Opinion
No. A04-2036.
Filed July 5, 2005.
Appeal from the District Court, Hennepin County, File No. Ln 02-15476.
Todd E. Gadtke, Hauer, Fargione, Love, Landy McEllistrem, P.A.; and Robert W. Gadtke, Gadtke Law Firm, LLC, (for appellants)
Jaren L. Johnson, Meagher Geer, P.L.L.P., (for respondent)
Considered and decided by Schumacher, Presiding Judge; Peterson, Judge; and Wright, Judge.
This opinion will be unpublished and may not be cited except as provided by Minn. Stat. § 480A.08, subd. 3 (2004).
UNPUBLISHED OPINION
In its action to foreclose on a mechanics' lien, respondent-subcontractor prevailed against appellant-homeowners. Appellants now argue that respondent is not entitled to foreclosure because it intentionally overstated the amount of the lien and it abandoned the parties' construction project. We affirm.
FACTS
On October 23, 2000, appellants David and Donna Gadtke (the Gadtkes) contracted with Bruce Bren Homes, Inc. (Bruce Bren) for the construction of a single-family residence. Bruce Bren solicited a proposal from respondent Standard Plumbing Appliance Company (Standard) to complete the plumbing for the project. On July 25, 2000, Standard submitted a proposal to complete the plumbing for $34,495. The terms of the proposal required Bruce Bren to pay half the price upon completion of the "rough-in" and the remaining half upon completion of the plumbing project. On January 22, 2001, Bruce Bren sent a letter of acceptance to Standard.
In accordance with Minn. Stat. § 514.011, subd. 2(a) (2004), Standard submitted a pre-lien notice to the Gadtkes on February 16, 2001, that provided in relevant part: "You have the right to pay [Standard] directly and deduct this amount from the contract price, or withhold the amount due to [Standard] from your contractor until 120 days after completion unless your contractor gives you a lien waiver[.]" In March and May 2001, respectively, the Gadtkes made progress payments to Bruce Bren under their contract.
Standard began the plumbing in March 2001. When Standard completed the rough-in in July 2001, it stopped work and asked Bruce Bren to tender the first half of the subcontract price. Due to financial difficulties, Bruce Bren did not make the payment.
Standard then requested payment from the Gadtkes. Having received no response to this request, Standard submitted an invoice to the Gadtkes on November 15, 2001, for $24,645, an amount that was a reduction from the original contract price because several fixtures were never received. Relying on the pre-lien notice, the Gadtkes withheld payment and asserted that Standard was obligated to complete the plumbing. The Gadtkes attempted to negotiate a separate agreement with Standard for this work, but Standard rejected the Gadtkes' proposal. The Gadtkes then retained Market Mechanical to complete the plumbing for the project.
Standard served and recorded a mechanics' lien statement on November 21, 2001, claiming a $24,700 lien. Standard brought an action to foreclose on the mechanics' lien against the Gadtkes on September 17, 2002. The case proceeded to trial. The Gadtkes raised two defenses — Standard intentionally overstated the value of its work and it abandoned the project.
At trial, Ollie Ness, a master plumber for Standard, testified that Standard had completed 80 percent of the plumbing project. The Gadtkes countered with a deposition by Mark Duffney, the owner of Market Mechanical, who asserted that the rough-in constituted only 25 to 40 percent of the plumbing project.
In its findings of fact, conclusions of law, and order for judgment, the district court held that Standard's departure from the project did not preclude it from seeking foreclosure on a mechanics' lien. The district court also rejected the Gadtkes' argument that Standard had intentionally overstated the value of its work. It then ordered foreclosure on the mechanics' lien in the amount of $20,792. This appeal followed.
DECISION I.
