Laborers do not have to be directly employed by a company in order to be entitled to a first lien according to state law, the South Carolina Court of Appeals ruled on June 10.
The statute at issue in C.R. Meyer & Sons Co. v. Custom Mechanical CSRA, LLC, a case of first impression, was section 29-7-10 of the South Carolina Code, which deals with payments from contractors and subcontractors to laborers and others out of money received.
According to court documents, in 2006 and 2007, C.R. Meyer & Sons served as the general contractor for the construction of a multi-story toilet paper-making machine at a Kimberly-Clark plant in Beech Island. C.R. Meyer & Sons subcontracted with Custom Mechanical.
Custom Mechanical borrowed money from Presidential Financial Corp. and Security Federal Bank, records show, and both lenders perfected security interests in Custom Mechanical’s accounts receivable.
According to court documents, Custom Mechanical used workers from its wholly owned subsidiary, Custom Industrial Services, to perform the work, which included the installation of industrial piping.
According to the workers’ attorneys, workers were given an opportunity to participate in a vacation and holiday savings fund program, in which a portion of their weekly earnings would be withheld and submitted directly to the local pipefitters’ union, which would pay that money back to the employees during the summer and December holiday season.
Around May 2007, according to the appellants’ initial brief, Custom Mechanical began laying off the plumbers, pipefitters and welders. By year’s end, all 29 had been terminated without cause.
“At a certain time, the employer gobbled all that [money] up and and laid off all my folks and didn’t pay the money,” said laborer’s attorney Nekki Shutt of Callison, Tigue & Robinson in Columbia.
When that happened, the workers sued, and eventually, in February 2011, received $275,000 through a confession of judgment for the wrongfully held vacation pay.
In the meantime, the brief says, Custom Mechanical sued C.R. Meyer & Sons for failing to pay it all the money it was due, and in 2010 was awarded nearly $2 million by an arbitration panel for breach of contract.
C.R. Meyer appealed in circuit court and Custom Mechanical filed a third-party suit against its creditors, including its lenders and 29 employees. The award was confirmed, records show, and C.R. Meyer agreed to pay $1.8 million into the trust account of Custom Mechanical attorneys at Richardson Plowden & Robinson in Columbia pending the resolution of third-party claims, including those of the workers.
The lenders asserted that their security interests had “priority over all other alleged liens” held by Custom Mechanical’s creditors, while the laborers claimed first priority according to section 29-7-10.
A special referee assigned to the case ordered that the funds in the escrow account—save $325,000 still being disputed—be disbursed. Lenders and employees each filed cross-motions for summary judgment and claimed priority to the remaining money.
The special referee, retired Circuit Judge James Williams Jr., granted the lender’s motion for summary judgment and found that the employees were not entitled to a first lien under state law.
While Custom employees didn’t contest the fact that the banks recorded the first liens, they argued that section 29-7-10 establishes a statutory lien in their favor because they were laborers involved in the “erection, alteration or repairing of buildings.”
Williams found, among other things, that workers were employees of Custom Industrial rather than Custom Mechanical, a separate legal entity.
John Nichols of Bluestein Nichols Thompson & Delgado in Columbia, who helped Shutt represent the laborers on appeal, said that while he believes Custom Industrial is simply an “alter ego” of Custom Mechanical, one need not look further than the statute to determine that it is a moot point.
“It doesn’t matter who their employer was; what matters is, did they provide labor for the project and was this a payment to someone … for this project? And that’s the end of it—they get a prior lien,” Nichols said.
He added: “I am at a loss to explain how [Williams] could look at this statute against these facts and reach the conclusion he reached.”
On appeal, the employees argued—and the court agreed—that the circuit court’s granting of summary judgment to Custom Mechanical was improper.
Writing for the court, Chief Judge John Few noted that Williams correctly determined the employees were “laborers” under state law, but incorrectly found that they weren’t entitled to the first lien because they were employed by Custom Industrial rather than Custom Mechanical.
“We disagree that the specific identity of the employer makes any difference,” Few wrote. “We interpret section 29-7-10 as establishing a first lien in favor of ‘laborers’ who worked on ‘the erection … of buildings’ regardless of their specific employer.”
The court also disagreed with Williams’ finding that the employees were not entitled to a first lien because the funds were placed in an escrow account rather than directly in the contractor’s hands.
The circuit court that ordered the funds placed in the lawyers’ account, the court of appeals held, also gave Custom Mechanical the right “to assert any priority to the funds.”
“The court’s order demonstrates Custom Mechanical retained ownership of the funds even though the funds were held ‘pending resolution of any claims asserted by [creditors],’” Few wrote. “Thus, the funds in the escrow account were owned by Custom Mechanical and were held for its benefit—to pay its creditors—upon court order.”
Nichols said that was his contention all along.
“My argument was, lawyers are the agents of their client and as a lawyer, I receive money that belongs to my client,” Nichols said. “I may have possession of it, but that’s still the client’s money.”
In deciding this case, the appeals court said, Williams relied on Morgan & Austin v. D.W. Alderman & Sons’ Co., a 1905 case similar to Meyer, but with a distinct difference: The funds in Morgan belonged to an individual partner of an entity ordered to pay the plaintiff rather than the partnership, which was ordered to pay Morgan & Austin.
“The situation here is different,” Few wrote. “The fact that the circuit court ordered the funds be placed in the lawyers’ trust account did not change the ownership of those funds.”
Nichols said the decision to get involved in the appeal of this case was an easy one, saying it’s “all about fairness.”
“It was my clients’ backs on which all the work was done,” she said.
The case has been reversed and remanded for trial.
“We still have to prove the case, but I’m feeling a lot better about our situation than I was before this decision,” Nichols said.
The seven-page decision is C.R. Meyer & Sons Co. v. Custom Mechanical CSRA, LLC (Lawyers Weekly No. 011-055-15). The full text of the opinion is available online at sclawyersweekly.com.
Follow Heath Hamacher on Twitter @SCLWHamacher