|Unlicensed Contractors Beware: No Lien Rights Under the Private Works Act
In a decision of first impression, the United States Bankruptcy Court for the Eastern District of Louisiana recently held that unlicensed contractors do not have lien rights under the Private Works Act, La. Rev. Stat. § 9:4801, et seq. (the “PWA”). See South Louisiana Ethanol, LLC v. Whitney National Bank, Adv. Proc. No. 09-1119, United States Bankruptcy Court for the Eastern District of Louisiana [Rec. Doc. 529]. The case will have significant implications for contractors who are not licensed as required by law at the time they enter into contracting agreements.
The PWA grants a privilege to contractors, subcontractors, laborers, sellers of movables, and others for the price of their work, or supplies to the owner of an immovable. La. Rev. Stat. § 9:4802, et seq. Under the PWA, a contractor is defined as an entity that has a contract with the owner or contractor. La. Rev. Stat. § 9:4807.
Louisiana law also provides that it is unlawful for any person to engage in the business of contracting or to act as a contractor unless he holds an active license as a contractor. La. Rev. Stat. § 37:2160(a)(1). Further, any agreement entered into by a contractor which did not procure a contractor’s license in compliance with La. Rev. Stat. § 37:2150, et seq., is an absolute nullity for which the contractor cannot recover the contract price. Instead, all the unlicensed contractor has is an unjust enrichment claim and such a contractor can recover only the actual costs of the materials, services and labor provided without allowance for profit or overhead. See Tradewinds Envtl. Restoration, Inc. v. St. Tammany Park, LLC, 578 F.3d 255 (5th Cir. 2009) and Trade-Winds Envtl. Restoration, Inc. v. Stewart Development, LLC, 409 Fed. Appx. 805 (5th Cir. 2011) (unpublished) (collectively, the “Tradewinds decisions”).
In the South Louisiana Ethanol case, South Louisiana Ethanol (“SLE”) retained a general contractor to construct and refurbish an ethanol facility. The general contractor then retained subcontractors to provide various services. The subcontractors were not licensed as required by Louisiana law. Both contracts contemplated more than $50,000 of work. When SLE was unable to pay the contractor for its work, the subcontractors filed Statements of Lien and Privilege for liens allegedly arising in their favor under the PWA for amounts allegedly owed under the subcontracts. SLE subsequently filed a petition for relief under Chapter 11 of the Bankruptcy Code. At that time, the subcontractors claimed that their liens outranked the security interest of SLE’s secured lender, Whitney National Bank. SLE therefore commenced an adversary proceeding to rank the competing lien interests of the parties.
The unlicensed subcontractors acknowledged that under the Tradewinds decisions, their contracts were absolutely null and their claims were limited to recovery of actual costs, without any allowance for overhead or profit. Nevertheless, they argued they were entitled to PWA liens because a) neither the provisions of the PWA (i.e., La. Rev. Stat. § 9:4801, et.seq.) nor the licensing provisions applicable to commercial contractors (i.e., La. Rev. Stat. § 37:2150, et.seq.) expressly prohibited an unlicensed contractor from obtaining a lien under the PWA, and b) none of the jurisprudential authorities addressing the issue of unlicensed contractors had expressly invalidated such a lien under the PWA. Indeed, prior to the South Louisiana Ethanol decision, no Louisiana (federal or state) court had extended the Tradewinds decisions to hold that an unlicensed contractor could not assert a lien under the Private Works Act.
The Bankruptcy Court disagreed with the subcontractors and concluded they were not entitled legally to a lien under the PWA. Under the PWA, a contractor or subcontractor is defined as an entity that has a contract with the owner or contractor. Because the subcontractors were unlicensed, their contracts were absolute nullities and by definition that meant they did not have contractual claims. Accordingly, the Bankruptcy Court held that the subcontractors were “neither a contractor nor subcontractor under the PWA.”
The Bankruptcy Court’s decision is correct for another reason, not stated by the Bankruptcy Court. Under the Tradewinds decisions, the unlicensed subcontractors were relegated to a claim for unjust enrichment. Under Louisiana law, an unjust enrichment remedy is deemed “subsidiary and shall not be available if the law provides another remedy….” See La. Civ. Code art. 2298; Walters v. Medsouth Record Mgmt., LLC, 2010-0352 (La. 6/4/10), 38 So. 3d 241, 242 (plaintiff was foreclosed from collecting on unjust enrichment claim against medical records company for company’s alleged wrongful actions since plaintiff had a remedy in tort against the company); Carriere v. Bank of Louisiana, 95-3058 (La. 12/13/96), 702 So. 2d 648, 671 (“it is clear from the language of that article [Article 2298] that unjust enrichment…is, as it always has been under our decisions, a ‘subsidiary remedy.’”). Thus, it is not possible for an unlicensed contractor to obtain a lien under the PWA since under Tradewinds his only claim is one for unjust enrichment, and having a lien would be a remedy in addition to unjust enrichment.
The South Louisiana Ethanol decision is consistent with numerous other jurisdictions, which have expressly held that noncompliance with their state’s respective statutory scheme requiring valid contractors’ licenses forecloses contractors from enforcing liens on the property involved. See, e.g., Hakimi v. Cantwell Landscaping & Design, Inc., 50 A.D.3d 848, 851, 855 N.Y.S.2d 273 (N.Y. App. Div. 2008) (because landscaper was required to possess contractor’s license for its home improvement work and failed to acquire such a license, he could not enforce his lien); Slatkin v. White, 102 Cal. App. 4th 963, 968, 126 Cal.Rptr.2d 54, 58 (Cal. Ct. 3 Dist. 2003) (the prohibition on contractors from bringing actions for collection of compensation for services for which a license is required without alleging that contractor was licensed at all times “applies to a contractor seeking to foreclose his or her mechanic’s lien, and thus, by extension, to an unlicensed contractor’s right to file a mechanic’s lien” (internal citations omitted)); Vallejo Dev. Co. v. Beck Dev. Co., Inc., 24 Cal. App. 4th 929, 939, 29 Cal.Rptr.2d 669, 674 (Cal. Ct. 2 Dist. 1994) (“California courts have consistently applied [California’s contractors licensing statute] to foreclose actions seeking to enforce a mechanic’s lien”).
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