MINUTES OF THE SUBCOMMITTEE OF THE SENATE COMMITTEE ON JUDICIARY Sixty-eighth Session May 25, 1995 The Senate Subcommittee on Judiciary was called to order by Chairman Ernest E. Adler, at 4:00 p.m., on Thursday, May 25, 1995, in Room 227 of the Legislative Building, Carson City, Nevada. Exhibit A is the Agenda. Exhibit B is the Attendance Roster. COMMITTEE MEMBERS PRESENT: Senator Ernest E. Adler, Chairman Senator Mike McGinness Senator Jon C. Porter STAFF MEMBERS PRESENT: Allison Combs, Senior Research Analyst Lori M. Story, Committee Secretary OTHERS PRESENT: Charles Cook, Lobbyist, Nevada Land Title Association Sid Perzy, Credit Manager, Las Vegas Paving Corporation Harold Jacobsen, Credit Manager, Steward and Sundell Concrete; Member, Credit Managers of California, Las Vegas Chapter; Member, Associated General Contractors; Member, National Electrical Contractors Association James Bennett, Executive Vice President, United Title of Nevada; Nevada Land Title Association SENATE BILL 434: Makes various changes to provisions governing statutory liens. Senator Adler opened the hearing on Senate Bill (S.B.) 434. He stated the subcommittee's goal was to attempt to address the problems and conflicts raised by various parties about the bill. He asked Senator McGinness if he had a question for the proponents of the bill. Senator McGinness admitted his lack of familiarity with the process, and asked if there are liens filed at every stage of the construction process. Charles Cook, Lobbyist, Nevada Land Title Association, responded to the senator's question, but first he asked the question be clarified. Senator McGinness restated his question, wondering if the foundation worker, the subfloor installer, the framers, etc., were all able to put liens on projects. Mr. Cook replied that each of those parties have lien rights, including the material suppliers and the laborers. The senator asked if everyone files liens automatically. Mr. Cook replied they do not usually do this, but they have the right. Senator McGinness continued his questioning, attempting to ascertain the usual process that leads to the placing of a lien against a property. He offered an example of a curb and gutter installer who does the job, but gets paid only two- thirds of the entire contract amount. Does the contractor file the lien right away or does he wait a while in order to allow the builder time to pay? Mr. Cook explained it happens both ways, but a contractor who files liens right away might do so because he has a bad relationship with the builder or owner of the property. Sometimes, Mr. Cook explained, the subcontractors will attempt to lien for the full amount of the contract when they have received payment for part of it. Another scenario could be a subcontractor puts in all the sidewalks, is not paid, and liens for the full amount of his contract, including the cost of the materials supplier's concrete. If the materials supplier also places a lien, the result is higher than the total amount of the contract. Senator Adler moved to questions posed by other sources. He referred to a question raised by the Clark County Clerk's Office, who feared the law would double their filings in just 1 year. Mr. Cook noted this increase would be due to the bill's provision that pre-lien notices be recorded. He noted he had also been contacted about the negative impact of this particular provision. Thus, Mr. Cook concluded, the provision should be deleted from the bill. Moving ahead, Mr. Cook noted he has a list of items that have been agreed upon as best deleted from the bill. He offered to provide the list to the subcommittee and thus avoid unnecessary discussion on those points. The chairman asked Mr. Cook to provide the list to him, noting he would share the list with the other members of the subcommittee. Senator Adler brought up a point that he considers "fundamental to the whole bill." Subcontractors have reported to him, he told, that bonding around does not work as a means of collecting money owed. Bond companies do not pay, they reported to the senator, and many of them have been unable to collect on projects that have been bonded around. Mr. Cook explained the statute would create a "different bond" for the specific purpose of securing the lien. Currently, there is a performance bond or payment bond, which is often required by the municipality. This statute creates a mechanism where the bond is the security for the lien, thus, he speculated, there will not be the same problem, because it becomes the absolute security for the lien. Sid Perzy, Credit Manager, Las Vegas Paving Corporation, asserted his only real problem in the past is the actual collection on the bond. It has been necessary, he explained, to hire an attorney in order to collect from the bond company. He speculated that this situation is not unique to his company, but would be prevalent throughout the state. Senator Adler asked how much an attorney would cost to collect the bonds. Harold Jacobsen, Credit Manager, Steward