Louisiana 2nd Circuit Demotes Importance of Lessor’s Notice of Lease – But It’s Wrong!

Louisiana 2nd Circuit Demotes Importance of Lessors Notice of Lease   But Its Wrong!The mechanics lien is called many things across the country, but Louisiana has the most unique identifier, where it is known as a “Statement of Claim and Privilege.”

Everyone in Louisiana took the name for granted, figuring it is what it is. A recent decision from Louisiana’s 2nd Circuit Appeals Court, however, underscores that the statement’s name is more than just a name, it’s a description. In Louisiana, you see, claimants are filing two separate and distinct (and apparently severable) things: a claim and a privilege.

Difference Between The Claim and Privilege In Louisiana Lien Laws

Before getting into legal jargon, the layman’s explanation here is that a mechanics lien claim generally has two components. First, lien claimants can proceed in litigation directly against the property owner to pay the debt. Second, they have a privilege against the property itself, which can be foreclosed upon to produce payment of the debt.

[pullquote style="right" quote="dark"]First, lien claimants can proceed in litigation directly against the property owner to pay the debt. Second, they have a privilege against the property itself, which can be foreclosed upon to produce payment of the debt.[/pullquote] This is generally the same in every state. In Louisiana, the two remedies are spelled out in the name of the document, the Statement of Claim and Privilege.

The claim and privilege in Louisiana, as it is elsewhere, is all tied together in a single set of laws, and when claimed, a single document. However, the Louisiana 2nd Circuit segregated the two remedies.

These claim and privilege rights arise out of the Louisiana Private Works Act, codified in La. R.S. 9:4801 et seq.

The “privilege” arises from §9:4801: “The following persons have a privilege on an immovable to secure the following obligations of the owner arising out of a work on the immovable…”

The “claim” arises from §9:4802: “The following persons have a claim against the owner and a claim against the contractor to secure payment of the following obligations arising out of the performance of work under the contract…”

Louisiana Court Demotes Importance of Notice Of Lease

[pullquote style="left" quote="dark"]The notice period is only 10 days from the first furnishing of equipment, and thus, the cost to equipment rental companies is high.[/pullquote] Those leasing equipment to a construction project in Louisiana are required to deliver a Notice of Lease. This is required on both public and private projects in the state. The notice period is only 10 days from the first furnishing of equipment, and thus, the cost to equipment rental companies is high.

Previously, everyone in Louisiana assumed non-compliance with the Notice of Lease requirement was a complete bar to any recovery under the Private or Public Works Acts.

The 2nd Circuit Court in Hawk Field Services, L.L.C., et al. v. Mid-America Underground, L.L.C., et al. now calls this into question. According to the ruling, those who do not send the Notice of Lease cannot file a “privilege” against the property under §9:401, but they can still file a “claim” against the owner and contractor pursuant to §9:4802.

To achieve this result, the Court determined that the claim and privilege were separate remedies, provided by separate statutes. The Notice of Lease requirement is nestled in §9:4802, with that Section’s (G)(1) providing:

For the privilege under this Section to arise, the lessor of the movables shall deliver a copy of the lease to the owner and to the contractor not more than ten days after the movables are first placed at the site of the immovable for use in a work.

The 2nd Circuit clings to the word “privilege” in this (G)(1) provision, holding that the failure to send the Notice of Lease impacts the “privilege” available to the equipment lessor – which is provided by §9:4801 – but not the claim provided by §9:4802.  The result here is that the privilege against the property fails, but the claim against the owner carries forward.

Why The Louisiana 2nd Circuit Is Wrong

So this explanation from the 2nd circuit makes some logical sense when it’s explained by the court. The trouble is that they overlook important language within the Private Works Act. In other words, the Louisiana 2nd Circuit Interpretation of the Private Works Act in Hawk Field Services is wrong.

[pullquote style="right" quote="dark"]the Louisiana 2nd Circuit Interpretation of the Private Works Act in Hawk Field Services is wrong.[/pullquote] The remedy provided by La R.S. 9:4801 is indeed separate from La. R.S. 9:4802. However, each of these statutes clearly define to whom they apply, and 9:4801 never applies to equipment lessors who lease equipment to a contractor or subcontract.  The statute only applies to equipment lessors that lease equipment directly to the property owner.

