Construction & Public Contract Law Section Blog: Court of Appeals: Clear Communication Reduces Risk of Unnecessary Litigation:

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  • Construction & Public Contract Law Section Blog
    July
    13
    2017

    Court of Appeals: Clear Communication Reduces Risk of Unnecessary Litigation

    Steven D. Mroczkowski

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    Steven Mroczkowski discusses a recent ruling in District II Court of Appeals that is a reminder for attorneys to emphasize to clients the importance of clear communication during projects, and that a review of title records prior to filing a lien may be prudent when ownership is not abundantly clear.

    The District II Court of Appeals recently clarified constructive notice under Wisconsin’s construction lien law and the standard of review applicable to constructive notice cases.

    In Bayland Building, Inc. v. Spirit Master Funding VIII, LLC (2016AP1807, June 7, 2017)1, the court applied a de novo standard of review to the circuit court for Ozaukee County’s order of summary judgment in favor of successor-owner defendant, Spirit Master Funding VIII, LLC (Spirit Master).

    The appellate court reversed the circuit court, holding that emails from the initial property owner, Siren Saukville, LLC (Siren), to general contractor, Bayland Building, Inc. (Bayland), and modified warranty language naming Spirit Master did not constitute constructive notice that Siren no longer had any ownership interest in the property at issue.

    As such, Bayland’s failure to provide notice to Spirit Master before it filed a lien was not fatal to its lien foreclosure action against Spirit Master.

    Facts of the Case

    In August 2013, Bayland entered into a contract with Siren to construct a commercial building in Saukville on property owned by Siren.

    On Sept. 30, 2014, Siren conveyed the property to Spirit Master Funding IX, LLC2. Before the conveyance, Siren and Bayland exchanged emails about the warranty for the project. The first relevant email stated that “the investor … needs [acknowledgement] that the warranty is in place and can be transferred. …” The second relevant email referenced a closing with the investor (unnamed at that point) and stated that if Siren and the investor were not able to “close” on a specific day, “the investor will back out, because this was earmarked as an investment for this quarter only.”3

    The modified warranty for the project provided that Bayland consented to the warranty’s assignment from Siren to Spirit Master Funding IX, LLC and its successors and/or assigns, while also covering Siren, a future tenant, and their successors and assigns.4

    Steven Mroczkowski com smroczkowski carlsondash Steven Mroczkowski, Chicago-Kent 2010, is an attorney with Carlson Dash, LLC, in Pleasant Prairie and Chicago, where he specializes in construction law and commercial litigation.

    Bayland completed the project and demanded $485,051.24 from Siren. Siren refused to pay, and Bayland filed a claim for lien against Siren and filed suit seeking a money judgment and foreclosure of its lien. After Bayland learned that Siren sold its entire interest in the property, Bayland filed suit to foreclose its lien against the current owner, Spirit Master.5

    Spirit Master moved for summary judgment, claiming that the emails and modified warranty language provided constructive notice to Bayland of the change in ownership of the property. As such, Bayland’s failure to provide notice to Spirit Master before filing its lien was a fatal defect. The circuit court agreed and entered summary judgment in favor of Spirit Master.6

    Bayland’s Appeal

    Bayland argued that the emails and modified warranty language did not provide it with constructive notice that Siren had transferred its entire ownership interest in the property. The appellate court agreed. It reiterated that lien claimants do not have a continuing obligation to review ownership records after the first date on which they supply labor or materials to a project because their right to a lien arises on that date. Contractors do not lose lien rights when property changes hands after they start work, as long as they do not have actual or constructive notice of the ownership change and they comply with the notice provisions of construction lien law.7

    The court limited its inquiry to whether the emails and modified warranty language gave Bayland constructive notice that Siren divested itself of its entire ownership interest in the property. In other words, given what Bayland knew, was it reasonable to not review ownership records prior to filing its claim for lien?8

    The court concluded that it was. It held, as a matter of law, that the established facts on which Spirit Master relied to impute notice to Bayland were insufficient. The court opined that the emails only referenced an investor “being brought in” rather than Siren “selling out.”

    Moreover, the modified warranty expressly provided continued coverage to Siren. According to the court, the emails and the modified warranty provided notice to Bayland that an investor was in fact joining Siren, but Siren was going to remain tied to the property in some ownership capacity.

    The court held that Bayland did not lose its lien rights where Siren transferred complete ownership of the property without notice, actual or constructive, to Bayland. The appellate court reversed and remanded the case to the trial court for further proceedings.9

    Constructive Notice and De Novo Review on Appeal

    The Bayland case has, for the time being, established that whether a party had constructive notice in the construction lien law context is subject to de novo review on appeal.

    It also provides an example of facts that one appellate court found insufficient to impute notice to a contractor that property has changed ownership – even though those facts referenced:

    • a closing,
    • an investor, and
    • a modified warranty that named a new party to which the warranty would apply.

    Counsel for owners and contractors can benefit from a review of Bayland, both to remind clients of the importance of clear, explicit, memorialized communication during projects, and also as a reminder that where property ownership is not abundantly clear, a review of title records prior to filing a lien may be prudent, if for no other reason than to reduce the risk of unnecessary litigation.

    Endnotes

    1 All citations reference the Bayland case, unless otherwise noted.

    2 On December 31, 2014, Spirit Master Funding IX, LLC conveyed the property to defendant-respondent Spirit Master.

    3 ¶8.

    4 ¶9.

    5 ¶10.

    6 ¶11.

    7 ¶13.

    8 ¶12.

    9 ¶13.





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