(July 28, 2016) Can a party collect attorney fees available to “prevailing parties” under the Construction Lien Act without actually winning its lien foreclosure claim? According to a recent decision by the Michigan Supreme Court, the answer is “Yes” – at least when that party receives an arbitration award establishing that it proved a breach of contract by the other side.

The Michigan Construction Lien Act (the “Act”) provides that “[i]n an action to enforce a construction lien through foreclosure . . . the court may allow reasonable attorneys’ fees to a lien claimant who is the prevailing party.” In Ronnisch Construction Group, Inc v Lofts On the Nine, LLC, et al, a contractor (“RCG”) filed a two-count lawsuit against a property owner (“LOTN”): 1) arguing that LOTN breached its contract by failing to pay RCG roughly $626,000 due for constructing a condominium project; and 2) seeking to foreclose a construction lien.

After RCG filed its suit in the circuit court, the parties agreed to stay that proceeding to pursue contractually-mandated arbitration. The arbitrator awarded RCG $636,058 on its breach of contract claim and awarded LOTN $185,238 on its counterclaims, resulting in a net award to RCG of $450,820.36. The arbitrator did not address RCG’s claim for attorney fees and costs and instead reserved that issue for the trial court. LOTN paid the arbitration award in full a few weeks later and RCG filed a motion in the circuit court to recover costs and fees as a “prevailing party” under the Act. The trial court denied RCG’s request for attorney fees, holding that RCG was not a “prevailing party” under the Act because the arbitrator’s award to RCG was only for RCG’s breach of contract claim, not its construction lien foreclosure claim. RCG appealed that decision, and the Michigan Court of Appeals ruled that the trial court had discretion to award attorney fees under §118(2) of the Act.

A majority of the Supreme Court agreed with the Court of Appeals. Recognizing that an action to enforce a construction lien through foreclosure may involve multiple, separate claims, the Supreme Court held that the Act’s language only requires that the plaintiff prevail in the “action,” not necessarily on its lien foreclosure claim. By prevailing on one of its claims – the contract claim – RCG successfully prosecuted “the action” and was entitled to pursue attorneys’ fees from LOTN. The majority noted that a breach of contract claim and lien foreclosure action are “integrally related,” because a lien “stems from the underlying contract” and “is but a means for enforcing the payment of the debt arising from the contract.” Because RCG prevailed on its breach of contract action by receiving a final and binding arbitration award, “it obtained an enforceable award compensating it for its labor and materials,” and therefore successfully prevailed “on the main issue in its construction lien action” when it received a favorable award on its contract claim.

Three of the Justices (Chief Justice Young, Justices Zahra and Larsen) dissented from the majority opinion. The dissenting opinion, written by Chief Justice Young, asserted that the majority improperly expanded coverage under the Act to include a party (RCG) which did not have a “present ‘right’ to a lien.” (Emphasis in original). Because LOTN had paid the full amount of the arbitration award before RCG filed its motion seeking attorney fees, the dissent opined that RCG was “no longer a lien claimant, much less a prevailing one.” Therefore, the dissent characterized the majority opinion as “purpose-driven, not textual,” would have held that “RCG had extinguished any claimed lien by accepting full payment” of the arbitration award, (emphasis in original), and would have reversed the Court of Appeals’ decision.

Ronnisch is important to Michigan builders and contractors for three reasons. First, it reinforces the principle that a party may still be subject to certain provisions of Michigan law, including the Construction Lien Act’s attorney fee provision, if the parties’ lawsuit is decided by contractually obligated arbitration rather than a Michigan court. Second, at least according to the majority’s opinion, it clarifies when attorney fees are recoverable by a party which prevails on claims brought in conjunction with a construction lien foreclosure claim: even if the plaintiff is ultimately unsuccessful in foreclosing the construction lien, the plaintiff may still recover attorney fees if it is successful on other “integrally related” claims brought in that “action.” And third, the dissent points out the very significant risk that parties need to consider carefully whether to accept payment of arbitration awards or lawsuit judgments; even though here the majority ultimately overlooked that fact, at least three of the Supreme Court Justices found that accepting that payment would have precluded the plaintiff from further relief (including the payment of costs and fees otherwise available under the Act). Therefore, parties should contact their lawyers before accepting payment on any award or judgment, or risk forfeiting any right to further compensation.

For further information regarding construction law issues, contact one of our Construction Law Attorneys.

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