The Mechanics Lien Are You

Protected?
GREGORY PAONESSA

ABSTRACT
From time immemorial, property owners have been hiring others to
make improvements to their land. Since this practice began, these workers
needed to ensure that they would be able to collect the funds expended on
the others land. The mechanics lien has long provided workers and
suppliers of a piece of property the ability to gain a security interest in that
property should the owner or general contractor not come forth with
payment. The United States has used mechanics liens on private projects
since its founding; however, based on sovereign immunity, such liens are
unavailable on federal projects and property. It is due to this sovereign
immunity that the United States government instituted the Miller Act, a
bonding program that ensures payment down the chain of contracting
parties.
Mechanics lien statutes have gone through numerous changes since
their inception. Two main types of mechanics lien systems exist, with
the derivative-type system being most prevalent as it benefits the owner by
passing the risk of payment onto the subcontractor or materialman.
Instituting a system that blends bonding, like the Miller Act system, and
providing general contractors, subcontractors, and materialmen, with a
direct lien right against the owners property will alleviate a vast amount
of the current systems risk. It is only once a blended system is instituted
that all parties involved in a private construction project will be adequately
protectedresulting in a more prosperous development sector, national
economy, and just contracting system.

Juris Doctor, cum laude, New England Law | Boston (2014). B.S., Business Administration,
University of Vermont (2007). I would like to thank the Law Review staff for their assistance in
making this article what it is today. A very special thanks is owed to my family and friends
for their love, support, and guidancewithout you I would be lost.

579

580

New England Law Review

v. 48 | 579

INTRODUCTION

any Americans hope that one day they will be able to build their
dream home.1 A property owner, Cornelius, hired a general
contractor, Harrys Humungous Homes (Harrys), to build his
dream home. To facilitate this, Harrys hired subcontractors, including a
plumbing company, Palumbos Plumbing Services (Palumbos).2 As in
many construction contracts, Cornelius and Harrys contract stated that
progress payments would be released monthly, based on the amount of
work performed during the preceding month. 3 Such an agreement is
captured in a monthly payment requisition.4 As a result, Harry, Palumbo,
and the other subcontractors, will work on credit.5 Credit allows work to be
performed prior to payment.6 This situation leaves the subcontractorslike
Palumbosin a precarious position because they must outlay large sums
of cash in order to supply labor and materials. 7 As such, these
1

Press Release, Chase, Owning A Home Is Still the American Dream (Mar. 15, 2013),
available at http://www.businesswire.com/news/home/20130315005661/en/Owning-HomeAmerican-Dream (Owning a home is at the heart of most Americans dreams.).
2 Corneliuss, Harrys, and Palumbos story is anecdotal; they are fictitious characters
whose story is based on real cases that will be used throughout as a basic illustration of the
constant struggle between property owners, contractors, and subcontractors in the world of
construction. See, e.g., Superior Mech. Plumbing & Heating, Inc. v. Ins. Co. of the W., 965
N.E.2d 890, 89192 (Mass. App. Ct. 2012) (showing how it is customary for general contractors
to hire subcontractors to perform work that falls within their specialty).
3 Cf. Superior, 965 N.E.2d at 892.
4 BLACKS LAW DICTIONARY 1420 (9th ed. 2009) (defining requisition as [a]n authoritative,
formal demand); see, e.g., Superior, 965 N.E.2d at 892 (explaining how the subcontractor,
Superior, submitted four requisitions for payment to PinnCon for work performed); see also
Kevin Johnston, The Definition of Payment Requisition, CHRON, http://smallbusiness.chron.
com/definition-payment-requisition-36536.html (last visited Aug. 21, 2014) (A payment
requisition is a request from a department for permission to pay a bill. The bill can only be
paid when you sign the payment requisition, and this gives you control over expenditures
each month.).
5 The Ascent of Money:The Origin of Credit (PBS Documentary June 4, 2010), available at
http://www.pbslearningmedia.org/asset/fin10_vid_origincred/ (explaining how, without the
advent of credit or the belief that one will pay for services or goods provided, the entire
economic structure of our world as we know it would not be possible). Credit comes from the
Latin root word credo meaning to believe. Id.
6 See, e.g., Superior, 965 N.E.2d at 892 (describing how Superior submitted payment
requisitions for work performed up through March 18, 2008 for which they awaited payment);
Matthew V. Byrne, Jr. & John J. Costello, The Evolution of Coverage Under the Miller Act, 28
FORDHAM L. REV. 287, 287 (1959) (Inherent, however, in projects of this nature are the
dangers to which materialmen and suppliers are subject when they extend credit to the
contractor or his subcontractors.).
7

See supra text accompanying notes 36.

2014

Are You Protected?

581

subcontractors depend on Cornelius and Harrys timely progress

payments, but those payments are not always forthcoming.8 When
payment is not made, and the subcontractors fear that they will not receive
that payment, they may follow a statutorily defined process to perfect, or
secure, a lien on the propertycalled a mechanics lien9allowing that
party to gain a security interest in the property at issue.10
While a mechanics lien is an available solution on private projects, it is
not available on federal projects.11 The federal government passed the
Miller Act to protect involved parties and prevent federal property from
becoming encumbered the way private property can be. 12 Instead, the
subcontractors and materialmen13 involved in federal projects covered by
the Miller Act are protected by payment bonds. 14 A payment bond protects
subcontractors on a government project: if the general contractor fails to
remit payment to its subcontractors or materialmen, the subcontractor or
materialman will seek payment from the third party suretya bonding
companythus rendering a mechanics lien unnecessary.15 If Cornelius
was the government owner, and Harrys the general contractor, then

See, e.g., Superior, 965 N.E.2d at 892.

See Masten Lumber & Supply Co., v. Brown, 405 A.2d 101, 103 (Del. 1979) ( [S]ecuring to
Mechanics and others payment for labor and materials in erecting or repairing any building or
structure . . . .) (citation omitted).
9

10 JAMES D. FULLERTON, CONSTRUCTION LAW SURVIVAL MANUAL app. 43, at 514, 517
(2014), available at http://www.fullertonlaw.com/docs/appendices/50_state_survey_of_
mechanics_lien_rights.pdf; see Byrne & Costello, supra note 6 (If the improvement were made
upon private property, the supplier could, in the event of nonpayment, claim a lien against
the real property to the extent of the value of the materials delivered and incorporated into the
work.).
11

See Byrne & Costello, supra note 6.

Compare 40 U.S.C. 3131 (2012) (stating that prior to awarding any contract over
$100,000, the contractor must furnish bonds to cover payment and performance, thereby
rendering mechanics liens moot), with MASS. GEN. LAWS ch. 254, 4 (2012) (explaining how
subcontractors and materialmen may file mechanics liens to protect themselves from an
owners failure to pay for work performed). See also Byrne & Costello, supra note 6, at 287
([P]olicy and common sense prohibit such security [a mechanics lien] upon a public
project.).
12

13

A materialman is a person who supplies materials, typically in the building trades.

WEBSTERS THIRD NEW INTERNATIONAL DICTIONARY 1392 (Philip Babcock Gove ed.,
1986).
14 40 U.S.C. 3131(b) (2012) (stating that two types of bonds are required prior to a
contract being awarded to the lowest bidding contractora payment bond and a performance
bond).
15 See 40 U.S.C. 3131(b)(2) (2012) (The amount of the payment bond shall equal the total
amount payable by the terms of the contract unless the officer awarding the contract
determines . . . that a payment bond in that amount is impractical. . . .).

582

New England Law Review

v. 48 | 579

Harrys must secure a payment bond so Palumbos would be able to

recover if Harrys failed to pay.16

16

See supra text accompanying notes 1115.

2014

Are You Protected?

583

Because mechanics liens have existed in the United States since the
late 1700s, parties have litigated almost every aspect of various states
mechanics lien statutes.17 One such area is known as the defense of
payment, a theory in lien laws which requires that funds be due or to
become due.18 In other words, it requires that there is money owed on the
contract and that the owner has not paid.19 Due or to become due is read
as a condition precedent20 which, like any condition precedent, must be
satisfied in order to properly lien a piece of property. 21 However, states
interpret these terms differentlyNew York, for example, uses the amount
of funds due or to become due to limit the owners possible liability to that
amount.22 Other states, such as Pennsylvania, ignored the effect of this
phrase entirely by allowing for no limit on liability to the owner within a
specific period of time.23
These different statutory designs resulted in two prevailing systems;

17

See, e.g., Gillespie v. Bradford, 15 Tenn. (7 Yer) 168, 171 (Tenn. 1834) (holding a
subsequent purchaser of property will be subject to the enforcement of a mechanics lien held
on the property); Haswel v. Goodchild, 12 Wend. 373, 377 (N.Y. Sup. Ct. 1834) (holding a
party must show money is due from the owner to the contractor to enforce a lien against said
owner).
18 BloomSouth Flooring Corp. v. Boys & Girls Club of Taunton, Inc., 800 N.E.2d 1038,
1041 (Mass. 2003).
19

