Nevada Supreme Court Holds That a Bad Check Invalidates an Unconditional Release of a Mechanics Lien

What happens if a lower-tiered contractor provides higher-tiered contractor with an unconditional release of mechanics lien rights in exchange for payment by check, only to have that check returned for insufficient funds? This was the scenario presented to the Nevada Supreme Court in Cashman Equipment Co. v. West Edna Assocs., 132 Nev. Adv. Op. 69.

The case involved the construction of the new Las Vegas City Hall. Whiting Turner Contracting (“WTC”) served as the Project general contractor. WTC selected Mojave Electric (“Mojave”) to serve as the Project electrical subcontractor. Cashman Equipment Company (“Cashman”) originally submitted a winning bid to Mojave to provide specialty materials. However, WTC mandated that Mojave involve disadvantaged business entities, so Cam was selected for this purpose to serve as an intermediary between Mojave and Cashman.

Pursuant to their respective agreements, Mojave paid Cam (the intermediary) for services provided by Cashman. In turn, Cam issued a check to Cashman for the equipment provided. Cashman executed an unconditional release of its mechanics lien rights in exchange for the check. However, Cam’s check to Cashman was returned for insufficient funds, and Cashman’s subsequent efforts to obtain payment were unsuccessful (Cam’s owner absconded with the payment from Mojave). As a result, Cashman recorded a mechanics lien and eventually filed suit to foreclose the lien.

The trial court refused to enforce Cashman’s mechanic’s lien and upheld the unconditional release despite the fact that Cashman had not received payment for its work. The trial court also found that Mojave’s payment to Cam constituted payment to Cashman because Mohave’s check to Cam was honored. Cashman appealed to the Nevada Supreme Court.

The Nevada Supreme Court reversed the trial court decision and held that the unconditional release was void. The Court compared the subject release to a “pay-if-paid” provisions commonly found in construction contracts. In a separate case, the Court previously had held that “pay-if-paid” provisions were unenforceable because they violate public policy. Lehrer McGovern Bovis, Inc. v. Bullock Insulation, Inc., 124 Nev. 1102, 1118, 197 P.3d 1032, 1042 (2008). Similarly, the Court found that enforcement of the subject release would violate Nevada’s public policy favoring mechanics liens to ensure payment to those who provide labor or furnish materials to improve property. The Court further found that the subject release was statutorily unenforceable pursuant to NRS 108.2457(5)(e), which precludes enforcement of a waiver when the payment exchanged for the release is in the form of a check that fails to clear the bank “…for any reason.”

Although not specifically discussed in this case, Cashman ultimately prevailed because it complied with the specific requirements set forth in Nevada’s mechanics lien statutes. This case is also illustrative of Nevada’s strong public policy protecting contractors’ payment rights.

Reciprocity for Architects and Engineers in Nevada

Professional Engineers and Land Surveyors

To qualify for a Professional Engineer reciprocal license, you need to meet the following requirements:

  • Must have an accredited BS Engineering degree from the US or have an ABET equivalent foreign BS Engineering degree. – NRS 625.183
  • If you don’t have a BS Engineering degree you, must have had a minimum of 10 years’ experience in the discipline you are applying for and have been licensed in another state prior the July 1, 2010.
  • Have completed the NCEES Fundamentals of Engineering exam or qualify for a waiver of the exam – NRS 625.193
  • Have completed the NCEES 8-hr Professional exam in the discipline you are applying for.
  • With a BS degree, have a minimum of 4 years of acceptable engineering work experience after graduation. Two years must be under a licensed PE in the discipline you are applying for. References are accepted from US and Canadian PEs.

To qualify for a Professional Land Surveyor reciprocal license you need to meet the following requirements:

  • Must have an approved BS Surveying degree from the US or have an ABET equivalent foreign BS Surveying degree. – NRS 625.270
  • If you don’t have a BS Surveying degree, you must have been licensed in another state prior the July 1, 2010.
  • Have completed the NCEES Fundamentals of Land Surveying exam or qualify for a waiver of the exam – NRS 625.271
  • Have completed the NCEES 6-hr Professional Surveyor exam.
  • With a BS surveying degree, have a minimum of 4 years of acceptable surveying work experience after graduation. Two years must be under a licensed PLS. References are accepted from US PLS only.
  • Complete the Nevada 2-hr PLS exam after Board approval of the application.