and Sundell Concrete; Director, Credit Managers of California, Las Vegas Chapter; Member, Associated General Contractors; Member, National Electrical Contractors Association, stated it is generally a per hour fee that is charged for such service. The chairman asked Mr. Jacobsen if he had ever had an occasion when the bond was simply paid, without extraordinary efforts to collect. Mr. Jacobsen replied, "never." The senator noted this seems to be the case in all instances. The witness told he has attempted in the past to process a claim against a bond, as an individual. The bond company would not even respond to him, he stated, and it is necessary to file some court action to claim the bond. Mr. Jacobsen wished to point out the current law already contains provisions that allow bonding around a lien. The difference here, he stated, is the current law requires the petition to bond around a lien be filed with the court. Under the proposal, there is no need to file a petition with the court, and therefore, there is no oversight of the process or assurance the bonding company is reputable and able to pay. Additionally, the new proposal will release the real property to be sold, which leaves the subcontractor with no recourse. Mr. Perzy explained to the subcommittee that bonding companies vary and some are not financially sound. By having the courts oversee the process there is some assurance that the bonding companies used will be reputable companies, known in the industry as "T" companies, Mr. Perzy added. Mr. Cook declared the remedy currently available is not very different from that being proposed by the bill. He added the statutes currently require that the bonds are issued by bonding companies that are currently licensed within the state. Senator Adler opined there would be a different situation created by the bill because currently, in order to close escrow on the sale of the property, the lien must be cleared by paying the subcontractor. Mr. Jacobsen interjected if the lien is bonded around there is no need to pay the subcontractor before closing the sale, but there would be a need for the subcontractor to hire an attorney. He reiterated that not all bonds are good, and the county recorder has no means of determining this. Mr. Cook reminded the subcommittee that currently liens expire after 6 months and cannot be enforced after that time. He emphasized the change will only shorten the process because it removes the need to file a petition with the court so a lien can be bonded around. Mr. Jacobsen agreed with Mr. Cook, but opined the change would be to the detriment of the subcontractor. Senator Adler asked if the court would award attorney's fees to the prevailing party if judicial intervention is necessary. Mr. Jacobsen replied the court will award attorney's fees, but it is the subcontractor who must "front the money" to pay the attorney. James Bennett, Executive Vice President, United Title of Nevada; Nevada Land Title Association, offered the committee examples of situations where the lien cannot be released because there is no lawsuit brought. As a result the title cannot be cleared, which is to the detriment of the property buyer. Mr. Cook suggested a change in the amount of the bond, perhaps raising the amount of the bond. This would provide a bond for a greater amount than what the lien claims is due. Senator Adler asked what happens if the process is followed and the bonding company refuses to pay or the company goes defunct and the bond is no good. Is it possible to sue the contractor at this point, he asked. Mr. Jacobsen replied if there is a contract there is always the possibility of suing due to breach of contract. The problem arises when the only possession of value belonging to the contractor is the real property, which he may have sold. Thus, it is very important to have the real property to fall back on. Mr. Jacobsen stressed once again, the importance of having judicial oversight. If the bond is no good, it does not matter what the amount of the bond is. Mr. Perzy asked to comment that the judicial process is a very slow thing. It is very difficult for the subcontractors to wait the year or 2 that the processes of a lawsuit require. Mr. Bennett responded that perfecting the mechanics lien is also a court proceeding with slow progress. Mr. Cook stated the lien remains for 6 months, but if no action is taken it expires. However, the debt remains until it is paid or is discharged by bankruptcy, he added. He emphasized the builders wish to avoid litigation. Senator Adler noted he heard this wish to decrease the litigation and this bill should accomplish that goal, for the builders. The problem he sees, he said, is there will be the same number of lawsuits, only different ones. Mr. Jacobsen agreed with Senator Adler. The senator also noted he has discussed the bill with several attorneys that handle construction cases and none of them believe it is a good idea. Mr. Cook told there was a lot of discussion about this process