See Superior Mech. Plumbing & Heating, Inc. v. Ins. Co. of the W., 965 N.E.2d 890, 894
(Mass. App. Ct. 2012) (holding that [s]uch lien shall not exceed the amount due or to become
due under the original contract as of the date notice of the filing of the subcontract is given by
the subcontractor to the owner) (quoting BloomSouth, 800 N.E.2d at 1041); Russell v.
Woodbury, 610 A.2d 798, 800 (N.H. 1992) (holding that recovery is limited to sums due or
owing to the principal or general contractor at the time of notice to the owner).
20 See BLACKS LAW DICTIONARY 334 (9th ed. 2009) (defining condition precedent as [a]n
act or event, other than a lapse of time that must exist or occur before a duty to perform
something promised arises).
21

See, e.g., Superior, 965 N.E.2d at 894 (requiring an amount due or to become due in
order for a subcontractor to perfect a lien against the owner); Russell, 610 A.2d at 800 (limiting
recovery to sums due or owing at the time of notice of lien to the owner); In re Raymond Profl
Grp., Inc., 408 B.R. 711, 737 (Bankr. N.D. Ill. 2009) (explaining how Illinois law provides for a
lien on improved property only in the amount due or to become due on improvements so
made).
22

See Ethan Glass, Old Statutes Never Die . . . Nor Do They Fade Away: A Proposal for
Modernizing Mechanics Lien Law by Federal Action, 27 OHIO N.U. L. REV. 67, 77, 81 (2000); see also
infra Part II.AII.B.
23 See supra note 22. These two systems of limited liability and no limit on liability are also
described as the derivative and direct mechanics lien systems and are each followed by
various states in the country. See infra Part II.AII.B; see also R.I. GEN. LAWS 34-28-4 (West,
Westlaw through amendments through chapter 534 of the 2013 Regular Session) (explaining
how any work performed within 200 days of the notice of intent to lien is lienable).

584

New England Law Review

v. 48 | 579

the direct system where parties rights lay directly with the owner, and the
derivative system where parties rights are derivative of the rights of those
with whom they contracted.24 Under both systems, one party risks a result
that is not favorable to its positioneither the owner pays twice for the
same work,25 or the subcontractor goes unpaid because the general
contractor received payment from the owner and failed to pay the
subcontractors, rendering no more funds due or to become due to the
general contractor.26 It is through a bonding requirement, such as that
embodied in the Miller Act, combined with a waiver of the payment
defense, that all parties involved, mainly the owner and the subcontractor,
can come out of this situation whole.27
Over the past two centuries, states made numerous changes to their
mechanics lien laws to better serve the goals of the statutes and the
persons who benefit from them.28 Legislators responded to the imbalance
of power that is only natural between the property owner and the person
providing services, increasing the owners property value, with statutory
amendments.29 The worker makes the time and effort investment on the
assumption that the owner will pay, but until the owner does pay, the
owner is in a significantly superior power position.30 This imbalance of
power extends beyond the relationship between the owner and general
contractor to the relationship between general contractor and
subcontractor; steps taken by the general contractor may, in turn, affect the
subcontractors ability to file and perfect a lien.31

24

See infra Parts II.AII.B.

See First Commercial Corp. v. First Nat. Bancorporation, Inc., 572 F. Supp. 1430, 1434 (D.
Colo. 1983) (explaining how the owner of a piece of property is a direct beneficiary of a
statutory trust because the owner faces potential double payment).
25

26

See Superior, 965 N.E.2d at 89496.

See infra Part V.
28 See Jeffrey M. Biolchini, Enforcing a Mechanics Lien Under the New Rhode Island Statute, 56
R.I. B.J., Sept.Oct. 2007, at 9, 9 (explaining the recent addition by the Rhode Island legislature
of a section to the states mechanics lien law making the statute constitutional).
27

29

KENNETH E. RUBINSTEIN, MECHANICS LIEN BOOT CAMP 2, available at, http://www.agcnh.

org/News/Reports_assets/Lien%20Law%20Seminar%20Materials.pdf (last visited Aug. 21,
2014); see also Prompt Payment Act, 2010 Mass. Acts 1199, (codified as amended at MASS. GEN.
LAWS ch. 149, 29E (2012)) (putting forth Massachusettss version of the Prompt Payment Act,
which requires payment to be paid in a statutorily mandated time period on projects over the
three million dollar threshold).
30

RUBINSTEIN, supra note 29.

See Superior, 965 N.E.2d at 895 (holding that the general contractor, PinnCon, failed to
meet the condition precedent of paying the subcontractors out of funds released by the owner,
resulting in no additional funds being due or to become due and removing the subcontractors
ability to perfect a lien against the owner).
31

2014

Are You Protected?

585

Based upon this imbalance of power, this Note argues that states
should get involved in the contracting process to protect the collection
rights of the weaker subcontractor by codifying the requirement that
projects over a specific dollar threshold must: (1) require a payment bond
similar to the Miller Acts payment bond requirement; and (2) require
owners to waive the defense of payment to provide subcontractors and
materialmen the ability to perfect a mechanics lien. Such requirements
would give owners the power to choose whether the owners or general
contractor should shoulder the risk of general contractors absconding with
payments, either way ensuring that the less powerful subcontractor or
materialman is fully paid.
Part I of this Note analyzes mechanics liens generally including:
mechanics liens origins; mechanics liens policies and goals; the process
of perfecting a mechanics lien; and the mechanics lien payment defense.
Part II of this Note examines the two prevailing mechanics lien theories:
the derivative system and the direct system. Part III explores the Miller Act,
the federal governments solution to mechanics liens, focusing on the
Miller Acts origins and goals. Part IV of this Note compares and contrasts
the two prevailing theories of mechanics lien statutes and weighs the two
theories benefits and detriments. Lastly, Part V of this Note presents a
unique solution to the pitfalls presented by the two prevailing theories of
mechanics liens so that neither the owner nor the subcontractor will
shoulder an inappropriate level of risk.
I.

The Mechanics Lien

A. The Origins of the Mechanics Lien

Mechanics lien laws have existed since the days of the ancient
Romans32 and were used in the United States for over two centuries, with
the first mechanics lien law enacted the same year as the Bill of Rights,
1791.33 The creation of our nations first mechanics lien law is attributed to
Thomas Jefferson, who argued before the Maryland legislature that such a
law was necessary to develop our great nations newly minted capital,
Washington, D.C.34 Without such lien laws in place, an owner could
contract for improvements to their real property and then, when the bill

32

In re Fontainebleau Las Vegas Holdings, LLC., 289 P.3d 1199, 1210 (Nev. 2012) (citing
Edward H. Cushman, The Proposed Uniform Mechanics Lien Law, 80 U. PA. L. REV. 1083, 1083
(1932)).
33

CHARLES EMMETT DAVIDSON, THE MECHANICS LIEN LAW OF ILLINOIS: A LAWYERS BRIEF
6 (1922), available at http://books.google.com/books?id=KYUaAAAAYAAJ&
printsec=frontcover&source=gbs_ge_summary_r&cad=0#v=onepage&q&f=false.
34 Id. (explaining how Washington was initially part of Maryland).
ON THE TOPIC

586

New England Law Review

v. 48 | 579

came, simply refuse to pay, leaving the contracted party with little
recourse.35 This pre-lien system stunted development and produced a
shortage of housing in the Washington, D.C. area.36 After the first
mechanics lien law was put in place, and its success was realized, many
other states soon followed suit.37
B. The Mechanics Liens Policies and Goals
Mechanics liens are not a form of a judicial lien,38 but instead are a
form of a statutory lien39 designed to require strict statutory compliance to
properly perfect and enforce.40 The statutory nature of the mechanics lien
makes it an effective tool in collecting overdue accounts because the party
perfecting the lien need only follow the strict statutory guidelines to garner
an encumbrance on the property.41 This judicial-free process means that the
court system need not get involved unless there is a dispute over an aspect
of the lien-perfection process, which includes many timing, notice, and
filing requirementsall which must be met in order to have a properly
perfected and forceful lien.42 Parties and attorneys filing mechanics liens in
different states must pay great attention to detail because their
requirements are created by state statute; consequently, lien requirements
vary from state to state.43

35

Id.; see Scott Wolfe Jr., A Short History of the Mechanic Lien, THE LIEN & CREDIT J. (Nov. 15,
2010), http://www.zlien.com/blog/a-short-history-of-the-mechanic-lien/ (explaining how there
was plenty of land, but not many people willing to take the risk of paying for materials and
labor to improve anothers land without some security for payment).
36

See DAVIDSON, supra note 33.

Id.; see Christopher H. Little, The Rhode Island Mechanics Lien Law: A Plea (and Proposal)
for Clarity and Fairness, 3 ROGER WILLIAMS U. L. REV. 207, 212 (1998) ([B]y the start of the
twentieth century, virtually all states had adopted such laws.); see also Thaxter v. Williams, 31
Mass (14 Pick.) 49, 49 (1833) (explaining how a petition was made to the Court of Common
Pleas in Massachusetts for a lien upon improved land).
38 Cf. Wolfe, supra note 35 (discussing how mechanics liens are statutory by nature).
39 See, e.g., MASS. GEN. LAWS ch. 254, 4 (2012) (statutorily defining the process and
procedure that must be followed for a subcontractor or materialman to perfect a lien against a
property owner).
37

40

FULLERTON, supra note 10.