Nevada only accepts reciprocal applicants licensed in the U.S. or Canada, no other foreign countries.

http://www.nvboe.org/licensure-applications/addl-licensure-info/faqs/

Architects

The state of Nevada requires that all candidates for registration via reciprocity:

  1. Hold certification with the National Council of Architectural Registration Boards and have a copy of their Blue Council folder (certificate) transmitted to the board office.
  2. Have successfully completed all portions of the NCARB exams administered by NCARB standards at the date of your initial registration or any exam deemed equivalent by the board.
  3. Have fulfilled the seismic requirement by exam, completion of an NCARB-approved seismic seminar, or a seismic treatise submitted to another western state. Seismic design was included in the NCARB December 1965 Structural Examination.
  4. Complete the Application for Architect Registration by Reciprocity.

Each applicant may or may not be required to appear before the board for an oral interview. The applicant is required to take an open-book written test on Chapter 623 of the Nevada Revised Statutes, Blue Book and Rules of Conduct. The board will review the test, application, integrity and ethical standards for registration in the state of Nevada.

http://nsbaidrd.state.nv.us/uploads/RecipArcApp.pdf

Nevada Department of Transportation (NDOT) is Not a Design Professional for Certificate of Merit Purposes

Like many states, Nevada has heightened requirements for actions against design professionals for professional negligence. Commonly known in other jurisdictions as a “certificate of merit”, NRS 11.256 – NRS 11.259 require that a complaint filed against a design professional in the nonresidential construction context be accompanied by an attorney affidavit and an expert report which must include, among other information, a statement from the expert that there is a reasonable basis for filing the action against the design professional. NRS 11.258(3). An initial pleading in an action involving the construction of a non-residential building against a design professional served without the attorney affidavit and expert report required by NRS 11.258 is void ab initio, and the district court does not have discretionary authority to allow the party to amend its pleadings to cure its failure to comply with NRS 11.258. Otak Nev., LLC v. Eighth Judicial Dist. Court of Nev., 260 P.3d 408, 409 (Nev. 2011); Converse Prof’l Grp. v. Eighth Judicial Dist. Court of Nev., 310 P.3d 574, 581 (Nev. 2013).

Typically, the question of whether a party is a design professional and therefore protected by certificate of merit requirements is relatively straightforward as the term is defined in the statutory scheme. “Design professional” means a person who holds a professional license or certificate issued pursuant to chapter 623, 623A or 625 of NRS or a person primarily engaged in the practice of professional engineering, land surveying, architecture or landscape architecture. NRS 11.2565(2)(b).

The Nevada Supreme Court recently issued an opinion in which it was asked to determine whether the Nevada Department of Transportation (“NDOT”) was a design professional under this definition. In State DOT v. Eighth Judicial Dist. Court, 368 P.3d 385, 386 (Nev. 2016), a commercial property tenant sued the property owner, NDOT and the City when water entered the leased property and caused damage. The suit alleged that NDOT was negligent for failure to properly design, construct, maintain and or repair a state highway located adjacent to the flooded property. The property owner cross-claimed against NDOT and the City, asserting claims for negligence and equitable indemnity and implied indemnity. Despite including allegations of design defects, neither the complaint nor the cross-claim were accompanied by an attorney affidavit and expert report pursuant to NRS 11.258.

NDOT moved to dismiss the complaint and cross-claim for failure to comply with NRS 11.258. In its Motion, NDOT argued that it is a design professional because its employees hold professional engineering licenses and it primarily engages in professional engineering. The trial court disagreed and denied NDOT’s Motion. Thereafter, NDOT sought writ relief in which it asked the Supreme Court to decide whether NDOT was a design professional as contemplated by NRS 11.2565(2)(b).

The Nevada Supreme Court held that NDOT was not a design professional for two reasons. First, it found that its employees are not statutorily required to be licensed professional engineers and that it was not “…primarily engaged in the practice of professional engineering….” as contemplated by NRS 11.2565(2)(b). Second, under Nevada law, the term “person” “…does not include a government, governmental agency or political subdivision of a government.” NRS 0.039.

