Southeast Directional Drilling, LLC v. Kern River Gas Transmission Company: the Pitfall of Not Filing a Notice
In order to secure mechanic’s lien and bond claim rights in Utah, the claimant must first file a preliminary notice with the State Construction Registry (SCR) within 20 days from first furnishing materials or services. Fail to file the notice and a claimant’s rights under the mechanic’s lien and bond claim statutes could go right out the window – even the claimant’s rights to take action against the debtor for failing to obtain a payment bond.
The Facts of Southeast Directional Drilling, LLC v. Kern River Gas Transmission Company
In 2010, Kern River Gas Transmission Company hired a general contractor, Barnard Pipeline, Inc., who in turn hired several subcontractors, including Southeast Directional Drilling, LLC. The project, Apex Expansion Project, was for construction of a section of a natural gas pipeline that runs through several states (over 1700 miles in length).
A Notice of Commencement was filed in the Utah SCR, and it identified the project owner as Kern River Gas Transmission Company and the project as Apex Expansion Project. Subcontractor, Southeast Directional Drilling, LLC, did not file a preliminary notice with the Utah SCR.
The Argument
Unfortunately, not only did Southeast Directional Drilling, LLC fail to file its preliminary notice, but the project was not bonded.
When it was discovered that the project was not bonded, Southeast Directional Drilling, LLC filed suit against Kern River Gas Transmission Company, for “failure to obtain a payment bond in accordance with Utah Code Annotated § 14-2-1.”
As it turns out, in Utah, if a preliminary notice isn’t filed with the SCR, claimants are not permitted to take action against another party for failure to obtain a bond.
“Because SEDD (Southeast Directional Drilling, LLC) failed to provide the preliminary notice prior to the commencement of the action on the payment bond, SEDD may not make a claim against Kern River for failure to obtain a payment bond. Utah Code Ann. § 14-2-5(2).”
Southeast Directional Drilling, LLC tried to argue that statute only requires a preliminary notice to be served if a claimant is seeking a claim against the bond, not if the claimant is suing because a party failed to obtain a payment bond.
Again, the court disagreed with Southeast Directional Drilling, LLC, advising that if the statute wanted to specifically say a notice was only required in order to make claims under the bond, it would have.
“…the statute itself implements different terms when referring to claims or actions “on a payment bond” and “payment bond claims” generally. See Utah Code Ann. §§ 14-2-1(4) and 14-2-5(2). If the Utah legislature had intended, the preliminary notice bar to apply only to a right of action “on a payment bond”—which presumes that there is a payment bond in place—it would have used the language “on a payment bond” or “against a payment bond” in section 14-2-1(5). Instead, the statute uses much broader language, and bars all “payment bond claim[s]” under the chapter.”
The court furthered their explanation:
“Finally, the statute bars a claim for failing to obtain a bond where no preliminary notice was filed in order to avoid an absurd result. Preliminary notice is required to be given to the designated agent (not just the payment bond principal) to provide notice to all actors involved in a construction project—including owners— of potential claims against them. The Utah statute, however, requires preliminary notice to the owner so that it may fully protect itself in the event that there is no bond in place.”
The Lesson
File or serve the preliminary notice! The lack of filing/serving may impact more than your rights to secure a mechanic’s lien or bond claim.