See Margaret Reiter, Types of Property Liens: Learn When a Creditor Is Allowed to Place a Lien
on Your Property, in SOLVE YOUR MONEY TROUBLES: DEBT, CREDIT & BANKRUPTCY (2011),
available at http://www.nolo.com/legal-encyclopedia/types-property-liens.html.
42 See ch. 254, 4 (setting forth the many requirements that must be met to properly perfect
a subcontractor mechanics lien).
41

43 Compare MO. ANN. STAT. 429.012 (West, Westlaw though the end of the 2013 First
Regular Session of the 97th General Assembly), with ch. 254, 4 (displaying the variations
between two states mechanic-lien statutes).

2014

Are You Protected?

587

Mechanics liens serve many goals, but one of the most important is to
encourage development by providing security to persons making
improvements to other peoples property if the owner fails to pay.44 When
Harrys and Palumbos add labor and materials to the construction of
Corneliuss home and upon his failure to properly pay, they may secure a
mechanics lien on the property to ensure that Cornelius cannot transfer it
without first satisfying the lien amount. 45 Mechanics liens are one of
several legal tools at a subcontractors disposal to ensure payment . . .
because it encumbers the improved real estate in much the same fashion as
a mortgage or a judgment, effectively preventing resale.46 Because
mechanics liens have strong implications on the property subject to the
lien, strict compliancenot merely substantial compliancewith the
statute is required by all states. 47 Some states identified [t]he purpose of
the provisions providing for mechanics liens is to require the person with
an interest in real property to pay for improvements or benefits which have
been induced or encouraged by his own conduct.48
Several principles justify mechanics liens, the first being ancillary to
mechanics liens main goalto prevent unjust enrichment by ensuring
that property owners pay for improvements made to their property.49
Rather than resorting to quantum meruit to recover the costs of
improvements made to anothers property, a mechanics lien provides
contractors with a surer and speedier, if not exclusive, method of
recovery.50 The next goal of mechanics liens, closely tied to the first,
ensures that laborers and suppliers are compensated for the work or goods
they provide.51
Compensation must be made in dollarsthe contractor receives no
44 See Glass, supra note 22, at 68 (explaining how the construction industry relies on credit;
people supplying materials and labor on credit need a mechanism to protect their
investment).
45

See infra text accompanying notes 4654.

AMERICAN SUBCONTRACTORS ASSN, INC., LIEN AND BOND CLAIMS IN THE 50 STATES iii
(2011), available at http://www.keglerbrown.com/content/uploads/2013/10/Lien-and-BondClaims-in-the-50-States-2013-edition.pdf.
47 See id.
48 William H. Lindsley, Mechanic Liens, in 26 ILLINOIS LAW & PRACTICE 2 (2014), available
at WestlawNext.
46

49

Glass, supra note 22, at 68 (citing Combustion Engg, Inc. v. Miller Hydro Grp., 577 A.2d
1186, 1188 (Me. 1990)).
50 Comment, Mechanics Liens and Surety Bonds in the Building Trades, 68 YALE L.J. 138, 141
(1958) [hereinafter Building Trades] (citations omitted).
51 Glass, supra note 22, at 68 (citing Chamberlain v. City of Lewiston, 129 P. 1069, 1071
(Idaho 1912)) (explaining there is no benefit to destroying improvements to immobile real
property for non-payment).

588

New England Law Review

v. 48 | 579

benefit from removing the board once it is nailed.52 Generally, society

benefits from: (1) increased productivity; (2) increased property value due
to building improvements; and (3) reduced economic waste.53 Lien laws
also facilitate increased efficiency; the statutory process in each state allows
claimants to acquire a non-judicial security interest in the property subject
to the lien.54
C. The Process of Perfecting a Mechanics Lien
Although mechanics lien statutes vary from state to state, there are
general requirements and guidelines common throughout. 55 One of the
first issues in any lien case is to ensure the party filing the lien possesses
standing.56 In most states, three general requirements must be met to
ensure that the party may secure a lien.57 First, a claimant must be within
three tiers of the owner of the project . . . . Second, if supplying a tangible
product, it must be affixed or become a permanent part of the
improvement. Third, [there are] no suppliers to suppliers.58 Subject to the
jurisdictional defenses available to an owner, a claimant is entitled to a lien
on the lesser amount of either the contract price or the reasonable value of
the services and materials supplied to the project.59 The next point in the
process is typically providing notice to the owner, either that a lien is being
filed or that the party is performing work on the project, thereby putting
the owner on notice that the party expects payment.60 Once notice is
provided, the next step is typically to file the lien.61

52

See RUBINSTEIN, supra note 29.

Id.
54 See id. (explaining how contract suits consume both time and finances of all parties
involved, including state and judicial resources).
55 See FULLERTON, supra note 10 (discussing how every state required strict adherence to
the statutory mandates).
56 Id. (explaining how in the majority of states there are three general requirements that
must be met before a party has a right to perfect a lien).
57 Id.
58 Id. A tier is how far removed the owner is from a contractor or supplier; for example,
the first tier is the party who has a direct contract with the owner, and the second tier is the
parties contracting with that party, and so on. See, e.g., Seaman v. Climate Control Corp., 436
A.2d 271, 274 (Conn. 1980).
59 FULLERTON, supra note 10, at 47778.
60 Id. at 478; see Glass, supra note 22, at 7576.
61 Glass, supra note 22, at 76 (There are two basic filings required by states: a pre-lien
notice indicating that the claimant intends to perform labor, supply materials, or perfect a
mechanics lien; and the mechanics lien itself.).
53

2014

Are You Protected?

589

D. Mechanics Liens and the Defense of Payment

The payment defense prevents the owner from paying twice for the
same workbecause the owner already paid.62 The payment defense is
an affirmative defense63 based on [a] defendants assertion of facts and
arguments that, if true, will defeat the plaintiffs . . . claim, even if all the
allegations in the complaint are true.64 Consequently, a subcontractor
properly asserting a lien, due to nonpayment for past work completed,
may not recover from an owner who already paid the general contractor.65
If Cornelius paid Harrys for all the work performed on the projectand
Harrys did not pay Palumbosthe subcontractor, although owed money,
could not perfect a lien against Cornelius because he could assert this
affirmative defense.66
The payment defense relates to the idea that subcontractors can only
lien a project in the amount that is due or to become due. 67 Once a lien is
filed, some courts will initially look at the amount of funds already
expended.68 Then the court will add the amount required to complete a
project after a general or subcontractors breach, and then subtract any
retainage held by the owner from the breaching contractor. 69 This
remaining dollar figure will be the amount due or to become due under the
original contract.70 In contrast, other courts will not take these figures into

62

See Maverick Materials, Inc. v. Kauffman, 488 S.E.2d 690, 69192 (Ga. Ct. App. 1997)
([Under Georgia law,] the owner is entitled to credit against lien claims for any sums paid to
the contractor which were properly applied to bills for labor and material.); Superior Mech.
Plumbing & Heating, Inc. v. Ins. Co. of the W., 965 N.E.2d 890, 89394, 89698 (Mass. App. Ct.
2012) (holding that PinnCon already paid the general contractor the funds Superior attempted
to lien and, as a result, no funds were due or to become due preventing Superior from
perfecting a lien).
63 See COLO. REV. STAT. ANN. 38-22-102(3.5) (West, Westlaw through the First Reg. Sess.
of the Sixty-Ninth Gen. Assembly (2013)).
64 BLACKS LAW DICTIONARY 482 (9th ed. 2009).
65 See Wholesale Specialties, Inc. v. Vill. Homes, Ltd., 820 P.2d 1170, 1172 (Colo. App.
1991); Maverick, 488 S.E.2d at 692; Superior, 965 N.E.2d at 897.
66

See supra text accompanying notes 6265 (referencing the hypothetical characters used
throughout this Note).
67 Superior, 965 N.E.2d at 896 (holding that payments were already made to the general
contractor for the work that the subcontractor attempted to lien so there were, essentially, no
funds due or to become due for that work as a result of the previous payments); see also
Maverick, 488 S.E.2d at 69192 (affirming summary judgment for the property owners because
they paid $1,902 over the contract price to complete the work, resulting in no more money due
or becoming due).
68
69
70

Superior, 965 N.E.2d at 89394.

Id. at 897 & n.11.
Id. at 894.

590

New England Law Review

v. 48 | 579

account.71 If the cost to complete the project is above the original contracted
price, plus any approved changes, then there will be no funds due or to
become due, and the party attempting to perfect a lien will not succeed.72
The defense of payment requires the party least able to control risk to
shoulder the majority of the risk; thus the subcontractor may do everything
in their power to perform on the contract, but if they fail to make a proper
filing, they will be precluded from perfecting a lien and unable to collect on
any money owed.73
II. Two Prevailing Mechanics Lien Systems
Mechanics liens are born by state statute, meaning that each state
drafts these laws as they see fitresulting in little uniformity throughout
the nation.74 Over the years, different models for mechanics lien statutes
emerged and two prevailing theories developed.75 The first theory is the
derivative system,76 which holds that subcontractors and materialmen are

71

Compare id. at 89697 (explaining how L.A. Fitness, the property owner, expended
$237,140 over the original contract price to complete the contract, and as a result there were no
retainage funds remaining to fulfill the lien asserted by Superior), with Masten Lumber and
Supply Co. v. Brown, 405 A.2d 101, 104 (Del. 1979) (explaining how owners may be subject to
double payment regardless of the fact that the project will now cost more than the original
contract price).
72 See Superior, 965 N.E.2d at 89697; Maverick, 488 S.E.2d at 69192.
73 See Superior, 965 N.E.2d at 89293 (holding that the party who breached failed to meet a
condition precedent to funds becoming due, thereby precluding payment to parties who did
not participate in the breach); K. Brett Marston & Spencer M. Wiegard, Key Points to Consider
in Filing and Challenging a Mechanics Lien, 59 VA. LAW., Oct. 2010, at 37, 39, available at
http://www.vsb.org/docs/valawyermagazine/vl1010-mechanics-lien.pdf (limiting the amount
of the lien to amounts owed in the chain of contract above the claimant means that parties
above the claimant in the chain of contract can affect the claimants own lien rights).
74 See John W. DiNicola & Edwin L. Hall, The Massachusetts Mechanics Lien Law, in LIEN
LAW & PROMPT PAY UPDATE 2011, at 59 (MCLE, Inc. 2011).
75

See infra notes 7679 and accompanying text.