at a recent continuing legal education seminar. The attorneys attending this seminar, he reported, seemed to think the bonding change is a positive step. Senator Adler noted he would agree if there were good bonding companies to rely on. Mr. Perzy stated there was an across-the-board agreement there is a need to speed up the process. The real issue is the need for judicial control of the process, he stated. Senator Adler offered an anecdote of his experiences with bonding companies. There is a lot of stalling before a bonding company is ready to pay the bond, he stated. Mr. Cook and Mr. Bennett responded, noting there is no real defense for such actions, but the same thing can happen with the developer. Mr. Bennett also offered an anecdote about a developer and the difficulties faced when liens are inappropriately filed against a property. Mr. Bennett asserted the goal is to find another device to address conflicts between the contractor and the subcontractors, rather than involving "innocent third parties" (the home buyers). The discussion of concerns continued, with Mr. Perzy pointing out the device exists, and Mr. Jacobsen explaining that invalid liens can be addressed through a lawsuit for clouding title. Finally, upon the request of Senator Porter, Mr. Cook went over the sections of the bill that the parties have agreed to remove. Mr. Cook reported the majority of the bill does not rely on the bonding issue, and if it is going to cause a real hindrance those sections dealing with the alternative bonding provision can be removed. These sections will be 2, 3, 9, 10, and 11, generally, along with modifications to section 5 (where it references sections 2 and 3), and section 12, subsection 3. Senator Porter next asked to review the proposed changes to the bill which are outlined in Exhibit C. Mr. Cook explained that section 8 deals with notices of completion. Subsection 4 of section 8 calls for a deletion of the option to deliver these notices in person, retaining the requirement to deliver by certified mail. It also requires a notice be delivered to any person who submitted a written request for such notice, before the notice of completion was recorded.... Mr. Jacobsen voiced no opposition to this proposal as certified mail seems to be a reliable means of delivery. He did voice a concern that the notices were not being mailed in a timely manner. He proposed an amendment to allow the lien period to start upon the signature of the certified mail delivery receipt. Mr. Jacobsen also noted some contractors have been known to file a notice of completion while the subcontractors are still on the job. Mr. Bennett wondered how the public would receive notice of completion. Mr. Cook stated the public would receive notice because it is a recorded document. However, this system would cause a real problem for title companies which would have to examine each individual green certified mail receipt to determine the deadline. Mr. Jacobsen agreed this might be somewhat of a hardship, but noted it would not be greater than that suffered by the subcontractors who are receiving inadequate notice. Senator McGinness asked how it is possible for the contractor to file a premature notice of completion. Mr. Bennett replied there are statutory rules for a "good" notice of completion. If the rules are not followed, the notice of completion is not "good." Then the statutes allow an additional 90-day extension to the lien rights of the subcontractors, the witness stated. Mr. Jacobsen agreed this is the current statute, which the subcontractors like. The senator asked if the homes can be sold prior to the notice of completion. Mr. Jacobsen opined filing the notices of completion is a means of "summing up a project" which allows the title company to calendar the lien deadline and to begin issuing clear title to the properties. Mr. Cook moved to the second page of Exhibit C, which modifies section 12 of the bill. This page covers the previously discussed change to the section. Senator Adler voiced some confusion and took the opportunity to clarify the record. He referred to section 12, lines 29-30, the word "order" is substituted for "bond." Again, Mr. Jacobsen offered no objection to this proposed change. There was some discussion about the meaning of the section, with the senator suggesting the wording should be added which would clearly indicate where the order should be recorded. Ultimately the group decided to eliminate section 12 of the bill, along with the proposed change on the second page of Exhibit C. The discussion moved to the next proposal on Exhibit C which deals with section 15 of the bill. Mr. Jacobsen voiced his desire to retain the current 31 day time period of notice of supplied materials or work performed, which the bill proposes to change to 20 days (section 15, subsection 1, line 4, on page 9 of the bill). He opined the time period is essential to the small businessmen who sometimes must do their own paperwork during nonworking hours. Mr. Perzy agreed