PUBLIC PROJECT LIENS IN KENTUCKY – JAY MATHENY
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Jackie M. Matheny Partner Denton Law Firm 555 Jefferson Street Suite 301 Paducah, Kentucky 42001 (270) 450-8253 www.dentonfirm.com |
PUBLIC PROJECT LIENS AND YOU IN KENTUCKY
So, you are the executive director of “INSERT PUBLIC AGENCY” in Kentucky, and Contractor X has just finished a beautiful renovation of your lobby. You are pleased with the work, and your contractor has finished the project on time and, remarkably, under budget. You think that all is well until one day, out of the blue, you receive a letter from the president of the family-owned XYZ Supply Company, Inc. advising you that XYZ has not been paid for materials provided for your lobby renovation project and, that, as a result, XYZ intends to hold your public agency’s real property liable for the unpaid balance owed on Contractor X’s credit account.
Shaken by this letter, you contact Contractor X to advise him of the issue, and he advises you that this whole situation was simply caused due to an oversight by his accounting staff. He further advises you that he will get the issue resolved by tomorrow. You take Contractor X at his word, and you forget about this situation…until you receive a copy of the lien that was filed by XYZ against your public agency’s real property. So, what do you do now?
Believe it or not, this problem arises more frequently than people realize. Under Kentucky law, any person or entity which provides labor or materials for the benefit of real property in Kentucky is granted statutory lien rights. These liens are often referred to as “mechanic’s liens” or “materialman’s liens,” and a Google search will generally provide contractors and material suppliers with a basic outline of how to assert such liens on a private project. But, the process for asserting a lien for labor or materials on a public project is much different than the process for asserting a lien for labor or materials on a private project. With that said, let us take a moment to see how these types of liens differ and what the result of the hypothetical above should be.
KRS 376.010 – The Private Project Lien Statute
In Kentucky, “[a]ny person who performs labor or furnishes materials, for the erection, altering, or repairing of a house or other structure…or for the improvement in any manner of real property…by contract with, or by the written consent of, the owner, contractor, subcontractor, architect, or authorized agent, shall have a lien thereon, and upon the land upon which the improvements were made or on any interest the owner has therein, to secure the amount thereof with interest…costs.” See KRS 376.010(1). Broadly speaking, this statute provides that, if you are a contractor, subcontractor, or material supplier, and you have provided labor or materials for the benefit of real property, then you, by statute, have a lien on that real property1. Now, the word “real property” is highlighted here for a very important reason – private project liens in Kentucky may only be asserted against real property. However, unlike private project liens, public project liens fall into two (2) categories: a.) liens that may be asserted against publicly owned real property; and b.) liens that may be asserted against the proceeds owed by a property owner to a contractor. But, each of these situations is very specific and very unique.
KRS 376.210 – The Public Project Lien Statute
KRS 376.210 provides that, “[a]ny person, firm, or corporation who performs labor or furnishes materials or supplies for the construction, maintenance, or improvement of any canal, railroad, bridge, public highway, or other public improvement in this state by contract, express or implied, with the owner thereof or by subcontract thereunder shall have a lien thereon, and upon all property and the franchise or the owner, except property owned by the state, a subdivision or agency thereof, or by any city, county, urban-county, or charter county government.” See KRS 376.210(1). However, the statute goes on to state: “If the property improved is owned by the state or by any subdivision or agency thereof, or by any city, county, or urban-county, or charter county government, the person furnishing the labor, materials, or supplies shall have a lien on the funds due the contractor from the owner of the property improved.” See Id.
But, what does this statute really say? In short, KRS 376.210 says that, if you are a contractor, subcontractor, or material supplier, and you have provided labor, materials, or supplies on a public project, then you have a statutory lien on the real property for which your labor, materials, or supplies was/were provided unless the real property is owned by the state, a subdivision/agency of the state, a city, a county, an urban-county, government, or charter county government, in which case your lien is actually against any funds that are due and owing from the property owner to the contractor. This is truly a case where the exceptions “swallow” the rule. In other words, in most instances where labor, materials, or supplies are furnished on a public project in Kentucky, a lienholder must assert his/its lien against the proceeds owed by the property owner to the contractor (rather than against the real property for which the labor, materials, or supplies were furnished).
And, the cases interpreting KRS 376.210 expand on the definition of “state or by any subdivision or agency thereof, or by any city, county, or urban-county, or charter county government” very broadly and provide significant protections against the assertion of liens against publicly owned property. For example, housing authorities in Kentucky (which are often created by city ordinances pursuant to state statute and federal law, but funded, in part, by federal funds) are considered to be political subdivisions/agencies of the state whose real properties are protected against the assertion of public project liens. See Brooks v. Lexington-Fayette Urban County Housing Authority, 332 S.W.3d 85, 90 (Ky. App. 2009), citing Louisville Metro Housing Authority v. Burns, 198 S.W.3d 147 (Ky.App.2005); City of Louisville Municipal Housing Commission v. Public Housing Administration, 261 S.W.2d 286 (Ky.1953); Salisbury v. Housing Authority of Newport, 615 F.Supp. 1433, Footnote 1 (E.D.Ky.1985) (overruled on other grounds by Duchesne v. Williams, 849 F.2d 1004 (6th Cir.1988)); Tedder v. Housing Authority of Paducah, 574 F.Supp. 240 (W.D.Ky.1983). With that said, there are a very limited number of situations where a public project lien could be asserted against the real property owned by a public agency. Consequently, in most situations, a lien arising under KRS 376.210 must be asserted against the funds owed by a public entity to the contractor.
CONCLUSION
Because most public project liens in Kentucky must be asserted against funds that are owed by a public entity to a contractor, the assertion of the public project lien by XYZ Supply Company, Inc. against the real property owned by the public agency in our hypothetical above would most likely be improper IF the real property were owned by a state agency or by a city or county government. As a result, the public agency described in the hypothetical above could seek a release XYZ’s lien in several ways. First, the public agency could advise XYZ of the impropriety of its lien against the agency’s real property and simply ask that the lien be voluntarily released. If XYZ refused to voluntarily release the lien, then the public agency could “bond over” the lien pursuant to KRS 376.100. Another potential alternative for the public agency would be to seek a judicial release of the XYZ’s lien. And, perhaps another alternative would be to make a claim against Contractor X’s performance bond on the project.
In short, the public agency described in the hypothetical above is not without recourse and has options to seek a release of the lien that was asserted against its real property. So, if you are the director of a public agency, and you find yourself in the situation above, you should immediately consult with your agency’s legal counsel to discuss the options that are available to seek a release of the public project lien that has been asserted against your agency’s real property.
[1] While it is true that KRS 376.010 provides statutory lien rights to any person who provides labor or materials for the improvement of a property, there are a number of steps required to properly assert and perfect a lien arising under KRS 376.010. For example, pre-lien notice and post-lien notice to the property owner are required, by statute, in order to properly assert and perfect a lien arising under KRS 376.010. However, the process for assertion and perfection of liens arising under KRS 376.010 goes beyond the scope of this article. But, it is worth noting, that the perfection process for liens arising under KRS 376.010 is very detailed and specific. And, failure to follow any of the statutory steps to assert and perfect a mechanic’s lien may result in a loss of lien rights. See Laferty v.Wickes Lumber Co., 708 S.W.2d 107 (Ky. App. 1986). Suffice it to say, if you are a contractor, subcontractor, or material supplier, and you wish to assert and perfect a lien against real property in Kentucky, you would be wise to consult with an attorney prior to undertaking any lien assertion efforts in Kentucky.