See Glass, supra note 22, at 77 (describing the derivative system, used by states such as
New York, and the direct system, used by states such as Pennsylvania); see also Masten
Lumber & Supply Co. v. Brown, 405 A.2d 101, 10304 (Del. 1979).
76

Under the New York System the lien of a sub-contractor or materialman

depends on or is limited by the amount remaining due to the contractor,
and the sub-contractor, laborer or materialman has only a derivative
lien, being substituted to the right of the contractor. In contrast, [u]nder
the Pennsylvania System the right of sub-contractors, laborers or
materialmen does not depend at all upon any indebtedness due from the
owner to the contractor, but they get a direct lien as distinguished from a
derivative one.
Masten, 405 A.2d at 10304 (quoting State v. Tabasso Homes, 28 A.2d 248, 253 (Del. Gen. Sess.

2014

Are You Protected?

591

derivative claimants to the general contractor, so their ability to perfect 77 a

lien is dependent upon the general contractors lien rights.78 The other main
theory is the direct system, which acknowledges that the right of
subcontractors to claim a mechanics lien is independent of the agreement
between the owner and contractor.79 Each theory is advantageous to one
party over the otherthe derivative system is more beneficial to owners
such as Cornelius, and the direct system is more beneficial to
subcontractors such as Palumbos.80
A. The Derivative System
Most states follow the derivative system, commonly referred to as the
New York System.81 Under this system it is understood that, [b]ecause a
subcontractor is a derivative claimant and, unlike a general contractor, has
no constitutional, common law, or contractual lien on the owners
property, a subcontractors lien rights are totally dependent on compliance
with the statutes authorizing the lien.82 When such a claim is dependent
and involves a derivative claimant, subcontractors liens must be satisfied
out of funds due and owing from the owner to the general contractor.83
This exposes the subcontractor to increased risk.84
B. The Direct System
The second system for filing mechanics liens is the direct system.85

1942)).
77 BLACKS LAW DICTIONARY 1251 (9th ed. 2009) (To take all legal steps needed to
complete, secure, or record (a claim, right, or interest).).
78 See DiVeronica Bros. Inc. v. Basset, 624 N.Y.S.2d 296, 297 (N.Y. App. Div. 1995); Morrell
Masonry Supply, Inc. v. Lupes Shenandoah Reserve, LLC, 363 S.W.3d 901, 904 (Tex. Ct. App.
2012); Glass, supra note 22, at 77.
79

Glass, supra note 22, at 77 (citing Tabasso Homes, 28 A.2d at 253).

See R. Russell ORourke, Ohio Mechanics and Materialmens Liens, in OH. MECH. &
MATERIAL. LIENS 9-1 (3d ed. 2001) (explaining how changes in the applicable statute were
made with the intention of protecting the property owner); RUBINSTEIN, supra note 29, at 23
(explaining how strict statutory compliance with lien laws is designed to benefit the owner
over the contractor or potential lien filer); Glass, supra note 22, at 77 (explaining how the right
of a subcontractor to file a lien is independent of the agreement between the owner and
contractor, thereby giving the subcontractor a direct lien right against the owner).
81 Masten, 405 A.2d at 103 (quoting Tabasso Homes, 28 A.2d at 258).
82 Morrell Masonry, 363 S.W.3d at 905 (quoting First Natl Bank in Graham v. Sledge, 653
S.W.2d 283, 285 (Tex. 1983)).
80

83

DiVeronica Bros., 624 N.Y.S.2d at 297 (citations omitted).

See Superior Mech. Plumbing & Heating, Inc. v. Ins. Co. of the W., 965 N.E.2d 890, 896
(Mass. App. Ct. 2012).
85 Glass, supra note 22, at 77.
84

592

New England Law Review

v. 48 | 579

Under this system, the subcontractors lien rights are not dependent on the
general contractors rights, but are based solely on the subcontractors
ability to meet the lien laws statutory requirements.86 Under the direct lien
system, the breach of a party in a higher tier 87Harrys breach with
Corneliuscannot bar that claimant from asserting a lien.88 So long as
adequate funds remain, the second tier subcontractor may perfect its lien
against the property.89 The court explained that:
The plaintiffs right to a lien is given solely by statute, and is not
made to depend in any way upon the act of the original
contractor in paying or not paying his immediate
subcontractor. . . . If the original contractor is, under the present
law, unprotected, in that he may be compelled to pay twice for
the same work and materials, the fault is not with the plaintiff,
and the remedy must be sought in the Legislature and not in the
court.90

The plaintiff possesses a direct right, and not one that is derivative (or
dependent) on the general contractors right to perfect its lien.91
III. The Miller Act
A. Origins of the Miller Act
The Miller Act was enacted in 1935 to protect the interests of the
federal government, taxpayers, and subcontractors and suppliers.92 It
requires any contractor awarded with a federal construction contract
valued over $100,000 to furnish both a payment and performance bond:
these bonds protect the interests of the federal government, taxpayers,
subcontractors, and suppliers from defaulting parties. 93 Before the Miller

86

See Steel Suppliers, Inc. v. Ehret, Inc., 486 A.2d 32, 36 (Del. Super. Ct. 1984) (holding that
the general contractors waiver of any lien right did not extend to the subcontractor because
subcontractors lien rights were independent of general contractors).
87 See Seaman v. Climate Control Corp., 436 A.2d 271, 27475 (Conn. 1980) (explaining how
a second tier subcontractor retains their lien rights even if the first tier subcontractor had
already been paid in full).
88

Steel Suppliers, 486 A.2d at 3536 (explaining how this disparity between states
mechanics lien statutes makes it difficult to use another states case law to decide mechanics
lien disputes).
89 See Seaman, 436 A.2d at 274.
90 Id. at 276 (quoting Barlow Bros. Co. v. Gaffney, 55 A. 582, 584 (Conn. 1903)).
91 See id.
92 Associated Gen. Contractors of Am., Miller Act: Preserve the Intent of the Miller Act, AGC,
http://www.agc.org/cs/advocacy/legislative_activity/miller_act (last visited Aug. 21, 2014)
[hereinafter Miller Act].
93 40 U.S.C. 3131(b) (2006); Miller Act, supra note 92.

2014

Are You Protected?

593

Act, federal-project contractors were at risk because the federal

governments sovereign immunity prevented them from perfecting a
mechanics lien.94 Congress enacted the Heard Act in 1894 to protect
subcontractors, materialmen, and all others involved in federal projects,
but due to its numerous deficiencies, Congress repealed and replaced it
with the Miller Act to better serve the goals envisioned. 95
B. Goals of the Miller Act
The goals of the Miller Acts bonding scheme are straightforward:
[E]nsuring that construction contractors are qualified to perform
their contractual obligations to the government, [so] that precious
taxpayer funds are protected through third-party guarantees of
contract performance and payment, and that subcontractors and
suppliers have a payment remedy in the event the prime
contractor becomes insolvent or fails to pay them.96

This payment remedy is necessary because the governments sovereign

immunity prevents contractors from filing mechanics liens on federal
projects.97 Additionally, the Miller Act fulfills many goals beyond ensuring
payment to persons involved in a project and preventing the filing of a
mechanics lien by a party against the government.98 Another goal is
evaluating the capacity, character, and capital of construction firms to
determine their ability to performensuring contractors engaged in
federal projects are fully qualified to complete them.99 The primary
purpose of the Miller Act, however, was to protect subcontractors who
supplied material and labor to federal public works projects by providing
an alternative, and usually superior, remedy to the assertion of mechanics
liens.100 Thus, states should adopt the Miller Acts bonding scheme for
intrastate, private construction projects.101

94

FLA. BAR: CONTINUING LEGAL EDUC., FLORIDA CONSTRUCTION LAW AND PRACTICE 14,
14.2 (2011).
95 Id.
96 Miller Act, supra note 92.
97 See David Henry, The Contractors Friend (The Federal Miller Act), PRIMERUS,
http://www.primerus.com/business-law-articles/the-contractors-friend-the-federal-miller-act1252011.htm (last visited Aug. 21, 2014).
98

Miller Act, supra note 92.