The Gadtkes challenge the district court's conclusion that Standard did not intentionally overstate the amount of its mechanics' lien. We review the findings of the district court for clear error. Minn. R. Civ. P. 52.01; In re Silicon Implant Ins. Coverage Litig., 667 N.W.2d 405, 415 (Minn. 2003). In doing so, we defer to the district court's assessment of witness credibility and make all reasonable inferences in favor of the district court's findings. Chafoulias v. Peterson, 668 N.W.2d 642, 662-63 (Minn. 2003); Rogers v. Moore, 603 N.W.2d 650, 656 (Minn. 1999). The application of the mechanics' lien statutes to these findings presents a question of law, which we review de novo without deference to the district court. Shaw Acquisition Co. v. Bank of Elk River, 639 N.W.2d 873, 876 (Minn. 2002).
The consequences of an overstatement of the amount of a mechanics' lien are governed by Minn. Stat. § 514.74 (2004), which provides:
In no case shall the liens given by this chapter be affected by any inaccuracy in the particulars of the lien statement. . . . In no case shall a lien exist for a greater amount than the sum claimed in the lien statement, nor for any amount, if it be made to appear that the claimant has knowingly demanded in the statement more than is justly due.
Thus, when a lienor intentionally overstates the amount due, the lienor is precluded from seeking foreclosure. Delyea v. Turner, 264 Minn. 169, 175-76, 118 N.W.2d 436, 440-41 (1962). To establish this defense, the owner must demonstrate that the lienor's overstatement of the amount due was made in bad faith. Bierlein v. Gagnon, 255 Minn. 143, 148, 96 N.W.2d 573, 578 (1959). Bad faith cannot necessarily be inferred as a matter of law from a finding that the lienor sought recovery for certain nonlienable items. Aaby v. Better Builders, Inc., 228 Minn. 222, 225-26, 37 N.W.2d 234, 236 (1949).
The Gadtkes contend that the district court committed clear error by rejecting evidence that Standard knowingly demanded more than was due. In advancing this argument, the Gadtkes first claim that Standard improperly sought a mechanics' lien for the full contract price. When cross-examining Ness, the Gadtkes elicited an admission that Standard was seeking the full contract price of $24,495. However, Ness's admission is contradicted by both the November 15 invoice, which indicates that Standard had discounted $2,800 from the full contract price as a credit for unfinished work, and the November 21 lien statement, which also recites the discounted amount. When viewed in the light most favorable to the district court's findings, this evidence rebuts the assertion that Standard sought a mechanics' lien for the full contract price.
The Gadtkes also claim that Standard knowingly underestimated its discount from the full contract price. Although Standard admitted that the plumbing was 80 percent complete, the discount of $2,800 represents only a 12-percent reduction from the full contract price. Ness testified that the $2,800 amount was calculated based on the price of labor necessary to complete the plumbing project. In light of the deference accorded the district court's evaluation of witness credibility, the district court could reasonably conclude that Standard's determination of the lien amount was not made in bad faith.
The Gadtkes next claim that Standard knowingly sought additional compensation for certain water and sewer improvements that were covered by the contract price. The change orders and the November 15 invoice both indicate that Standard billed the price of certain water and sewer improvements as an extra. The record does not support the Gadtkes' contention that, by adding itemized billing for these amounts, Standard proceeded in bad faith or had an improper motive. Viewing the evidence in the light most favorable to its findings, the district court's finding that Standard did not intentionally overstate the amount due is not clearly erroneous.
The Gadtkes counter that, because the overstatement here is egregious, Standard's motive was improper as a matter of law. In advancing this argument, the Gadtkes substantially rely on Lyons v. Jarnberg, 128 Minn. 288, 150 N.W. 1083 (1915). Lyons involved a contractor who knowingly demanded the full contract price, "fully 20 [percent] more than was justly due," when it had not completed the contract. 128 Minn. at 291, 150 N.W. at 1084. On these facts, the Lyons court observed that the contractor "necessarily knew that [it was] attempting to acquire a lien for material not furnished and for labor not performed." Id. Lyons, however, does not suggest that, in the absence of a knowing overstatement, improper motive may be imputed as a matter of law. Furthermore, the Minnesota Supreme Court has since held that improper motive cannot be implied as a matter of law when a lienor seeks recovery for certain nonlienable items. Aaby, 228 Minn. at 225-26, 37 N.W.2d at 236. Thus, the Gadtkes' reliance on Lyons is misplaced.
