“An Update on Construction Law in Missouri: Property Owners, Contractors and Lenders Take Heed” by Rich Maltby

In the last four months of 2012, Missouri’s appellate courts have been very busy deciding cases that will impact those in the areas of construction and real estate. Regardless of whether you are a property owner, contractor, or lender, it is important to understand these recent developments. The following is a summary of three notable recent decisions in Missouri:

1. Supreme Court Sharpens Missouri’s First Spade Rule.
   On September 11, 2012, the Missouri Supreme Court issued an opinion in Bob De George Associates, Inc. v. KD Christian Construction Co., 377 S.W.3d 592 (2012), concerning whether a mechanic’s lien was superior to a purchase-money deed of trust that had not been recorded until after the contractor had commenced work. The case overruled several prior decisions in Missouri suggesting that the lender’s purchase-money deed of trust encumbering land is prior and superior to a mechanic’s lien even if the deed of trust was never recorded.
   The contractor brought suit against both the property owner and the bank seeking to foreclose on its lien. The Supreme Court harmonized Missouri’s recording statutes, RSMo. §§ 442.380 and 442.400, which require the lender to record its deed of trust with the Recorder of Deeds in order to claim priority over third parties, with Missouri’s First Spade Rule, RSMo. § 429.060, which provides that all mechanic’s liens commence at the date of the first stroke of the axe or spade regardless of the time of filing the lien, performing the work, or furnishing the materials.
   The Supreme Court explained that the recording statutes postpone the effectiveness of an unrecorded deed of trust against a third party who does not have actual knowledge of the instrument. The recording statutes protect persons who acquire an interest in real property without notice of prior encumbrances. The First Spade Rule operates as a “relation-back” priority rule in that a mechanic’s lien takes priority over all other encumbrances subsequent to the commencement of the contractor’s work regardless of the timing of the filing of the mechanic’s lien. Since the bank had not recorded its deed of trust until after the contractor began work, the Court found in favor of the contractor even though its lien was filed after the bank recorded its deed of trust. This is a departure from the trend in the past 40 years to find the bank’s interest superior to the contractor under these circumstances.
2. Appellate Court Places Heavier Burden on Contractors Trying to Enforce Mechanic’s Liens.
   The Missouri Western District Court of Appeals was not quite as protective of contractors in R.K. Matthews Investment, Inc. v Beulah Mae Housing, LLC, 2012 WL 4344190, which was decided on September 25, 2012. In that case, a contractor brought an action against a project owner for breach of contract, enforcement of mechanic’s lien, and relief under Missouri’s Prompt Pay Act. The owner defeated the contractor’s claims by successfully arguing that the contractor had failed to follow the requirements of the mechanic’s lien statutes.
   This case arguably complicates a contractor’s ability to enforce lien rights in at least three ways. First, in a contractor’s claim for non-payment, the contractor must prove that the work was performed in a good and workmanlike manner. The burden to disprove the quality of work shifts to the owner only if the owner has raised a claim for damages against the contractor. If the owner simply denies the contractor quality of work (rather than asserting a claim), then the burden remains with the contractor to prove it. Second, even though the mechanic’s lien statutes do not expressly require a general contractor to include an itemized statement along with the mechanic’s lien, failure to do so increases the risk that the general contractor did not meet the “just and true account” threshold which requires a lien statement to provide an owner with sufficient information to investigate whether the labor and materials described in the lien actually improved the property and whether the charges were reasonable. Third, while the existence of errors in a lien statement does not necessarily mean the contractor deliberately intended to defraud the owner (which invalidates the lien), a judge or jury is free to conclude that fraud occurred based on the frequency of errors in the lien and other evidence regarding the lien claimant’s lack of credibility.
3. Appellate Court Smoothes the Road for an Owner to Recover for Overbilling and Defective Work.
   On October 25, 2012, theMissouri Southern District Court of Appeals (which is the district in which we are located) in Matt Miller Company, Inc. v Taylor-Martin Holdings, LLC, 2012 WL 5258713, addressed a number of disputes between an owner and contractor regarding a cost plus contract. The owner was the landlord of a historical building that was the subject of a rehabilitation commercial project involving tax incentives. The owner terminated the contract contending that the contractor failed to perform. The contractor filed a mechanic’s lien and the owners filed claims for improper billing and defective work. While the court addressed a number of issues on appeal, perhaps the most noteworthy findings, which largely favored the owner, were as follows: a. Even though the owner had entered into a lease with its tenants preventing it from repairing or maintaining the building during the term of the lease, the court found that the owner had an interest beyond merely a right to collect rent in that it could sell or mortgage the building at any time and terminate the leases early by paying a penalty. Thus, the owner, as landlord, was a proper party to pursue claims against the contractor for damages. b. On a cost plus contract where the contractor is to be paid cost of the work plus a fee, the contractor must be able to link percentages in invoices to actual amounts attributable to specific work on the project. Charges structured as percentages for items such as insurance, offsite work, social security, and payroll taxes are unrecoverable unless the contractor can demonstrate the specific percentage pertains to actual work on the project. c. While it remains the law that an owner’s measure of damages is either the cost of repair or the diminution of value of the property, the contractor has the burden to prove diminution of value and a court need only consider diminution of value when that measure of damage is substantially less than the owner’s evidence of cost of repair. d. When a contract contains a consequential damages waiver, the court will narrow that language to allow the owner to recover full repair costs. Thus, in this case, where the repair of defective tuckpointing was necessary, the court found that the damages include an amount for repainting the building after performance of the tuckpointing corrective work.

There are lessons to be learned from each of these recent cases. For instance, lenders should polish up their protocols and checklists as it concerns the filing of deeds of trust in the financing process. In addition, if a contractor hopes to be successful on a lien claim, the contractor should tighten up its record-keeping and err on the side of including greater specificity in its lien statement as to the labor and materials furnished on the project for which payment is due.Moreover, parties to a construction contract can further define terms and conditions to remove ambiguities as to rights and remedies of the parties in the event of default, including the types of damages that are recoverable, which will eliminate the need for litigating many of the issues that surfaced in the Southern District case. The above construction law update is not intended to be a complete legal analysis as to the facts and circumstances in each of these above cases. For further information as to how these developments may impact your business, please contact CECB at 417-447-4400.