Id.
100 FULLERTON, supra note 10, at 536.
101 See id.
99

594

New England Law Review

v. 48 | 579

ANALYSIS
IV. There Is No Best Mechanics Lien System that Protects All Parties
Adequately
Although each serves its intended purpose, neither the derivative nor
the direct systems are perfect.102 Under the limited liability or derivative
system, if Cornelius already paid Harrys $12,000 out of $15,000 (leaving
only $3,000 due or to become due), Corneliuss only liability is for the
remaining $3,000; regardless of whether Harrys ever paid Palumbos any
of the $12,000.103 This leaves Palumbos unable to collect unpaid
receivables.104
Under the direct or no-limit-on-liability system, if Cornelius paid
Harrys the $12,000, yet Harrys failed to pay the subcontractors, those
subcontractors could lien the amount they are owedsubjecting Cornelius
to double liability.105 Cornelius would pay amounts in excess of the original
contract price and remain liable for funds not paid to subcontractors. 106
Under either system, one party is exposed to more liability than the
other.107 To fix this, states should enact a Miller Act-like bonding

102

See supra Parts II.AB.

See, e.g., Masten Lumber & Supply Co. v. Brown, 405 A.2d 101, 103 (Del. 1979)
(explaining that under the New York System, also known as the derivative system, the lien
amount of a subcontractor or materialman is limited by the amount due to the general
contractor); Superior Mech. Plumbing & Heating, Inc. v. Ins. Co. of the W., 965 N.E.2d 890,
89496 (Mass. App. Ct. 2012) (explaining how once the general contractor absconded with his
subcontractors payments and would not satisfy the condition precedent in Article 4 of the
rider, there were no longer any funds due or to become due because of the breach, and the
owners liability was therefore limited).
103

104
105
106

Cf. Superior, 965 N.E.2d at 89798.

See Masten, 405 A.2d at 104.
See id.
[W]here the principal contractor has abandoned the work and the owner
is compelled to pay an amount in excess of the original contract price in
order to have the work completed according to the contract specifications,
this does not preclude a subcontractor under the original contract from
establishing his lien for the full amount of his claim.

Id. (citation omitted).

107

Compare Pond Cove Millwork Co. v. Steeves, 598 A.2d 1181, 1182 (Me. 1991) (The
Mechanics Lien Statute affords a double payment defense to a homeowner when persons
who have furnished material and services independently to the homeowners contractor seek
enforcement of their liens.), with First Comm. Corp. v. First Natl Bancorporation, Inc., 572 F.
Supp. 1430, 143334 (D. Colo. 1983) (holding that the point of the states statutory trust law is
to make the owner a direct beneficiary so to avoid double payment by use of the trust fund),
and Masten, 405 A.2d at 103.

2014

Are You Protected?

595

requirement on private projects, while maintaining current lien laws; but

the payment defense will no longer be required.108 The defense of
payment will no longer be necessary because a bonding requirement
eliminates the issue of an owner being subject to the possibility of double
payment.109 In the alternative, states could provide owners with the option
of either requiring bonds on their projects or waiving the payment
defense, thereby ensuring that subcontractors and materialmen are able to
file and perfect a lien if the general contractor absconds.110 The end result
will be mechanics lien laws like those used in the direct system states. 111
A. The Derivative System Benefits the Owner at the Expense of the
Subcontractor
The two current systems of mechanics liens benefit either the owner of
the property, Cornelius, or the parties who contracted with the general
contractor on the project, such as Palumbos.112 A person in Corneliuss
shoes would prefer a derivative state that allows for the affirmative
payment defense.113 Under the derivative system, a subcontractor like
Palumbos must be cognizant that failure to file one necessary document,
such as a notice of contract, may result in a loss of their lien rights. 114 The
subcontractor can also lose its lien rights if the general contractor lacks
funds due from the owner when the subcontractor attempts to file a
mechanics lien.115 This system requires notice to alert the owner of their

108

See infra Part V.

Cf. 40 U.S.C. 3131 (2006) (The amount of the payment bond shall equal the total
amount payable by the terms of the contract . . . .); Byrne & Costello, supra note 6, at 287
(explaining how bonds on federal projects are required because there are no lien rights and
that no lien rights means the government will never pay twice for the same work).
110 See supra Part II.B. (discussing the direct system where there is no defense of payment).
111 See, e.g., R.I. GEN. LAWS 34-28-4 (West, Westlaw through amendments through
chapter 534 of the 2013 Reg. Sess.) (making lien rights dependent on timing and not whether
there are funds due or to become due to the general contractor; thus, providing subcontractors
direct lien rights with the owner).
109

112

See supra Parts II.AB. (discussing the two systems of mechanics liens and how they
operate).
113 See supra Part II.A. (describing the limitations on subcontractors lien rights embodied
in the derivative system); see also supra Part I.D. (describing the defense of payment).
114 See MASS. GEN. LAWS ch. 254, 4 (2012) (explaining how a subcontractor must file a
notice of contract with the owner of a project any time after execution of the written contract
between the parties and prior to other timing dates passing in order to successfully lien a
project); see also Bonus Elec., Inc. v. Slosser, 687 P.2d 389, 392 (Ariz. Ct. App. 1984) (holding
that notice is implied when a subcontractors contract requires the other party to furnish
labor on the site and incidental materials and equipment.).
115

See, e.g., Superior Mech. Plumbing & Heating, Inc. v. Ins. Co. of the W., 965 N.E.2d 890,

596

New England Law Review

v. 48 | 579

potential liens and thus allow the owner to protect himself against double
payment.116 This is the main benefit of the derivative systemit protects
owners like Cornelius from double payment, or payment for the same
work or materials to two different parties resulting in the contract price
extending beyond its agreed-upon value.117 This system serves society
because it eliminates fear of unexpected contractual costsprompting
owners to invest in buildings and construction and prevent economic
stagnancy.118
The derivative system also allows for a carefully worded contract to
bar the subcontractor from properly perfecting a mechanics lien against
the owner.119 Consequentially, if the owner has completely paid the
general contractor, yet there are still funds due and owing from the general
contractor to the subcontractor, the subcontractor cannot secure a
mechanics lien against the owner.120 This is the exact situation that the
Miller Act and similar bonding schemes were designed to cure, and do
cure.121 Rather than Palumbos collection rights being derivative or
dependent on Harrys collection rights, Palumbos would go to Harrys
surety for paymentleaving Palumbos with a sure-footed method to

896 (Mass. App. Ct. 2012) (explaining how failure of the subcontractor to properly notify the
owner that they contributed labor and materials to the project, coupled with the fact that there
were no funds due and owing at the time of filing the lien, dispensed with the contractors
lien rights).
116 Bonus Elec., 687 P.2d at 391 (showing how the derivative system is primarily concerned
with protecting the owner at the expense of the contractor or subcontractor).
117 See Russell v. Woodbury, 610 A.2d 798, 799 (N.H. 1992) (explaining how the clear
statutory language limiting recovery to those sums that are due and owing to the principal, or
general, contractor is designed to protect the owner from unknown liability) (quoting
Westinghouse Elec. Supply Co. v. Electromech, Inc., 409 A.2d 1141, 1144 (N.H. 1979)).
118 Cf. The Economy, ARCHITECTURE 2030, http://www.architecture2030.org/the_solution/
solution_economy (last visited Aug, 21, 2014) (A healthy economy relies on an active
Building Sector because so many other sectors and industries are directly tied to it.).
119 See Steel Suppliers, Inc. v. Ehret, Inc., 486 A.2d 32, 35 (Del. Super. Ct. 1984); Superior, 965
N.E.2d at 89293 (explaining how a general contractors failure to pay the subcontractor out of
the funds paid by the owner in the payment requisition, prevented the subcontractor from
perfecting its mechanics lien against the owners property because the general contractor
failed to file a required document).
120

See Superior, 965 N.E.2d at 892. A general contractor who absconded with a payment
requisition did not satisfy a condition precedent, payment of subcontractors, to receive further
payment from the owner. Id. Therefore, funds were not due or to become due and a
mechanics lien could not be properly perfected by the subcontractor. Id.
121 See Byrne & Costello, supra note 6 (Section 2 of the Act confers upon a laborer or
materialman the right to sue the surety upon the payment bond where he has not been paid
for a period of 90 days from the date when the last of the materials or services were
supplied.) (footnote omitted).

2014

Are You Protected?

597

collect.122
Superior Mechanical Plumbing & Heating v. Insurance Company of the West
clarified how the derivative system works. 123 In that case, the plumbing
contractor, Superior, performed work as a subcontractor for PinnCon, the
acting general contractor.124 Superior submitted monthly requisitions,
which began to go unpaid.125 However, PinnCon continued to submit its
payment requisitions to the owner and, after receiving a requisition
payment in the amount of $690,966, PinnCon absconded with the payment
and closed its doors, paying its subcontractors nothing. 126 Because
Superiors lien rights were derivative to PinnCons lien rights, which at the
time were non-existent,127 Superior could not complete the lien-perfection
process.128 In states following the derivative system, many subcontractors
and materialmen routinely face a similar situation.129 Had the
subcontractors and materialmen secured bonds similar to those embodied
in the Miller Act in their projects, these parties probably would not meet
the same fateunpaid and powerless to secure payment. 130
The derivative system shifts the burden to the subcontractor to retain
the right to file and perfect a mechanics lien.131 Some state statutes have
been interpreted to require the claimant to provide notice to the owner that
she intends to furnish labor or material, intends to claim a lien, or both
before she provides the materials or labor or within a specific period of time
of providing these.132 These requirements are occasionally unrealistic from
cost, as well as from professional relationship standpoints. 133 Owners and

122

See supra Part III.B.

