Developing Strategies for Construction Payment Litigation
By Shemilly Briscoe and Timothy J. Geswein

Nevada’s licensed contractors feel the pinch of tough economic times in two fundamental ways. First, contractors find that project owners are unable or unwilling to pay for the work performed. Second, contractors have discovered that the effectiveness of their traditional enforcement mechanism—the timely recording of a mechanics lien and foreclosure—has been eviscerated by dramatic declines in real property values. As a consequence, many contractors are finding themselves in protracted and expensive litigation that results in a seemingly valueless judgment and foreclosure right.

Non-payment for work escalates
The Nevada State Contractors’ Board (Contractors’ Board) is charged with the enforcement of Chapter 624 of the Nevada Revised Statutes with the intent to promote public confidence and trust in the competence and integrity of licensees and to protect the health, safety and welfare of the public. NRS 624.005. A portion of that responsibility is to accept, categorize, and resolve complaints received from the public, project owners, and other contractors. NRS 624.355.
The Contractors’ Board defines a “money owing” complaint as a complaint arising under NRS 624.3012(2). This statute authorizes disciplinary action against a licensee for “willful or deliberate failure” to pay any money when due for any materials or services rendered in connection with the contractor’s operations when the contractor has “the capacity to pay” or when the contractor has “received sufficient money” as payment for the particular construction work. NRS 624.3012(2). The Contractors’ Board’s data reveals that “money owed” complaints have approximately doubled even though the overall number of complaints has only grown at approximately 12 percent per year. Table 1: Contractors’ Board Complaints by Fiscal Year. This data suggests that Nevada contractors are increasingly seeking remedies for non-payment.

Table 1: Contractors’ Board Complaints by Fiscal Year
(A fiscal year for the Contractors’ Board is July 1 through June 30)
Source: Nevada State Contractors’ Board
Complaint Category FY 2006 – 07 FY 2007 – 08 FY 2008 – 09
Money Owing 658 1,013 1,387
Workmanship 1,555 1,253 1,092
Industrial Regulation 571 872 1,004
Total 2,784 3,138 3,483

Indeed, the Contractors’ Board, analyzing the trend in its 2007-08 Annual Report, recognized that the increase in money owing complaints “may require the reallocation of certain investigative staff” and that “formal disciplinary proceedings and summary suspension of licenses may result” from the money owing complaints. However, the Contractors’ Board cannot enforce payment provisions; the Contractors’ Board can only discipline contractors. Bivins Constr. v. State Contractors’ Bd., 107 Nev. 281, 809 P.2d 1268 (1991). Therefore, contractors may have to litigate their contracts in order to receive payment for their work.

The pinch is from both the project owner and the subcontractors
Nevada law makes the general contractor responsible for payment to subcontractors in some situations. NRS 624.624. Additionally, the Nevada Supreme Court has cast uncertainty about the enforceability of contract clauses that seek to make the subcontractor’s right to payment contingent on a general contractor’s receipt of payment. Lehrer McGovern Bovis v. Bullock Insulation, 197 P.3d 1032 (Nev. 2008). These contract terms, known as “pay-if-paid clauses,” may violate Nevada’s public policy to pay subcontractors. Id. Consequently, a general contractor who attempts to contractually limit responsibility for payment to subcontractors may find itself still responsible for payment even though unpaid by the project owner. These obligations lead to going concern issues as well as disciplinary problems for contractors. Indeed, some contractors are going out of business or reducing payroll, including the elimination of management positions. Not only does this cause the loss of skilled labor and key staff, it leaves parties who are owed money with no alternative but to litigate to recoup for their work performed. However, litigation, although necessary, has its own perils because foreclosure rights are largely affected by property values.