The opinion does not delve into what services NDOT actually provided in this particular situation. However, it is clear from this case that there are circumstances in which an entity that employees design professionals can be sued for design defects that fall outside the protections set forth in NRS 11.256 – NRS 11.259. This issue will undoubtedly be refined as the Nevada Supreme Court is faced with the question of whether a firm is “primarily engaged in the practice of professional engineering” under different circumstances in the future.

Nevada Federal Court Retroactively Applies NRS 116.3102(1)(d) as Amended by AB 125 in Order Dismissing Construction Defect Complaint

On February 24, 2015, Governor Brian Sandoval signed Assembly Bill 125 (“AB 125”) into law. Dubbed the “Homeowner Protections Act of 2015,” AB 125 makes substantial changes to NRS Chapter 40.600 et seq., Nevada’s construction defect statutes. A general overview of those changes was presented in a post dated April 6, 2015.

On March 16, 2015, the Unites District Court for the District of Nevada provided what may have been the first judicial interpretation of the changes brought about by AB 125 in Platinum Unit-Owners’ Association v. Residential Constructors, LLC (2:14-cv-01076).

In Platinum, the plaintiff Platinum Unit-Owners’ Association (“Plaintiff”) was a common interest community owners association formed under NRS Chapter 116, Nevada’s Common Interest Ownership Act. Plaintiff association was composed of the owners of residences, improvements, appurtenances and structures at the Platinum Hotel/Condominium.

Plaintiff filed a suit against the developer, Residential Constructors, LLC (“Developer”) in which it alleged construction defects under NRS 40.600 et seq. Plaintiff brought the case as a representative action on behalf of the individual unit owners under NRS 116.3102(1)(d), which was one of the statutes amended by AB 125. In the complaint, Plaintiff sought “…recovery for damages to the property which consists of but is not limited to damages to the common areas, and/or damages to the separate interests within the Association’s common interest, power and standing pursuant to Nevada.” The lawsuit was filed in the Eighth Judicial District, Clark County, Nevada (state court).

Upon service of the complaint, the Developer removed the case to the United States District Court for the District of Nevada. Upon removal, the Developer filed a motion to dismiss in which it argued that Plaintiff lacked standing to prosecute its claims on behalf of the association under NRS 116.3102(1)(d).

On March 16, 2015, the court issued an Order granting the Developer’s motion to dismiss. The Court found that Plaintiff sufficiently pled claims of the individual unit owners in its representative capacity at the time the complaint was filed under NRS 116.3102(1)(d). At that time, the statute provided, in pertinent part: “the association: . . . (d) May institute, defend or intervene in litigation . . . in its own name on behalf of itself or two or more units’ owners on matters affecting the common-interest community.”

However, the Court found that after the complaint was filed, NRS 116.3102(2) was amended by AB 125 as follows: “The association may not institute, defend or intervene . . . in its own name on behalf of itself or units’ owners with respect to an action for a constructional defect pursuant to . . . this act unless the action pertains exclusively to common elements.” (Emphasis added). Since Plaintiff’s complaint was “…not limited to damages to the common areas” and sought recovery for “…damages to the separate interests,” the Court found that “…if applicable, this amendment removes Plaintiff’s standing for bringing this action on behalf of the individual unit owners.”

The significance of the Court’s opinion is not so much in the dismissal itself, but the rationale the Court utilized to apply AB 125. Pursuant to AB 125, the changes to NRS 116.3102(2)(d) do not apply “…if a unit owners’ association has given notice of defect…on or before the effective date of this act [February 24, 2015].” Despite the fact that Plaintiff had given its notice of defect well before the effective date of AB 125, the Court nevertheless applied the new version of NRS 116.3102(1)(d).

Relying on authority from the California Supreme Court, the Platinum Court acknowledged that retroactive application of statutes is disfavored. The Court explained, however, that “…an amendment withdrawing statutorily granted standing to pursue claims on behalf of another applies to currently pending cases because the measure does not change the legal consequences of past conduct by imposing new or different liabilities based on such conduct.” The Court further explained:

[B]ecause the revocation of statutory standing is a procedural change regarding who may bring a claim and does not change the substantive rules regarding what conduct is mandated or prohibited nor limit the right of the injured party to recover, it is not retroactive.

Plaintiff filed a motion to reconsider the Court’s order, and the matter is currently stayed.