Superior, 965 N.E.2d at 89697.
124 Id. at 892.
125 Id. at 892 n.3.
126 Id.
127 The lien rights were non-existent because Superior failed to file a notice of contract with
the owner prior to the effective termination date of the general contractors contract, thereby
leaving no funds due or to become due because there was in fact no operative contract
remaining. See id. at 896.
128 See id.
129 See, e.g., Superior, 965 N.E.2d at 890, 89192; see also BloomSouth Flooring Corp. v. Boys
& Girls Club of Taunton Inc., 800 N.E.2d 1038, 1040 (Mass. 2003); Pond Cove Millwork Co. v.
Steeves, 598 A.2d 1181, 1182 (Me. 1991).
123

130

The liberal reading of the Act coupled with the goal of the Act, to ensure payment to
those subcontractors or materialmen contributing labor or materials to a project, would likely
result in an opportunity to collect the funds due to those parties. See Byrne & Costello, supra
note 6, at 288, 290.
131
132
133

See Glass, supra note 22, at 76 (citations omitted).

Id. (emphasis added) (citation omitted).
Little, supra note 37, at 222 (Lenders are unlikely to advance funds upon recording of a

598

New England Law Review

v. 48 | 579

lenders do not want contractors and subcontractors filing liens against

their property prior to owing any payments. 134 Such a system creates
distrust and further complicates the working relationship among the
parties involved.135 Therefore, requiring bonds on all construction projects
would benefit all parties involved;136 there would no longer be a lack of
trust among the contracting parties because all parties will feel secure that
payment and quality work is forthcoming.137
B. Public Policy Demands that the Derivative Systems Negative Effects
on the Financial Well Being of Subcontractors Should End
The subcontractor is the party most vulnerable on a construction site to
the variable nature of the construction process and resulting cost
fluctuations.138 Thiscoupled with the fact that the subcontractor, or even
worse the materialman, is typically last in a long line of parties seeking
payment from the ownerplaces those parties at even greater risk.139
The subcontractors financial position is inherently one of dependence,
since his receipt of payment is tied to the successful performance
of all those above him and, to some extent, of those below him as
well. Conceptually, and in the absence of statute, once a general
contractor defaults, an unpaid subcontractor might be able to
recover from the owner in quantum meruit for the price of
materials and labor supplied. Nonetheless, the costs of and

notice of intention [to file a lien] for fear that doing so will cause subsequent payments to lose
priority to the person filing notice.).
134

See supra note 133 and accompanying text.

See Michael Pollick, What is a Mechanics Lien, WISEGEEK, http://www.wisegeek.com/
what-is-a-mechanics-lien.htm (last visited Aug. 21, 2014) (explaining that many contractors
use mechanics liens as a last resort because of the strain it places on the contractors
relationship with the property owner).
136 See Byrne & Costello, supra note 6, at 290 (stating that a supplier has a right of action up
to ninety days after all the materials are delivered, therefore requiring no filings prior to
default).
135

137

See supra Part III.B.

See Building Trades, supra note 50, at 139 (explaining that contractors and subcontractors
alike must quote prices well in advance of actual construction and then perform that contract
at a time when prices for labor or materials may have changed dramatically); Byrne &
Costello, supra note 6, at 287 (explaining how contractors, and therefore subcontractors, may
be harassed by unforeseeable difficulties; labor problems, increased costs, or unexpected
ground conditions.).
139 Cf. Peacock Constr. Co. Inc. v. Modern Air Conditioning, Inc., 353 So. 2d 840, 84243
(Fla. 1977) (stating that unless unambiguously expressed, payment by the general contractor
to the subcontractor is not a condition precedent that requires payment from the owner to the
general contractor, but a contractual obligation of the general contractor to the
subcontractorthus showing the lineage in payment on construction projects).
138

2014

Are You Protected?

599

delays in pursuing such a remedy would render it impractical;

and, of course, legal fees would diminish, and the owners
insolvency could frustrate, any recovery. Moreover, until the
subcontractor had successfully litigated his claim, he would often
lack sufficient capital to carry on his business.140

Without the ability to successfully file and perfect a mechanics lien, the
subcontractor faces a precarious financial position, potentially unable to
continue operating its business.141 For public policy justifications, this result
should be avoided at all costs because small businesses are the driving
force behind our economy.142
Americas 28 million small businesses are the backbone of our
economy.143 In the United States, small businesses employ approximately
half the workforce.144 Many consider a small business to be any company
with fewer than 100 employeesPalumbos surely satisfies this statistic.145
Some believe that over 60% of private sector jobs come from small
businesses.146 Of these small businesses, over half are home-based

140

Building Trades, supra note 50, at 140 (emphasis added) (citations omitted).
See, e.g., Pond Cove Millwork Co. v. Steeves, 598 A.2d 1181, 1181 (Me. 1991) (explaining
how the subcontractors attempted to perfect liens totaling approximately $20,852.15, but were
unsuccessful due to the defense of double payment); BloomSouth Flooring Corp. v. Boys
and Girls Club of Taunton Inc., 800 N.E.2d 1038, 1040 (Mass. 2003) (stating that BloomSouth
was seeking to recover $85,428 along with another subcontractor, the roofer, who sought to
recover $18,929.85not small sums of money); Superior Mech. Plumbing & Heating, Inc. v.
Ins. Co. of the W., 965 N.E.2d 890, 893 (Mass. App. Ct. 2012) (holding that Superior could not
perfect its lien valued at approximately $55,574); see also Peacock, 353 So. 2d at 842 (stating that
small subcontractors are unlikely able to assume the risk of the owners failure to pay the
general because they will not be able to remain in business under such a scheme).
141

142

See Korey Tichenor, Jobs, Small Business, and Economic Growth, THE RECEIVABLES
EXCHANGE (Sept. 7, 2012), http://web.archive.org/web/20120922171943/http://blog.receivables
xchange.com/blog/jobs-and-small-business (Small businesses are proven to fuel growth and
innovation while providing a steady stream of new jobs to the economy yet they experience
many adversities. Small business promotion is (and should be) an economic policy priority for
current as well as future administrations.).
143 Karen Mills, Small Business Tax Incentives in the Fiscal Cliff Deal, SBA (Jan. 5, 2013, 1:20
PM), http://www.sba.gov/community/blogs/official-sba-news-and-views/open-business/small

-business-tax-incentives-fiscal-cliff.
144 The Importance of Small Business to the US Economy, EVOLVEYOURBIZ, http://www.evolve
yourbiz.com/the-importance-of-small-business-to-the-us-economy.php (last visited Aug. 21,
2014) [hereinafter EVOLVEYOURBIZ].
145 See ObamaCare Small Business Facts, OBAMACAREFACTS, http://obamacarefacts.com/
obamacare-smallbusiness.php (last visited Aug. 21, 2014) (explaining how some industries
believe that 500 employees is a small business, but that the Small Business Health Option
Programs will be limited to small businesses with 100 employees or fewer).
146

EVOLVEYOURBIZ, supra note 144.

600

New England Law Review

v. 48 | 579

businesses.147 These facts are directly related to the financial well-being and
stability of our nation, whose weight is on the shoulders of the small
business subcontractor like Palumbos.148 Each time a company like
Palumbos or Superior goes unpaid, it puts one of these small businesses
the driving force behind the United States economyat risk, along with
the people who they employ.149
Construction is a huge part of our economy, ranking seventh out of all
industries for number of paid employees.150 In 2008, there were
approximately 7 million construction workers in the United States. 151 Of
those 7 million, approximately 2.6 million worked for companies that had
less than 20 employees.152 It is vital that their jobs are protected through the
institution of a payment protection scheme combining bonding and the
availability of mechanics liens.153 Under such a system, Cornelius would
be protected from double payment because Palumbos would simply go
after Harrys bond, while Harrys and Palumbos would also remain
protected from Cornelius default by retaining the right to file and perfect a
mechanics lien.154
C. The Direct System Benefits the Subcontractor at the Expense of the
Owner
For those states that follow the direct system, the benefit is with the
subcontracting party.155 It is for this reason that states allowing such direct
action against the owner expressly notify owners that double payment may
result upon their contractors failure to pay subcontractors and the owners

147

Id.
See supra text accompanying notes 143147.
149 See, e.g., Superior Mech. Plumbing & Heating, Inc. v. Ins. Co. of the W., 965 N.E.2d 890,
893 (Mass. App. Ct. 2012) (showing how subcontractors lose tens of thousands of dollars
when they go unpaid and have lost their ability to perfect a lien).
148

150

U.S. DEPT OF COMMERCE, U.S. CENSUS BUREAU, STATISTICS OF U.S. BUSINESSES: 2008
(2008), available at http://www.census.gov/epcd/susb/latest/us/US--.HTM (using the industry
sector chart and comparing construction to all other listed industries).
151 Id.
152 See id. Using the industry sector chart, subtract the 63.3% of businesses with over
twenty employees from 100% to get the figure of approximately 37% of businesses with less
than twenty employees. Then multiply 7,043,631, representing the number of construction
workers, by .37, representing the percentage of construction employees working for
enterprises with less than twenty employees, to come out with the figure of 2,606,143. Id.
153 See infra Part V.
154 Cf. supra Parts I.BC, III.B (showing the differing features of both bonding and gaining a
lien on a piece of property so that, it is clear that by combining the two, all parties are
protected).
155

See supra Parts II.AB.

2014

Are You Protected?