The district court's findings, which are supported by the evidence, establish that, although Standard overstated the amount of its mechanics' lien, the overstatement was not the product of bad faith or improper motive. Accordingly, we affirm the district court's rejection of this defense to Standard's foreclosure on its mechanics' lien.
II.
The Gadtkes also argue that, because Standard did not complete the plumbing as promised in the subcontract, it abandoned the project and is precluded from foreclosure on a mechanics' lien. The fact of abandonment is not disputed by the parties. Thus, we consider whether such abandonment precludes foreclosure, which, as a question of law, we review de novo. Shaw Acquisition Co., 639 N.W.2d at 876.
We observe at the outset that, although the district court reached the issue of abandonment on the merits, the district court alternatively held that the Gadtkes waived the issue. The Gadtkes also challenge the findings and conclusions of the district court on waiver. Because the abandonment claim was fully litigated on the merits and provides an independent basis for our analysis, we decline to address the parties' arguments as to waiver.
The Minnesota Supreme Court considered whether abandonment is a bar to foreclosure on a mechanics' lien in E.C.I. Corp. v. G.G.C. Co., 306 Minn. 433, 237 N.W.2d 627 (1976). There, when the owner stopped making progress payments, the contractor abandoned the work before it was substantially completed. Id. at 434, 237 N.W.2d at 629. The supreme court considered the effect of statutory language that, in substantially similar form, currently appears at Minn. Stat. § 514.03, subd. 2 (2004):
With respect to any contract or improvement . . . the lien shall be as follows:
(a) If the contribution is made under a contract with the owner and for an agreed price, the lien as against the owner shall be for the sum agreed upon;
(b) In all other cases, it shall be for the reasonable value of the work done, and of the skill, material, and machinery furnished.
The supreme court observed:
In the situation when the project is incomplete, however, the legislature intended that the lien be measured according to ordinary common law principles. Thus when the project is incomplete the measure of the lien may vary depending on whether the contract was for a specific price, whether the work is substantially complete, whether the [contractor] or [owner] is in breach, and whether the contract is treated as at an end. In this case the district court's findings show . . . that the project was not substantially complete, that the [owner] was in breach, and that the [contractor] chose to treat the contract as at an end. In such circumstances, according to the common law principles of quantum meruit, the lien should be measured by the reasonable value of the fraction of the project that was completed.
E.C.I. Corp., 306 Minn. at 436-37, 237 N.W.2d at 630.
When a contractor abandons work because the owner has failed to make progress payments, the contractor may seek foreclosure on a mechanics' lien. Id. Because Minn. Stat. § 514.03 provides a remedy regardless of whether a contract with the owner exists, a contractor may proceed even when it causes a breach. Therefore, even upon abandonment of a project for the improvement of real property, a contractor or subcontractor may proceed with foreclosure of a mechanics' lien.
Relying on our decision in Paving Plus, Inc. v. Prof'l Invs., Inc., 382 N.W.2d 912 (Minn.App. 1986), the Gadtkes suggest that the abandonment of a contract should bar an action to foreclose on a mechanics' lien. Paving Plus involved a contractor who had completed the work but refused to repair defects when the owner withheld the final progress payment. Id. at 913. Framing our analysis in the contract doctrine of substantial performance, we held that the contractor had not substantially performed the terms of the contract and, therefore, was not entitled to damages. Id. at 915-16.
The Gadtkes appear to conflate similar but distinct contract doctrines relating to abandonment and substantial performance. If one party to a contract succeeds in demonstrating that the other has abandoned its rights under the contract, the other party cannot enforce those rights under the contract. Republic Nat'l Life Ins. Co. v. Marquette Bank Trust Co. of Rochester, 295 N.W.2d 89, 93 (Minn. 1980). Similarly, if one party to a contract fails to substantially perform its obligations under a contract, that party is in breach and cannot enforce its rights under the contract. Material Movers, Inc. v. Hill, 316 N.W.2d 13, 18 (Minn. 1982); Sward v. Nash, 230 Minn. 100, 103, 40 N.W.2d 828, 830 (1950). Both doctrines only relate to the ability of a party to enforce its rights under a contract.
