Daily Development for
Friday, November 6, 1998

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

Thanks to Howard Lax, of the Michigan Bar, for the tip on this one, although the report itself is my own. We seem to be having far more mechanic’s lien cases than previously. Is this a sign of the times? What kind of sign?

MECHANIC'S LIENS; REQUIREMENT FOR LICENSE Despite statute that provides that an unlicensed contractor cannot sue to collect for unpaid fees, court will not quiet title in favor of a foreclosure purchaser against prior mechanic's liens filed by an unlicensed contractor without a prior determination that contractor has been compensated for value added to owner's property.

Republic Bank v. Modular One LLC, LC No. 96051067 CK (Mich. Ct. App. 11/3/98).

Owner acquired property in foreclosure sale after the prior owner defaulted on a mortgage. The prior owner also had failed to pay certain contractor's and under Michigan law the lien of the contractor in question apparently survived the foreclosure action. The court first determined that the owner, although not a party to the original contract with the contractor, was in a position to contest the mechanic's lien, since it was an "in rem" claim against the property.

Owner pointed to a Michigan statute that seemed to preclude absolutely unlicensed contractors from collecting on unpaid claims.

"A person or qualifying officer for a corporation or member of a residential builder or residential maintenance and alteration contractor shall not bring or maintain an action in a court of this state for the collection of compensation for the performance of an act or contract for which a license is required by this article without alleging and proving that the person was licensed under this article during the performance of the act or contract."

Notwithstanding the language of this statute, Michigan courts have permitted unlicensed contractors to raise the issue of unpaid claims defensively when they are sued by owners on the contract. A subsequent Michigan case relied upon this authority and general equitable principles to conclude that an owner could not receive the equitable remedy of a quieted title unless and until the court determined whether the owner had "done equity" by compensating the contractor for benefits conferred upon the property.

On appeal: Held: Affirmed: The Michigan Court of Appeals vote was 2-1.

Owner disputed the applicability of this authority because in each case the equitable issue arose between the contractor and one with whom the contractor had entered into an agreement for compensation. Here, of course, Owner, foreclosure purchaser, was somewhat distant from the dispute that gave rise to the contractor's claim.

The court noted that the equitable "focus" was upon the property and the equitable value of the work on it, rather than upon any contract to do work.

"In an equitable action, such as plaintiff's suit to quiet title here, a court looks at the whole situation and grants or withholds relief as good conscience dictates.' . . Therefore, the existence or lack of a contract or a recorded lien should not be the determinative consideration in deciding the equity of a builder being compensated for his work on an owner's property. Whether the owner contracted for the work, or implicitly approved it by buying the property with the builder's improvements, as here, the owner has benefitted at the expense of the builder."

Comment 1:This result is not likely to be uniform, as different states have different mechanic's lien statutes and different licensing statutes. Even where the statutes are worded the same, courts might differ as to the policy significance of a licensing statute. For instance, some courts have upheld the awarding of a quantum meruit claim to a party not licensed as a broker who delivers a buyer to a seller who later refuses to pay a commission. Others will not permit an unlicensed broker to recover at all as a matter of public policy.

Comment 2: Note that the result here is somewhat limited. The court does not hold, and presumably, in light of the statute, would not hold, that the mechanic's lienholder can actually foreclose the lien. So it is difficult to know what the significance of the lien would be in terms of the marketability of the title. But, where lenders or other parties don't want to invest in a "problem property," the ability to quiet title provides a useful solution to a difficult problem.

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