5773-S2.E AMH CL REIN 156

"NEW SECTION. Sec. 1. FINDINGS. The legislature finds that the vast majority of contractors and subcontractors engaged in the business of constructing or remodeling owner-occupied single-family homes are both technically proficient in their trade and able to manage their business dealings in accordance with the highest standards. The legislature also finds, however, that in those relatively few, but all-too-frequent, instances where prime contractors on such construction or remodeling projects intentionally or unintentionally mismanage payments received from residential homeowners that are intended for subcontractors, suppliers, and others, existing provisions are inadequate to protect residential homeowners. Additionally, the toll on a residential homeowner's personal economic and emotional condition that such financial mismanagement by this small fraction of prime contractors is not adequately balanced against the responsibilities, obligations, and possible penalties that contractors bear for such mismanagement. Consequently, the legislature finds that it is necessary to clearly establish that prime residential contractors and residential subcontractors have a duty to properly manage funds received from or on behalf of residential homeowners that are intended for suppliers, subcontractors, and others, and to hold those who fail in this duty personally responsible for such financial mismanagement.

Sec. 2. DEFINITIONS. RCW 60.04.011 and 1992 c 126 s 1 are each amended to read as follows:

Unless the context requires otherwise, the definitions in this section apply throughout this chapter.

(1) "Construction agent" means any registered or licensed contractor, registered or licensed subcontractor, architect, engineer, or other person having charge of any improvement to real property, who shall be deemed the agent of the owner for the limited purpose of establishing the lien created by this chapter.

(2) "Contract price" means the amount, including overhead and profit, agreed upon by the contracting parties, or if no amount is agreed upon, then the customary and reasonable charge therefor, but in no case shall "contract price" include any amount payable under the contract, or otherwise, in the event of nonpayment or late payment.

(((3))) (4) "Draws" means periodic disbursements of interim or construction financing by a lender.

(((4))) (5) "Furnishing labor, professional services, materials, or equipment" means the performance of any labor or professional services, the contribution owed to any employee benefit plan on account of any labor, the provision of any supplies or materials, and the renting, leasing, or otherwise supplying of equipment for the improvement of real property.

(((5))) (6) "Improvement" means: (a) Constructing, altering, repairing, remodeling, demolishing, clearing, grading, or filling in, of, to, or upon any real property or street or road in front of or adjoining the same; (b) planting of trees, vines, shrubs, plants, hedges, or lawns, or providing other landscaping materials on any real property; and (c) providing professional services upon real property or in preparation for or in conjunction with the intended activities in (a) or (b) of this subsection.

(((6))) (7) "Interim or construction financing" means that portion of money secured by a mortgage, deed of trust, or other encumbrance to finance improvement of, or to real property, but does not include:

(b) Funds to pay interest, insurance premiums, lease deposits, taxes, assessments, or prior encumbrances;

(d) Funds to pay other customary fees, which pursuant to agreement with the owner or borrower are to be paid by the lender from time to time;

(e) Funds to acquire personal property for which the potential lien claimant may not claim a lien pursuant to this chapter.

(((7))) (8) "Labor" means exertion of the powers of body or mind performed at the site for compensation. "Labor" includes amounts due and owed to any employee benefit plan on account of such labor performed.

(((8))) (9) "Mortgagee" means a person who has a valid mortgage of record or deed of trust of record securing a loan.

(((9))) (10) "Owner-occupied" means a single-family residence occupied by the owner as his or her principal residence.

(((10))) (11) "Payment bond" means a surety bond issued by a surety licensed to issue surety bonds in the state of Washington that confers upon potential claimants the rights of third party beneficiaries.

(((11))) (12) "Potential lien claimant" means any person or entity entitled to assert lien rights under this chapter who has otherwise complied with the provisions of this chapter and is registered or licensed if required to be licensed or registered by the provisions of the laws of the state of Washington.

(((12))) (13) "Prime contractor" includes all contractors, general contractors, and specialty contractors, as defined by chapter 18.27 or 19.28 RCW, or who are otherwise required to be registered or licensed by law, who contract directly with a property owner or their common law agent to assume primary responsibility for the creation of an improvement to real property, and includes property owners or their common law agents who are contractors, general contractors, or specialty contractors as defined in chapter 18.27 or 19.28 RCW, or who are otherwise required to be registered or licensed by law, who offer to sell their property without occupying or using the structures, projects, developments, or improvements for more than one year.

(14) "Prime residential contractor" means: (a) A prime contractor that is engaged in the business of making improvements to a single-family residence of a residential homeowner; and (b) the prime contractor's principals, partners, officers, directors, members, vice principals, and agents with executive, managerial, supervisory, physical, or actual control over the accounting or disbursement of amounts received by the prime residential contractor from or on behalf of residential homeowners.