601

initial failure to secure lien waivers.156

Failure of this contractor to pay those persons supplying material
or services to complete this contract can result in the filing of a
mechanics lien on the property which is the subject of this
contract . . . . Failure to secure lien waivers may result in your
paying for labor and material twice.157

Such double payment would not fare well with many business owners or
homeowners like Cornelius whose dream home has now turned into a
living nightmare.158
The case Des Moines Furnace & Stove Repair Co. v. Lemon is instructive
on this point.159 In that case, two separate mechanics liens filed by the
same entity, a furnace supply store, were consolidated as they both
involved supplying furnaces to the same individual, Leroy Lemon, owner
of a heating company.160 Lemon purchased two furnaces on credit and
installed them in two separate homes.161 Lemon then received payment
from the homeowners and never paid the furnace supply store.162 Des
Moines Furnace & Stove Repair Co. filed mechanics liens against both
homeowners, which the court upheld because the owners had remitted
payment to Lemon without ensuring that he paid for the materials used.163
The homeowners only available cure to remove the mechanics lien
required a second payment to Des Moines for the furnaces already paid
for.164 The court acknowledged that under state law a party has sixty days
from the date the materials were supplied to file a lien, and to avoid double
payment, the homeowner need not submit payment to a general contractor
within that sixty day period because lien rights are already extinguished.165
The court stated, [i]t is regrettable that in the cases under consideration
the owners must pay twice, but this misfortune could have been
156 MO. ANN. STAT. 429.012 (West, Westlaw through the end of the 2013 First Reg. Sess. of
the 97th Gen. Assembly). A lien waiver is [a] written and signed waiver of a subcontractors
mechanics lien rights, usu[ally] submitted to enable the owner or general contractor to
receive a draw on a construction loan. BLACKS LAW DICTIONARY 1718 (9th ed. 2009).
157 429.012 (emphasis added).
158 See DEPT CONSUMER AFFAIRS, A HOMEOWNERS GUIDE TO PREVENTING MECHANICS
LIENS, available at http://www.youngsair.com/sites/default/files/images/HomeownersGuideTo

PreventingMechanicsLiens.pdf (last visited Aug. 21, 2014) (explaining how a homeowner who
is not careful may risk double payment for the same job).
159 56 N.W.2d 923 (Iowa 1953).
160 Id. at 924.
161 Id. at 92425.
162 Id. at 924.
163 Id. at 924, 927.
164 Id. at 92728.
165 Des Moines Furnace, 56 N.W.2d at 927.

602

New England Law Review

v. 48 | 579

avoided . . . .166
D. Public Policy Demanded that Owners Liability for Double Payment
End
For public policy reasons, many states have made efforts to limit
liability such as that faced by the parties in Des Moines Furnace & Stove
Repair Co.167 This limitation is in place because the typical homeowner is
not a sophisticated contractor and may not understand the ramifications of
paying one contractor and not ensuring that payment has made its way
down the line, or chain of contracts, to the lowest-tier subcontractor or
materialman.168 Another reason for this limitation is that homeowners
cannot afford to pay for the same work twice; thus, a mechanics lien
demanding double payment may cause foreclosure of the property and
ultimately forced sale.169 Because states realized that this result was
unacceptable, they created protections against double payment for
homeowners.170 The ramifications of these additional state protections
result in a system of mechanics liens that is eerily similar to the derivative
system of mechanics liens, once again leaving the subcontractor exposed
to increased risk.171
This fear of double payment is directly averted through the bonding
schemes imposed by the federal government under the Miller Act.172 In this
situation, bonds are even more powerful because, once acquired, the less
knowledgeable homeowner will not be fearful of double payment or what

166

Id. at 92728.
See, e.g., DLF Trucking, Inc. v. Bach, 707 N.W.2d 606, 608 (Mich. Ct. App. 2005) (holding
that where full payment was remitted by the owner of a residential property, and the owner
swears to this fact in an affidavit, no lien can attach causing the owner to pay in excess of the
original contract price).
167

168 See Masten Lumber and Supply Co. v. Brown, 405 A.2d 101, 104 (Del. 1979) (explaining
how Delaware implemented 2707 to eliminate the harsh result of double liability against
residential homeowners, but that the legislature and the courts must still remain cognizant of
the intended purpose of mechanics lien laws, which is to protect suppliers of labor and
material).
169

See David T. Arena, Illinois Mechanics Liens An Unpaid Contractors Best Friend, DI
MONTE & LIZAK, http://www.dimontelaw.com/illinois-mechanics-liens.html (last visited Aug.
21, 2014) (stating that a properly attached lien can force the sale of the property subject to the
lien in order to satisfy the amount owed).
170 See DLF Trucking, 707 N.W.2d at 608 (discussing the Construction Lien Act, which states
in pertinent part of subsection 1 that [a] claim of construction lien shall not attach to a
residential structure, to the extent payments have been made . . . .) (emphasis added).
171 See id. (holding that plaintiffs lien cannot attach).
172 See 40 U.S.C. 3131 (2006) (preventing the filing of a mechanics lien in exchange for the
right to file a claim on the defaulting partys payment bond).

2014

Are You Protected?

603

the general contractor is doing with the dispersed funds.173 The owner no
longer needs to be the keeper of funds for the subcontractors and
materialmen.174 Any failure of the general contractor to pay subcontractors
and materialmen is cured through action on the bond held by the general
contractors suretyand not by filing a lien on the project.175 By instituting
a bonding scheme similar to that of the Miller Act, the owner and the
subcontractors or materialmen are protected against the defaulting general
contractor.176
V. To Balance the Risks of All Parties Involved, States Should Adopt a
Miller-Act-Like-Approach Coupled with the Direct System of
Mechanics Liens
A. The Bonding Required by the Miller Act Benefits Both Owners and
Subcontractors
The Miller Act provides a substitute to typical mechanics liens because
it enables contractors to go after the payment bond secured by the
defaulting party at the time of contract.177 [I]t has long been established
that the [Miller] Act should be liberally construed in favor of the
materialman [and therefore the subcontractor].178 This was the mindset as
far back as 1906.179 Bonding on construction projects is clearly not a new
concept.180 With the Miller Act, the federal government created the ideal
way to protect both itself and the subcontractor alike.181 This protection

173 Cf. id. (preventing the government from having to pay for the same work twice because
the subcontractors mode of recovery is with the third-party surety and not the owner).
174 Contra Des Moines Furnace & Stove Repair Co. v. Lemon, 56 N.W.2d 923, 927 (Iowa
1953) (holding that within the sixty-day period following materials being supplied or work
performed, the owner must be extremely careful of the amount of money released to the
general contractor because all other lien rights will not be lost).
175
176
177
178
179

See supra Part III.B.

See infra Part V.A.
See 40 U.S.C. 3131.
Byrne & Costello, supra note 6, at 288.
United States ex rel. Hill v. American Sur. Co., 200 U.S. 197, 20203 (1906).
The courts of this country have generally given to statutes intending to
secure to those furnishing labor and supplies for the construction of
buildings a liberal interpretation, with a view of effecting their purpose to
require payment to those who have contributed by their labor or material
to the erection of buildings to be owned and enjoyed by those who profit
by the contribution of such labor or materials.

Id.
180
181

See supra Part III.A.; see also Hill, 200 U.S. at 197, 20203.
FULLERTON, supra note 10, at 480.

604

New England Law Review

v. 48 | 579

worked so well for the federal government that states followed suit and
instituted their own Miller Acts known as Little Miller Acts.182 Due to the
success of these Little Miller Acts, which play a large role in our national
economy, states should implement similar statutes for private construction
contracts to ensure the protection of all the parties involved. 183
Private developers have also discovered the benefits of bonding and
avoiding having their property encumbered by angry subcontractors. 184
Although known to the private developer, requiring payment and
performance bonds are still at the discretion of the project owner.185 One
reason that private developers do not require bonds is their acquisition
costs.186 Typically, when an owner like Cornelius requires a bond, the price
of the bond will be built directly into the cost to complete the project.187
Although the owner is left covering the cost of the bond, he is paying for
the peace of mind and sense of security that he will never be subject to
paying twice or having his property encumbered, so long as he fulfills his
portion of the contract.188
Another issue that arises with bonding is the effect of the bonding
requirement on small and financially troubled companies. 189 In order to

182 See, e.g., Atlantic Sea-Con, Ltd. v. Robert Dann Co., 582 A.2d 981, 984 (Md. 1990)
(stating that the Maryland legislature mimicked the Miller Act in creating the Maryland Little
Miller Act in 1959 and interpretations of the states Miller Act should look to articles
interpreting similar sections of the federal Miller Act); Trio Forest Prods., Inc. v. FNF Constr.,
Inc., 893 P.2d 1, 2 (Ariz. Ct. App. 1994) (stating that in interpreting the Arizona Little Miller
Act, state courts need not give deference to federal interpretations of the federal Miller Act).
183

See supra Part V.A.; see also supra notes 143154 and accompanying text.
See SUR. INFO. OFFICE, THE IMPORTANCE OF SURETY BONDS IN CONSTRUCTION (2009),
available at http://www.sio.org/pdf/importanceof.pdf; see, e.g., Rivier College v. St. Paul Fire &
Marine Ins. Co., 187 A.2d 799, 806 (N.H. 1963) (holding that the indemnity bond held by the
general contractor operated as a performance bond, thereby requiring the insurance provider
to pay all subcontractors left unpaid by the general contractors default).
184

185

SUR. INFO. OFFICE, supra note 184.