Foreclosure rights eviscerated by declining real property values
Nevada’s statutory system permits a contractor to lien for the unpaid balance of the price agreed upon for labor, materials, and equipment furnished. NRS 108.222. Traditionally, contractors resist recording a mechanics lien until the last opportunity because the contractor hoped to resolve the unpaid bill. This traditional approach not only reduced costs, but it also preserved the relationship with the project owner. Key in this approach is the presumption that the real property’s value exceeded the unpaid amount.
However, in today’s economy, the presumption is oftentimes false. Title reports and bankruptcy filings routinely show commercial and other “revenue generating” properties are “underwater.” In these situations, the mechanics lien on the over-encumbered property is merely another stone in the avalanche of project woes.
Unpaid contractors are then faced with the sole option of suing and seeking to foreclose on the real property. To properly exercise this option, the contractor must make timely recordings and prevail on a civil suit that seeks foreclosure as a remedy. See, generally, NRS 108.239. Alternatively, when a project owner is in bankruptcy, a contractor must timely record, file a notice known as a §546(b) notice in the bankruptcy proceeding, and pursue payment as a creditor. Under either scenario, the contractor will find that, even though the mechanics lien statutes provide for summary proceedings that include the recovery of attorney’s fees and costs, the litigation expenditures are often substantial.
Project owners, facing litigation costs to preserve an economically unviable project, are making financial decisions that would have been unthinkable just a few years ago—they are permitting contractors to pursue litigation and acquire foreclosure rights rather than satisfy the mechanics liens. In fact, many project owners are halting work and seeking bankruptcy protection. Projects that were viable when ground was broken are now semi-completed and the subject of fierce litigation, not just between the project owner and the contractor, but between the lienholders and lenders regarding priority of claims.

Conclusion and recommendations
The current economic situation requires contractors— and the attorneys who assist them—to be more prepared and on guard for project failures than ever. Attorneys assisting contractors bidding on new work should recommend strict adherence to statutory obligations that protect rights should a new project encounter financial difficulty. For those attorneys assisting contractors in situations where the existing project has encountered financial difficulties, prompt action to preserve evidence and to control the contractor’s expectations are a must. An attorney assisting a contractor on a new project would be wise to carefully explain the importance of timely recordings and filings in order to preserve statutory rights. Likewise, an attorney assisting on a new project should encourage the use of construction control accounts with fund disbursement protections to minimize the risks a general contractor takes regarding subcontractor payment. A prudent attorney would also encourage the contractor to carefully document and execute change orders. Lastly, the attorney should recommend the contractor develop a clear internal policy regarding work stoppage for non-payment that complies with Nevada law. Attorneys assisting contractors who find themselves in negotiations or litigation regarding existing projects would be wise to recommend organization of all project materials and, if necessary, the taking of sworn statements from key persons to prevent the loss of testimony as workers disperse. Additionally, the prudent attorney should obtain a current title report to confirm not only the client’s priority, but the priority position of the other lienholders. In some situations, a property appraisal may be warranted to know, at the outset of litigation, the value of the property. Bankruptcy filings should be monitored. This information will permit the attorney to make a reasoned analysis of the litigation’s prospects and to evaluate the potential value of judgment and foreclosure right. Coupled with this analysis would be a careful explanation of foreseeable litigation costs and expenses so that the contractor may make informed decisions on how to proceed. Contractors face increased risks because of today’s difficult economy. However, an attorney can assist greatly in evaluating and preserving a contractor’s ability to be paid for the work the contractor performs.

Shemilly Briscoe is an associate attorney at Santoro, Driggs, Walch, Kearney, Holley & Thompson. Timothy J. Geswein is an associate attorney at Kravitz, Schnitzer, Sloane & Johnson.