(((13))) (15) "Professional services" means surveying, establishing or marking the boundaries of, preparing maps, plans, or specifications for, or inspecting, testing, or otherwise performing any other architectural or engineering services for the improvement of real property.

(((14))) (16) "Real property lender" means a bank, savings bank, savings and loan association, credit union, mortgage company, or other corporation, association, partnership, trust, or individual that makes loans secured by real property located in the state of Washington.

(17) "Residential homeowner" has the meaning provided in RCW 18.27.010. For purposes of sections 3 and 4 of this act, "residential homeowner" also means an individual person or person who has entered into a contract with a contractor, builder, or developer to purchase and occupy a single-family residence at the completion of improvements to the residence or a garage appurtenant to the residence.

(18) "Residential subcontractor" means: (a) A subcontractor retained by a prime residential contractor to assist in making improvements to a single-family residence of a residential homeowner; and (b) the residential subcontractor's principals, partners, officers, directors, members, vice principals, and agents with executive, managerial, supervisory, physical, or actual control over the accounting or disbursement of amounts received by the residential subcontractor from or on behalf of residential homeowners.

(((16))) (20) "Subcontractor" means a general contractor or specialty contractor as defined by chapter 18.27 or 19.28 RCW, or who is otherwise required to be registered or licensed by law, who contracts for the improvement of real property with someone other than the owner of the property or their common law agent.

NEW SECTION. Sec. 3. PRIME RESIDENTIAL CONTRACTOR; FIDUCIARY DUTIES AND PERSONAL LIABILITY. A new section is added to chapter 60.04 RCW to read as follows:

(1) A prime residential contractor has the duty to act in the best interest of a residential homeowner in the receipt, management, and disbursement of all amounts paid by or on behalf of the residential homeowner to the prime residential contractor for application toward the contract price.

(2) A prime residential contractor shall maintain accurate and complete accounting records and books adequate to identify all amounts received from or on behalf of a residential homeowner and the use or application of such amounts for the payment of the contract price for labor, professional services, materials, or equipment supplied by any entity having a potential lien claim right against the residential homeowner.

(3)(a) Except as provided in (b) of this subsection, all amounts paid by or on behalf of the residential homeowner to the prime residential contractor for application toward the contract price shall not be used by the prime residential contractor for any purpose until all amounts owed to potential lien claimants as of the date of the prime residential contractor’s request for payment have been paid to the extent owed.

(b) All amounts paid to a prime residential contractor by or on behalf of a residential homeowner shall be presumed to be applied toward the contract price for labor, professional services, materials, or equipment supplied by potential lien claimants other than the prime residential contractor unless, at the time of requesting or applying for payment from or on behalf of a residential homeowner, a prime residential contractor provides written notice to the residential homeowner identifying:

(i) The potential lien claimants, if any, to which payment is owed as of the time of requesting or applying for payment, or to which the prime residential contractor intends to apply part or all of the residential homeowner's payment; and

(ii) Which of such potential lien claimants, if any, the prime residential contractor does not intend to fully pay from the residential homeowner's payment, and the reason for less than full payment.

(4) A prime residential contractor shall be personally liable for the full amount of any lien claim that involves a violation of the prime residential contractor's duties under this section and that is recorded pursuant to RCW 60.04.091 if:

(a) The prime residential contractor fails to show, by clear and convincing evidence, that amounts paid to the prime residential contractor by or on behalf of a residential homeowner for application toward the contract price for labor, professional services, materials, or equipment supplied by a potential lien claimant other than the prime residential contractor were actually paid to a potential lien claimant;

(b) The prime residential contractor had or should have had knowledge of such use of amounts, unless the prime residential contractor shows, by a preponderance of the evidence in defending against the claimed lien, that he or she actually did not know and had no reasonable opportunity to know of such use of amounts; and

(c) The prime contractor owed the amount stated in the recorded claim of lien when the prime residential contractor applied for payment from the residential homeowner.

(5) Nothing in this section requires a prime residential contractor to create or maintain a separate account for each residential homeowner.

NEW SECTION. Sec. 4. RESIDENTIAL SUBCONTRACTOR; FIDUCIARY DUTIES AND PERSONAL LIABILITY. A new section is added to chapter 60.04 RCW to read as follows:

(1) A residential subcontractor has the duty to act in the best interest of a residential homeowner in the receipt, management, and disbursement of all amounts paid by, on behalf of, or for the benefit of, the residential homeowner or the prime residential contractor to the subcontractor for application toward the contract price.