with Mr. Jacobsen's assessment of the issue. Senator Adler read from a letter sent by Western Nevada Supply Co. (Exhibit D), which voiced a neutral position. He agreed this particular supplier is a very large enterprise with no concerns about bookkeeping or paperwork deadlines. Senator McGinness opined it would be best to leave the section at 31 days. The question was raised whether this should be a "floating 31-day period" or a "fixed" period. "If notice is filed 32 days out, some people would argue you have eliminated or lost your lien rights, others will argue you have only lost 1 day," Mr. Cook explained, "because it floats." He opined the statute really does not say, but it might be read as fixed, where it really should be floating. Mr. Jacobsen opined the statute is upheld as a floating period, but felt it might be best to clarify the statute. Senator Adler referred to the certified mail requirement, asking if this means it must be mailed within 31 days or received within the time period. Mr. Jacobsen stated in practice the requirement has been to mail the notice within the 31-day period. Discussion resulted in a consensus that the word "delivery" would mean receipt. Mr. Cook suggested there might be case law defining the statute, but agreed the paragraph needs some work. Senator Adler opined most other statutory deadlines are floating, and because of this, this statute would be floating too. Mr. Cook opined that section 15 should also be deleted from the bill. Discussion led to the conclusion that section 15 should remain, leave the notice time at 31 days, rather than the proposed 20; and remove "in person" on lines 5 and 6 of the bill. Senator Adler suggested additional language to the effect that "notice is deposited by certified mail..." or something along that line. It was concluded the 31 days would run from the last day to deposit the notice in the mail. Mr. Cook pointed out this change would require the retention of subsection 4 of section 15 which says "the notice need not be verified, sworn to or acknowledged," on line 41 of the bill, page 9. Senator Adler referred to page 4, subsection 4, noting this portion was deleted at the original hearing of the bill. He asked if this was still the desire. Mr. Cook stated "the quick answer is `no.'" Senator Adler stated there has been correspondence which favors both positions (retention and removal). Mr. Perzy asked that the definition of an improvement should remain the same, because it refers to the scheme of improvement as a whole. He explained if pre-lien notice is required on a house-by-house basis, there is also a need to do a house-by-house release of lien. He opined this piecemeal approach will cause a lot of confusion for lien rights deadlines. Senator Adler stated it was his preference to break down the lien process; to target more closely the houses in the development. He admitted he cannot figure out how best to do this. Mr. Jacobsen opined it comes down to what improvement or building is impacted or improved by the work done by the subcontractor. In paving or curbs and gutter, all the lots are improved by the process; in cabinet installation, it is easy to determine which houses have received the benefit of that labor and material. Additionally, Mr. Jacobsen pointed out, there is the fact that a paving subcontractor will complete his work and his 90-day lien period starts to run, the public governmental entities which are responsible for accepting the roads will fail to accept those roads within the lien period. The fact that retention funds are held from the subcontractor until the work is accepted by the county causes financial hardship. The problem, Mr. Jacobsen opined, is that lien laws do not follow the same logic as the retention policies. He suggested the law should be to allow 90 days from the time the county accepts the road to perfect liens against the improvements. Senator Adler observed that page 4, subsection 4 of the bill addresses the construction of buildings. He asked if it really does mean a building. Mr. Cook explained the bill is drafted after Arizona, California, and Washington laws which refer to buildings. He pointed out there is a separate section in the bill that addresses off-site improvements. The senator wondered if the language works if it does only apply to buildings. Mr. Cook said it does work in the other states. Senator Adler stated the intent is to allow the liens to be "wrapped up" on each building so the home owners will not have a lien against their building when the work covered by the lien was really on another building. Mr. Cook suggested the answer might be to amend subsection 4 of section 7 to require a separate contract. This will give everyone notice, because they will know what they are contracting for in each case, and the developer will have to set up separate contracts if he wishes to take advantage of this provision. Mr. Jacobsen agreed this suggestion follows "a certain logic," and if the contract is for one house, the lien