Who Has Standing to Make A Construction Defect Claim?
By Micah S. Echols 

Since the Nevada Legislature enacted NRS 40.600 et seq. in 1995, construction defect laws have been hotly contested and are the focus of complex litigation in Nevada. This trend in construction defect litigation is due in part to the lack of case law precedent in Nevada. Some of the newsworthy verdicts and settlements for large communities where construction defects have been alleged involve a homeowner’s association (HOA) acting as the plaintiff for hundreds of unit owners, sometimes without the unit owners’ consent. But, the question arises whether the HOA has the legal authority to pursue claims that belong to the individual unit owners. That is to say, does the unit owner have exclusive standing to pursue construction defect claims for his own home? Or, does the HOA have concurrent standing with the unit owner? And, if the HOA has some level of standing, does it need to give notice to the unit owner that the association is pursuing construction defect claims relating to an owner’s home?
This article addresses some of the basic theories on the issue of HOA standing in construction defect cases: (1) Does an HOA have broad standing to assert construction defect claims on behalf of unit owners, without the unit owners’ consent? (2) Is an HOA bound by NRCP 23, concerning class actions, when an HOA pursues claims for unit owners in a representative capacity? and (3) Does an individual unit owner have superior rights over an HOA to assert the same construction defect claims? The Nevada Supreme Court recently resolved the first two questions, but the third question remains unanswered. See D.R. Horton, Inc. v. Dist. Ct., 125 Nev. Adv. Op. No. 35 (Sept. 3, 2009).

Does an HOA have broad standing to assert construction defect claims on behalf of unit owners, without the unit owners’ consent?
The basic premise of NRCP 17(a) is that litigation should be prosecuted in the name of the real party in interest. However, Rule 17(a) allows for an exception when there is an agreement or statutory grant for one party to represent another. But, what if there is no such agreement? Can HOAs represent the interests of unit owners, even without the unit owners’ express, written consent? In 1978, the Nevada Supreme Court held that “in the absence of an express statutory grant” to bring a lawsuit on behalf of individual owners, an HOA did not have such standing. Deal v. 999 Lakeshore Ass’n, 94 Nev. 301, 579 P.2d 775 (1978). The Nevada Supreme Court recently concluded in D.R. Horton, Inc. that NRS 116.3102(1)(d), which was enacted in 1991, satisfies the “statutory grant” contemplated in Deal to allow HOAs to have standing.
The Nevada Supreme Court found that the language of NRS 116.3102(1)(d) gives HOAs broad authority to assert standing to “[i]nstitute, defend or intervene in litigation or administrative proceedings in its own name on behalf of itself or two or more units’ owners on matters affecting the common-interest community.” However, because this statutory authority is “subject to the provisions of the declaration,” the governing documents of a particular planned community may limit an HOA’s authority to assert standing. See NRS 116.3102(1). In essence, the Nevada Supreme Court’s holding in D.R. Horton, Inc. clarifies that NRCP 17(a) is satisfied by NRS 116.3102(1)(d) unless the governing documents limit an HOA’s authority.
Although the Nevada Supreme Court concluded that HOAs have broad standing to assert construction defect claims on behalf of unit owners, the court did not specifically address NRS 40.610 which defines “claimant” for construction defect matters. The definition of “claimant” includes “[a] representative of a homeowner’s association that is responsible for a residence or appurtenance and is acting within the scope of his duties pursuant to chapter 116 or 117 of NRS.” The key word in this phrase is “responsible.” Another definition of “claimant” refers to the unit owner, which implies that a claimant must have either ownership or at least some duty to maintain the units. However, the court’s opinion seems to imply that the language in NRS 116.3102(1)(d) defining the scope of an HOA’s authority as “matters affecting the common-interest community” is sufficient to satisfy the definition of “claimant.”