The Court’s application of AB 125 in the Platinum matter has generated a significant amount of discussion within the Nevada construction litigation bar. We are aware of at least one motion to dismiss that is currently pending in state court that specifically cites Platinum (although it is not binding authority). As the changes to Nevada’s construction defect statutes brought about by AB 125 take hold, we anticipate that court orders applying the new provisions will be challenged in the Nevada Supreme Court. It is important for Nevada construction industry professionals to become familiar with AB 125 and how it can potentially affect their construction practice. If you have questions about how AB 125 can potentially impact your construction practice, please contact Brian K. Walters at bwalters@gordonrees.com.

Recent Amendments (AB 125) to NRS Chapter 40 Even the Playing Field for Builders and Contractors

On February 24, 2015, Governor Brian Sandoval signed Assembly Bill 125 (“AB 125”) into law. Dubbed the “Homeowner Protections Act of 2015,” AB 125 makes substantial changes to Nevada’s construction defect laws, particularly regarding the burdens placed on homeowners and their counsel during pre-litigation NRS Chapter 40 proceedings. The changes set forth in AB 125 are effective immediately (and in some instances, retroactively). Highlights of relevant revisions are as follows:

  • Contractual Indemnity. Contractual indemnity provisions are now void and unenforceable if they require a subcontractor to defend and indemnify a “controlling party” from liability resulting from: (1) the intentional act or omission of the controlling party; or (2) another trade’s modification of the subcontractor’s work.
  • OCIP Disclosures. Developers must now disclose certain information regarding Owner Controlled Insurance Policies in a subcontractor’s contract documents.
  • Offers of Judgment. Parties may now serve Offers of Judgment (“OOJ”) at any time after a homeowner serves his NRS Chapter 40 Notice. If the homeowner reject the OOJ and fails to obtain a more favorable judgment during trial, he will be precluded from recovering his attorneys’ fees and costs from the date of service of the OOJ to the date of entry of judgment. He may also be required to pay for the offering party’s reasonable fees and costs.
  • Definition of a Constructional Defect. AB 125 limits the definition of a constructional defect to a defect which: (1) presents an unreasonable risk of injury to a person or property; or (2) is not completed in a good and workmanlike manner and proximately causes physical damage to the residence, appurtenance, or real property to which the appurtenance is affixed.
  • NRS Chapter 40 Notices. Homeowners are now required to identify in specific detail each defect that is the subject of their claim, including its exact location. They must also describe the cause of the defect, and the nature and extent of any damage or injury resulting from the defect. Additionally, homeowners must include a signed statement verifying the existence of each defect listed in the notice. If a notice is sent by an HOA, the statement must be signed by a member of the HOA’s executive board or an officer under penalty of perjury.
  • Visual Inspections. Homeowners must be present during visual inspection of their properties, and must identify the exact location of each alleged defect verified in their NRS Chapter 40 Notice. AB 125 imposes the same requirements on experts if the NRS Chapter 40 Notice was based upon an expert opinion.
  • Homeowners’ Warranties. Before serving a NRS Chapter 40 Notice, homeowners must submit their claim under their homeowners’ warranty, and may only include claims in the NRS Chapter 40 Notice that were denied by their insurer.
  • Removal of Attorneys’ Fees. AB 125 eliminates attorneys’ fees as recoverable damages under section 40.655.
  • Changes to the Statute of Limitation. The statute of limitation for constructional defect claims is now six years after substantial completion of the improvement. Additionally, the statute of limitations tolls from the time a NRS Chapter 40 Notice is given until: (1) one year after the notice of claim; or (2) thirty days after NRS Chapter 40 mediation is concluded or waived. Statutes of limitation and repose may be tolled for longer than one year only if a claimant demonstrates “good cause.”
  • Standing of Homeowners’ Associations to Sue. Homeowners’ Associations may not bring actions in its own name or on behalf of its unit owners’ for any constructional defect unless the action pertains exclusively to common elements.

While the full implications of AB 125 will not be known until it is put into practice, it is clear that the law creates new obligations for almost every party involved in a constructional defect lawsuit. It is essential that companies review AB 125 carefully to determine the impact on their business practices. To discuss how this law will impact your construction practice, please contact Robert E. Schumacher at rschumacher@gordonrees.com.

For a complete text of all revisions, click here.

For a comparative analysis of the new and old versions of NRS Chapter 40, click here.