asserts that the situation in the case sub judice falls under § (f)(3) and, taking the retainage into consideration, appellees are still “indebted under the contract.” Appellees argue that regardless of the appropriate application of § (a)(2), § (f)(3) overrides this provision be ³⁷² cause it clearly states that it is in effect “[notwithstanding any other