Cf. Typical Performance Bond Costs, VIKING BOND SERVICE, http://www.performance
suretybonds.com/typical_performance_bond_cost.htm (last visited Aug. 21, 2014) [hereinafter
VIKING] (Rates for Performance Bonds can vary depending on the qualification of the
Contractor, as well as type and size of the contract. . . . The average rates and costs can range
from 1% [to] 5%.).
186

187 Dan Donohue & George Thomas, Construction Surety Bonds in Plain English, ATTNY,
http://www.attny.com/gci32djd.html (last visited Aug. 21, 2014) (Premiums rise along with
the penal sum of the bond, and the owner ultimately pays these costs in the contract price.).
188 See id. (Nonetheless, the owner has an interest in setting the bond penal sum high
enough to provide the desired protection to the project.); cf. 40 U.S.C. 3131 (2006)
(preventing the perfection of a mechanics lien on federal property).
189 See VIKING, supra note 186 (stating that the rate given to a company is dependent on its
performance history and financial stability).

2014

Are You Protected?

605

facilitate a program that requires bonding on private projects, the

government, through an agency such as the Small Business Administration
(SBA), may need to step in and assist those start-ups and other
companies that cannot satisfy bonding companies requirements.190 The
SBA has already begun offering programs tailored to assist organizations
in this manner.191 The SBA minimizes a suretys fear by covering a
percentage of the bond for a small, financially troubled company.192 Thus
when Cornelius demands a payment bond prior to issuing the contract to
Harrys for the construction of his dream home, Harrys will have
assistance.193
B. Combining the Miller Acts Bonding System and the Direct
Mechanics Lien System Will Protect All Parties Involved
As much as the Miller Act protects against general contractor default, it
fails to protect the parties who have contracted with the government (there
is no protection against government default).194 For this reason, states must
use a combination of bonding and mechanics liens to protect each party
from the other parties potential default.195 The owners are protected
because the contractors are working on credit, so they only pay for what is
completed.196 The general contractors are shielded from default because the
subcontractors work for them on credit while the generals also have lien
rights against the owner that are indisputable, being in direct privity with

190

See What SBA Offers to Help Small Businesses Grow, SBA, http://www.sba.gov/content/
what-sba-offers-help-small-businesses-grow (last visited Aug. 21, 2014) (SBA can help
facilitate a loan for you with a third party lender, guarantee a bond, or help you find venture
capital. Understanding how SBA works is the first step towards receiving assistance.).
191

Id. (referencing the SBA Surety Bond Guarantee Program).

Conn. Econ. Res. Ctr., Surety Bond Guarantee ProgramSBA, CERC, http://products.cerc.
com/brinfo.nsf/0/ED60BC09125B6D3D85256A480073401C (last visited Aug. 21, 2014).
192

The U.S. Small Business Administration (SBA) can guarantee bonds for
contracts up to $5 million, covering bid, performance and payment bonds
for small and emerging contractors who cannot obtain surety bonds
through regular commercial channels. SBA's guarantee gives sureties an
incentive to provide bonding for eligible contractors, and thereby
strengthens a contractor's ability to obtain bonding and greater access to
contracting opportunities.
Id.
193

See supra notes 186189 and accompanying text.

See Byrne & Costello, supra note 6, at 287 (stating that a supplier making improvements
on private property may file a lien, but public policy does not allow such liens on public
property).
194

195
196

See infra text accompanying notes 196198.

See supra text accompanying notes 37.

606

New England Law Review

v. 48 | 579

the owner.197 The subcontractors are protected because, upon owner

default, they may file a lien; and upon general contractor default, they may
go after the general contractors bond. 198 The numerous parties and
variables involved in a construction project make the situation such that no
single piece of legislation is perfectprotecting all parties involved.199
Since 2007, municipality defaults have been on the rise, skyrocketing
beyond levels anyone thought possible.200 Many people invest in municipal
bonds, and although they have yet to default in large numbers, states have
already had to cut funding to municipalities and soon, states may also risk
default.201 It is not unrealistic to imagine a situation where a government
entity begins a construction project that runs over budget and results in the
government entity lacking the funds necessary to complete the project,
thereby risking default to the parties under contract. 202
For example, Jefferson County in Alabama filed for Chapter 9
municipality bankruptcy in 2010, mainly because of its excessively
expensive sewer system mocked as a Taj Mahal project, [such
bankruptcies] have picked up, too.203 One can easily see such defaults
putting the contracting parties at risk.204 Although these defaults have not

197 See supra Parts I.B, I.D, II (explaining mechanics liens in order to understand that the
general will never be subject to the defense of payment because the general uses the defense
when the owner already paid the general funds that are due to parties further down the
contracting chainsubcontractors).
198 See, e.g., R.I. GEN. LAWS 34-28-4 (West, Westlaw through amendments through chapter
534 of the 2013 Reg. Sess.) (providing for direct lien rights within 200 days of supplying labor
or materials). Cf. 40 U.S.C. 3131 (2006) (requiring payment and performance bonds on any
project for the federal government in excess of $100,000).
199 Jason T. Strickland, An Essential Brick and Its Chip: A Refresher on Payment Bond Claims
Under the Miller Act and the Little Miller Act, WARDANDSMITH (May 24, 2011), http://www.

wardandsmith.com/articles/payment-bond-claims-under-the-miller-act (stating that under the

Miller Act, owners, or government entities, go after the performance bond of defaulting
contractors, and subcontractors go after the payment bond of defaulting contractors).
200

See Michael Connor, More U.S. Cities Set to Enter Default Danger Zone, REUTERS (Apr. 17,
2012, 4:43 PM), http://www.reuters.com/article/2012/04/17/usa-defaults-outlook-idUSL1E8E
N2V520120417 (highlighting various municipality defaults around the nation, and explaining
the various causes that led to the dramatic situations).
201 Cf. id. (presenting the idea that municipality defaults are continually rising due to state
belt-tightening, which means states are also feeling the squeeze leaving them vulnerable to
default).
202

See infra text accompanying note 203.

Connor, supra note 200.
204 See William Selway, Jefferson Countys Journey From Sewer-Bond Scandal to Settlement:
Timeline, BLOOMBERG (Sept. 16, 2011, 1:41 PM), http://www.bloomberg.com/news/2011-0916/jefferson-county-alabama-s-path-from-scandal-to-debt-settlement-timeline.html
(explaining how, in September, 2008, Jefferson County was declared to be in default under
203

2014

Are You Protected?

607

yet hit the construction companies, the Miller Act, or any deviation thereof,
will not protect these contractors in that situation.205 This is likely because
the creators of the Miller Act never envisioned an America where
municipality defaults were occurring, and although still not common
place,206 the numbers do not lie: Bond defaults were $25.355 billion in
2011, or nearly five times the value of defaults in 2010, according to
Lehmann. In 2012s first quarter, defaults totaled $1.245 billion, or more
than double the $522 million of last years first quarter.207 Miller Act
payment and performance bonds will not protect the contracting parties if
one of these bankruptcies and resulting defaults reaches so far as to
prevent government bodies from paying construction companies
performing work under government contract.208
Such defaults are exactly what the mechanics lien is designed to
cureensuring payment to those who have supplied materials or labor
upon an owner default.209 Once states require a Miller Act-like bonding
scheme, they also should revert back to the direct system of mechanics
liens because the added protections for project owners against double
payment will no longer be required.210 This reversion will eliminate the
defense of payment, which will result in more comprehensive protection to
subcontractors and materialmen for non-payment by defaulting owners
and general contractors.211

CONCLUSION
The inherent make-up of a typical construction project allows for
variance and risk. The parties involved bid on contracts well in advance of
the performance date, leaving extended lead time for cost fluctuations and
economic changes. From the earliest time in our nations history, efforts
were made to stabilize the risky nature of construction projects by way of

agreements covering the $3.2 billion of sewer bonds for failing to make $46 million of
principal payments).
205 See Strickland, supra note 199; see also supra Part III (explaining the origins and goals of
the Miller Act, mainly, the fact that federal property is not subject to a lien due to sovereign
immunity).
206 See Connor, supra note 200 (stating that Chapter 9 municipality bankruptcy filings have
doubled from 2010 to 2011 going from six to thirteen respectively).
207

Id. (showing the possibility of government financial failure).

See Strickland, supra note 199 (showing the drawbacks of a system designed to act when
default of government bonds was not of real concern).
209 See supra Part I.B.
210 Cf. Miller Act, 40 U.S.C. 3131 (2006) (providing a remedy in the defaulting partys
payment bond).
208

211

See supra Part I.C.

608

New England Law Review

v. 48 | 579

collection methods designed to operate when parties default on their

payment obligations. The mechanics lien was the ultimate solution,
providing those parties harmed with an encumbrance on the property they
improved. The federal government found a different solution in the early
part of the 20th century through the use of third-party surety bonding. This
bonding scheme, although adding some cost to a construction project, is a
far superior mode of protection for the parties involved. It is only through
a combination of the age old method of protection, the mechanics lien, and
the federal governments solution using payment and performance bonds
that Cornelius, Harrys, and Palumbos will all be adequately protected
throughout the life of the project against each others possible default.