This is made clear by §9:4801(4), which states the privilege is provided to “[l]essors, for the rent of movables used at the site of the immovable and leased to the owner by written contract.”

One could try and read this to include those who lease equipment to subcontractor or contractor whose contract to perform work at the property comes from a contract someone, somewhere has with the property owner. I think, however, this would be a real stretch. This provision very clearly relates to “lessors…[who] lease[d] to the owner by written contract.” The language is not ambiguous.

Further, it is supported by the legislative comments to §9:4802(G)(1), which, referring to the Notice of Lease, states, “[n]or is such delivery required for a lease made directly to the owner and giving rise to a privilege under Section 4801, supra.”  This comment reiterates that §9:4801 only applies to leases made directly with the property owner.

Therefore, while the “claim” and “privilege” are indeed separate and distinct remedies within Louisiana’s Private Works Act, the “privilege” remedy simply never applies to the equipment lessor.  Equipment lessors never get a privilege against the actual immovable, as they are only entitled to the claim provided within §9:4802.  To preserve the right to this claim, they must deliver the Notice of Lease.

More support for this is provided by the treatment of material suppliers. Like equipment lessors, material suppliers also have notice requirements in Louisiana, and these notice requirements are dictated by the same sub-section (G) within 9:4802.  Note the important contrast in the language related to suppliers (G)(2) in comparison to the equipment lessor language (G)(1):

For the privilege under this Section or R.S. 9:4801(3) to arise, the seller of movables shall deliver a notice of nonpayment…

You see, where material suppliers are concerned, the notice is required for the privilege under this Section (9:4802 – the “claim”) or 9:4801(3) (the “privilege”).   The term “privilege” is used to describe the remedies provided by both 9:4801 and 4802.  The term “this Section” refers clearly to the immediate section where the provision exists (9:4802).

The 2nd Circuit’s decision requires a reading of “this Section” in paragraph (G)(1) to be completely different from the exact same words in (G)(2). This is a stretch, and it is in contrast with the entire Private Works Act and its comments, as it would render the Notice of Lease requirement completely meaningless.

If, for example, the Notice of Lease is only required to secure a privilege, and the privilege does not even exist for the equipment lessor, what is the purpose of the Notice of Lease?

Is The Case Now Law And What Hawk Field Services Means To Equipment Lessors In Louisiana

Law is complex. You would think you could rely on an appeals court ruling to dictate how you should act under the law, but you can’t.

First, the 2nd Circuit decisions are only applicable to the 2nd Circuit. All other courts in Louisiana are free to decide on this issue as they’d like, as the other circuits are only bound by the Louisiana Supreme Court. Frequently, the Louisiana Supreme Court will not decide these types of cases until the circuits have each ruled differently on the issue.

Second, but related to the above, it’s entirely possible that this Hawk Field Services decision could get overturned.  It should.  The trouble is that the overturning could come in the next few weeks, or it could stick around for 10 years.

If this decision was in-line with the law, equipment lessors could feel more comfortable relying on it. For the reasons expressed above, however, it seems like reversal of this decision is only a matter of time, and equipment lessors who rely on the ruling will be left without any support when that time comes.  Heck, you may actually spawn the case that results in its overturning!

In sum, the 2nd Court decision in Hawk Field Services is interesting, but it is not the law of the land in Louisiana.  Equipment Lessors should continue sending Notices of Leases without any regard to the decision, as it’s highly likely the case will be overturned in the future.

 

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Scott Wolfe Jr

About Scott Wolfe Jr

Scott Wolfe Jr. is the CEO of zlien, a company that provides software and services to help building material supply and construction companies reduce their credit risk and default receivables through the management of mechanics lien and bond claim compliance. He is also the founding author of The Lien and Credit Journal, a leading online publication about liens, security instruments and getting paid on every account. Scott is a licensed attorney in six states with extensive experience in corporate credit management and collections law, with a specific emphasis on utilizing mechanic liens, UCC filings and other security instruments to protect and manage receivables. You can connect with him via Twitter, LinkedIn and Google+.

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