The right to foreclose on a mechanics' lien, however, is not incident to the rights of a contractor or subcontractor under a contract. The existence of a contract is relevant only to the calculation of the lien amount under Minn. Stat. § 514.03, subd. 2(a). If a contractor substantially performs in accordance with a contract, that contract is enforceable and the lien amount is the contract price. Scott-Daniels Props., Inc. v. Dresser, 281 Minn. 179, 186-87, 160 N.W.2d 675, 680 (1968). But if a contractor does not substantially perform, an enforceable contract does not exist and the lien amount is based on the reasonable value of the completed work. E.C.I. Corp., 306 Minn. at 436-37, 237 N.W.2d at 630. Because contract doctrine does not govern the right of a contractor or subcontractor to seek foreclosure on a mechanics' lien, the Gadtkes' reliance on Paving Plus is misplaced.
The Gadtkes also contend that, because Standard had an obligation to the Gadtkes to complete the project, Standard was barred from foreclosing on its mechanics' lien. Claiming to be third-party beneficiaries of the subcontract between Standard and Bruce Bren, the Gadtkes assert that they are entitled to performance of the subcontract. A third party may recover as an intended beneficiary under either the "duty-owed" or the "intent-to-benefit" test. Cretex Cos. v. Constr. Leaders, 342 N.W.2d 135, 139 (Minn. 1984) (adopting Restatement (Second) of Contracts § 302 (1979)). The duty-owed test is satisfied when performance of the contract will satisfy one party's obligation to pay money to the third party. Id. at 138. The intent-to-benefit test is satisfied when performance of the contract is intended as a gift to the third party. Id.
Here, performance of the subcontract was neither intended to discharge a debt to the Gadtkes nor as an outright gift. Thus, the Gadtkes are not third-party beneficiaries and have no independent right to demand performance of the subcontract. See Mears Park Holding Corp. v. Morse/Diesel, Inc., 427 N.W.2d 281, 285 (Minn.App. 1988) (holding that a lender is not a third-party beneficiary of a construction subcontract); 9 Arthur L. Corbin, Corbin on Contracts § 779D (int. ed. 1951 Supp. 2004) (stating that an owner is an incidental beneficiary, not a third-party beneficiary, of a construction subcontract).
The Gadtkes also infer Standard's obligation to complete the project from Minn. Stat. § 514.011, subd. 2(a) (2004), which provides in relevant part:
Every person who contributes to the improvement of real property so as to be entitled to a lien . . . except a party under direct contract with the owner must, as a necessary prerequisite to the validity of any claim or lien, cause to be given to the owner . . . a written notice . . . which shall state: . . .
["]If we are not paid by your contractor, we can file a claim against your property for the price of our services.
You have the right to pay us directly and deduct this amount from the contract price, or withhold the amount due us from your contractor until 120 days after completion of the improvement unless your contractor gives you a lien waiver signed by me. . . .["]
The right to withhold payments under this provision is taken from Minn. Stat. § 514.07 (2004), which provides in relevant part:
No owner shall be required to pay the owner's contractor until the expiration of 120 days from the completion of the improvement, except to the extent that the contractor furnishes to the owner waivers of claims for mechanics' liens signed by persons who furnished labor, skill or material for the improvement and who have given the notice required by section 514.011, subdivision 2.
Neither provision, by its plain language, imposes an affirmative obligation on either a contractor or subcontractor to complete work. The Gadtkes are otherwise unable to cite any authority in support of an obligation to complete the work or forego foreclosure on a mechanics' lien. In contrast, E.C.I. Corp., in its analysis of Minn. Stat. § 514.03, subd. 2, expressly recognizes circumstances when a contractor does not complete work pursuant to a contract but still may seek foreclosure on a mechanics' lien. 306 Minn. at 436-37, 237 N.W.2d at 630. Thus, the Gadtkes' argument is unavailing.
Accordingly, the district court did not err in rejecting the Gadtkes' defenses to foreclosure on the mechanics' lien.