Pennsylvania Superior Court Holds that Unions May File Mechanics’ Liens

by Pepper Hamilton LLP
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[authors: Christine S. Kimmel, David J. Tshudy and Lauren M. Balsamo]

Earlier this year, an en banc panel of the Superior Court of Pennsylvania ruled that a trustee of an employee union benefit fund is encompassed within the definition of “subcontractor” under Pennsylvania’s Mechanics’ Lien Law (MLL); and, as such, it may file a mechanics’ lien for the payment of contributions due to it by a contractor under the terms of a collective bargaining agreement entered into many years prior to the performance of work on the subject property. Bricklayers of Western Pennsylvania Combined Funds, Inc. v. Scott’s Development Company, 41 A.3d 16 (Pa. Super. 2012). The holding in Bricklayers is significant and has numerous implications upon commercial lenders, title insurance companies, real estate developers and investors.

In Bricklayers, the defendant/property owner, Scott’s Development Company (Scott’s), retained general contractor, J. William Pustelak, Inc. (Pustelak), to perform construction work on its property. Several years prior to executing the construction agreement with Scott’s, Pustelak had entered into two collective bargaining agreements (the CBAs) with unions whereby Pustelak agreed to employ union members for certain specific construction work. Neither of the CBA’s specifically contemplated work to be performed on any particular real estate project. Under the CBAs, Pustelak was required to pay to trustees named in the CBAs (“Trustees”) contributions towards the members’ health, welfare, retirement and/or fringe benefits. Following the construction work on Scott’s property, during which the unions’ members performed labor for Pustelak, the Trustees claimed to not be paid the appropriate benefits contributions.

To collect the amounts owed to them by Pustelak, the Trustees asserted a mechanics’ lien against Scott’s property, to which Scott’s filed preliminary objections in the nature of a demurrer. The Court of Common Pleas of Erie County granted Scott’s preliminary objections finding that the Trustees lacked standing to pursue a mechanics’ lien. The Trustees appealed to the Superior Court of Pennsylvania.

Before the Superior Court, the Trustees argued that they possess the requisite standing to assert a mechanics’ lien as a subcontractor under the MLL. The Court, after noting that only contractors and subcontractors may file mechanics’ liens, examined the statutory definition of subcontractor:

[O]ne who, by contract with the contractor, or pursuant to a contract with a subcontractor in direct privity of a contract with a contractor, express or implied, erects, constructs, alters or repairs and improvement or any part thereof; or furnishes labor, skill or superintendence thereto; or supplies or hauls materials, fixtures, machinery or equipment reasonably necessary for and actually used therein; or any or all of the foregoing, whether as superintendent, builder or materialman.

The Court then determined, by applying the provisions of the Statutory Construction Act, that the definition of subcontractor should be liberally construed to effectuate the MLL’s objectives and promote justice. Employing this liberal construction, the Court concluded that the CBAs amounted to subcontracts with the contractor to furnish labor, skill or superintendence. The Court justified its holding by citing appellate court opinions from other states where unions and their benefits trustees were granted the requisite standing to file mechanics’ liens, and persuasive guidance from the United States Supreme Court’s decision in U.S. for Benefit and on Behalf of Sherman v. Carter, 353 U.S. 210 (1957). Accordingly, the order of the Common Pleas Court was reversed.

Judges Olson and Gantman filed dissenting opinions. Judge Olson dissented on two grounds: 1) although the majority correctly concluded that there was no express contract to furnish labor or improvements, it improperly considered an implied contract when that claim was never advanced by Appellants; and 2) unions are not “subcontractors” under the MLL because they do not “furnish” any labor, and therefore even if the Trustees could stand in the shoes of the union members they could not be subcontractors under the MLL. Although she agreed that a liberal construction of the term “subcontractor” was appropriate, she maintained that the intent of the MLL (“to protect the prepayment of labor and materials that a contractor [or subcontractor] invests in another’s property, by allowing the contractor [or subcontractor] to obtain a lien interest in the property involved”) was not advanced by the majority because the Trustees did not expend any labor or money on the project that risked non-payment, and therefore they are not parties the MLL was created to protect. Further, Judge Olson found dubious the majority’s reliance upon other states’ jurisprudence and the Carter opinion because the statutes being interpreted therein allow for individual workers to file mechanics’ liens for the payment of wages. Instead, she distinguished the MLL from the laws of the jurisdictions cited by the majority based on several Pennsylvania appellate cases and a legislative comment to the MLL which unambiguously state that laborers employed by a contractor are not subcontractors under the MLL. Judge Gantman similarly found the majority’s opinion contrary to the intent of the MLL, especially where the claims asserted are derived from tangential contracts, collateral to the construction agreement between the general contractor and owner.

Scott’s has filed a petition for allowance of appeal with the Supreme Court of Pennsylvania, which is currently pending.

The Court’s interpretation of the MLL, specifically including unions and their benefits trustees within the definition of subcontractor, will cause a myriad of new issues that must be considered by commercial lenders, title insurance companies, real estate developers and investors. Lenders, developers and investors may want to be certain that any contractors that have performed work on a property within six months of closing a mortgage loan (except for those secured by construction mortgages or purchase money mortgages) have paid or guaranteed payment of all financial obligations under any collective bargaining agreements that such contractors and subcontractors may have executed. Owners, developers and landlords should now pay closer attention to the type of subcontractors their general contractors are hiring and must scrutinize such contractors’ financial wherewithal to comply with their labor-related agreements. In addition, title insurers may become even more reluctant to provide coverage against mechanics’ liens, unless they are insuring the priority of a construction mortgage or a purchase money mortgage. Finally, with the Superior Court now liberally construing the substantive provisions of the MLL, lawyers, title companies and private parties should be warily monitoring future expansions of the MLL’s protections.

 

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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