Is an HOA bound by NRCP 23 concerning class actions when an HOA pursues claims for unit owners in a representative capacity?
In Shuette v. Beazer Homes Holdings Corp., the Nevada Supreme Court generally denounced the use of class actions in construction defect cases. 121 Nev. 837, 124 P.3d 530 (2005). The court reasoned that the uniqueness of each parcel of real property and the uniqueness of each claim did not usually pass an NRCP 23 analysis. The court also discussed the numerous parties that are involved in construction defect cases, which would require different subcategories of the class action, and would effectively undermine the very purpose of a class action. But, the court also pointed out that where defects are common throughout the class, there is a greater possibility for class certification. In Shuette, the court also emphasized the need to evaluate class action cases at different stages in the proceedings to determine whether the class needs to be decertified. Since an HOA is a single entity, the question arises how to apply Shuette to HOA cases. Additionally, there is no statutory provision to certify or decertify an HOA. The Nevada Supreme Court clarified in D.R. Horton, Inc. that even though an HOA has standing to represent unit owners, an HOA is treated like a class representative for purposes of NRCP 23. And, an HOA is still subject to the rigors of NRCP 23 class action certification, which requires numerosity, commonality, typicality, adequacy, and an inquiry into whether common questions of law or fact predominate over individual questions. In determining whether an HOA can represent all the unit owners within a particular community, a district court still needs to look at the individual claims of the unit owners, and a district court can choose to certify as a class only part of the unit owners. Therefore, even though the Nevada Supreme Court recognized an HOA’s broad standing to represent unit owners in construction defect matters, the HOA’s standing is tempered by established conditions for certifying a class action.

Does a unit owner have superior rights over an HOA to assert the same construction defect claims?
Although the Nevada Supreme Court’s D.R. Horton, Inc. opinion clarifies the scope of an HOA’s standing to assert claims for unit owners, the Nevada Supreme Court did not clarify what individual rights a unit owner may have with regard to claims for construction defects in his own home. Although not treated extensively, Shuette discusses concerns over class actions where proposed class members have already initiated litigation, and where class members have an interest in individually controlling the litigation. However, these concerns may never surface if an HOA acts as a class representative.
This unanswered question creates problems for contractors since both unit owners and HOAs often file their own lawsuits alleging construction defects with identical, overlapping claims. Regardless of which party may have standing, it is clear that a bright-line rule is needed to avoid duplicative lawsuits. Although HOAs have argued that the doctrines of res judicata and collateral estoppel will sort out such duplicative lawsuits, these doctrines do not take effect until a final judgment has been entered. See Clark v. Clark, 80 Nev. 52, 389 P.2d 69 (1964); see also Executive Mgmt., Ltd. v. Ticor Title Ins. Co., 114 Nev. 823, 963 P.2d 465 (1998). Even though res judicata and collateral estoppel may prohibit future, competing lawsuits, these doctrines do not resolve the problem with simultaneous, overlapping lawsuits. But, that will be a question for the Nevada Supreme Court or the Nevada Legislature to clarify at some future point.
In 1978, the Nevada Supreme Court denied an HOA standing to represent the interests of unit owners within a planned community. However, the court recently clarified that the Nevada Legislature’s enactment of NRS 116.3102(1)(d) in 1991 satisfies the standing requirement to allow an HOA to pursue construction defect claims as a representative for unit owners unless the governing documents otherwise limit the HOA’s authority.
Despite its apparently broad standing, an HOA still must satisfy the requirements of NRCP 23 dealing with numerosity, commonality, typicality, adequacy, and an inquiry into whether common questions of law or fact predominate over individual questions. A district court also has authority to decertify certain unit owners from participating in a construction defect lawsuit that do not comply with the NRCP 23 requirements. In other words, an HOA’s standing is not unlimited.
Although the Nevada Supreme Court clarified that an HOA has standing to represent unit owners in construction defect matters, the court has still not clarified what individual rights unit owners retain. Since this question remains unanswered, both HOA and unit owners can continue to file lawsuits alleging construction defects with identical, overlapping claims until either the Nevada Supreme Court or the Nevada Legislature clarifies this point.

Micah Echols is an attorney at Marquis & Aurbach in Las Vegas and can be reached at This e-mail address is being protected from spam bots, you need JavaScript enabled to view it or (702) 207-6087. Mr. Echols focuses his practice on commercial litigation and civil appeals.