is for one house, while if the contract is for 10 houses, the lien would be for 10 houses. Discussion followed which concluded the suggestion is a good one and should be implemented in the section. Mr. Cook proposed language be inserted on page 4, line 20 after "one separate building," which would say something to the effect "where there is one separate contract" or "which is covered by a single contract," or "lien rights fall within the confines of each separate contract." The conclusion of the subcommittee was to allow contracts to be drafted to suit the parties, but they would also hold lien rights only within the contracts, whether they contract for separate buildings or for multiple buildings. Additionally, Senator Adler noted wording needs to be added at the end of the sentence, "...completion of each separate building or contract." Mr. Cook opined the commercial developer could derive benefit from this proposal because they would be able to make renovations or additions to the large hotels without gaining lien rights on the other portions outside the contract. Discussion returned to the question of bonding, and Senator Adler voiced the opinion the Legislature may want to revisit the issue in a future session. He speculated the bonding around would work if there was some guarantee the bonding companies being used were reputable and willing to pay a rightful claim. The question of the court filing fee in section 4 of the bill arose and Senator Adler opined that $35 was not a sufficient amount. According to local courts, he reported, the lowest fee charged is $85 and the regular rate for filing a lawsuit is $165. The committee agreed that $85 is a reasonable fee. Mr. Jacobsen moved to other issues involving the hearing on frivolous liens. He noted this section removes, according to an attorney he discussed the matter with, the defendant's due process rights, because it does not allow sufficient time to answer or gather witnesses or evidence. He speculated the time frame in this section is insufficient. Senator Adler agreed with the witness. There was discussion of the section; what it really means, and how it would be impacted by the reality of the court calendar. A question was raised as to whether the 6 days allowed before a hearing is set would include the 3 days allowed to give the defendant notice of the challenge. This reduces the time for the defendant to answer to 3 days. The senator stated the time should be at least 10 days to allow the defendant 1 week to respond. Upon further discussion of other statutes that address hearings and preferential settings, the committee agreed the time frame for hearing should be not less than 10 days, or more than 20 days. Looking to the level of proof required to show the claim is frivolous, Senator Adler pointed out the burden is such that the plaintiff must show there is absolutely no basis for a claim. If there is any showing of good faith, the court will not dismiss the lien, he explained. Mr. Cook directed attention to section 8 of the bill. He speculated there is no need for the 15-day period within which to file the notice of completion and the bill proposes to eliminate that deadline. Senator Adler opined there should be some limit on the filing. Mr. Cook explained the shortest the lien period can be is 40 days, and this would result from someone filing a notice of completion after 50 days. Mr. Jacobsen opined removing the 15-day limit for filing would not result in a negative consequence, as long as the notice is sent by certified mail, as required in subsection 4 of section 8. The problem, he stated, is dealing with the retentions, which was mentioned earlier in the hearing. The longer it takes to get notice of completion, the longer the retentions are held. Mr. Perzy opined the notices need to be filed and mailed as soon as possible because the notices impact when he can bill or expect return of the retention monies. The senator agreed, but noted some of these issues may not be successfully addressed during the short time left in the current legislative session. Mr. Bennett pointed out that to his knowledge there is no law that actually requires the filing of notices of completion. He speculated losing the 15-day deadline might entice some of the builders to file the notices, when they might not if they miss the deadline. Senator Adler asked for confirmation that law does not require the filing of the notice of completion. This was confirmed. Mr. Jacobsen stated it becomes a matter of contract; the senator agreed. This seemed to clear up the issue and the decision was to amend section 8 as outlined on Exhibit C. There seemed to be no further conflict and Allison Combs, Senior Research Analyst, Legislative Counsel Bureau, gave an overview of the proposed amendments. This concluded the hearing and it was adjourned at 5:45 p.m. RESPECTFULLY SUBMITTED: Lori M. Story, Committee Secretary APPROVED BY: Senator Ernest E. Adler, Chairman DATE: Senate Subcommittee on Judiciary May 25, 1995 Page