(2) A residential subcontractor shall maintain accurate and complete accounting records and books adequate to identify all amounts received from or on behalf of a residential homeowner and the use or application of such amounts for the payment of the contract price for labor, professional services, materials, or equipment supplied by any entity having a potential lien claim right against the residential homeowner.

(3)(a) Except as provided in (b) of this subsection, all amounts paid by a prime residential contractor for the benefit of, or on behalf of, a residential homeowner to the residential subcontractor for application toward the contract price shall not be used by the residential subcontractor for any purpose until all amounts owed to potential lien claimants as of the date of the residential subcontractor’s request for payment have been paid to the extent owed.

(b) All amounts paid to a residential subcontractor for the benefit of, or on behalf of, a residential homeowner shall be presumed to be applied toward the contract price for labor, professional services, materials, or equipment supplied by potential lien claimants at the request of the residential subcontractor unless, at the time of requesting or applying for payment from a prime residential contractor, the residential subcontractor provides written notice to the prime residential contractor identifying:

(i) The potential lien claimants, if any, to which payment is owed as of the time of requesting or applying for payment, or to which the residential subcontractor intends to apply part or all of the prime residential contractor's payment; and

(ii) Which of such potential lien claimants, if any, the residential subcontractor does not intend to fully pay from the prime residential contractor's payment, and the reason for less than full payment.

(4) A residential subcontractor shall be personally liable for the full amount of any lien claim that involves a violation of the residential subcontractor's duties under this section and that is recorded pursuant to RCW 60.04.091 if:

(a) The residential subcontractor fails to show, by clear and convincing evidence, that amounts paid to the residential subcontractor by a prime residential contractor for application toward the contract price for labor, professional services, materials, or equipment supplied by a potential lien claimant other than the residential subcontractor were actually paid to a potential lien claimant;

(b) The residential subcontractor has or should have had knowledge of such use of amounts, unless the residential subcontractor shows, by a preponderance of the evidence in defending against the claimed lien, that he or she actually did not know and had no reasonable opportunity to know of such use of amounts; and

(c) The residential subcontractor owed the amount stated in the recorded claim of lien when the residential subcontractor applied for payment from the prime residential contractor.

(5) Nothing in this section requires a residential subcontractor to create or maintain a separate account for each residential homeowner.

Sec. 5. RECORDING; TIME; CONTENTS OF LIEN. RCW 60.04.091 and 1992 c 126 s 7 are each amended to read as follows:

Except as provided under subsection (3) of this section, every person claiming a lien under RCW 60.04.021 shall file for recording, in the county where the subject property is located, a notice of claim of lien not later than ninety days after the person has ceased to furnish labor, professional services, materials, or equipment or the last date on which employee benefit contributions were due. ((The notice of claim of lien:))

(b) The first ((and)) date on which the claimant began to perform labor, provide professional services, or supply material or equipment or the first date on which employee benefits became due;

(c) The last date on which the labor, professional services, materials, or equipment was furnished or employee benefit contributions were due;

(((d))) (e) The street address, legal description, or other description reasonably calculated to identify, for a person familiar with the area, the location of the real property to be charged with the lien;

(((e))) (f) The name of the owner or reputed owner of the property, if known, and, if not known, that fact shall be stated; ((and

(f))) (g) The principal amount for which the lien is claimed, excluding any interest, late fees, costs, attorneys' fees, or similar charges; and

(2) The notice of claim of lien shall be signed by the claimant or some person authorized to act on his or her behalf who shall affirmatively state ((they have)) that he or she has read or heard and understand the notice of claim of lien ((and)), believe the ((notice of claim of lien)) contents to be true and correct, and the lien is not frivolous and is not clearly excessive, under penalty of perjury, and shall be acknowledged as set forth in the form below, or pursuant to chapter 64.08 RCW. If the lien has been assigned, the name of the assignee shall be stated. Where an action to foreclose the lien has been commenced such notice of claim of lien may be amended as pleadings may be by order of the court insofar as the interests of third parties are not adversely affected by such amendment. A claim of lien substantially in the following form shall be sufficient:

Notice is hereby given that the person named below claims a lien pursuant to chapter ((64.04)) 60.04 RCW. In support of this lien the following information is submitted:

2. DATE ON WHICH THE CLAIMANT BEGAN TO PERFORM LABOR, PROVIDE PROFESSIONAL SERVICES, SUPPLY MATERIAL OR EQUIPMENT OR THE DATE ON WHICH EMPLOYEE BENEFIT CONTRIBUTIONS BECAME DUE: . . . . . . . . . . . . . . .

4. DESCRIPTION OF THE PROPERTY AGAINST WHICH A LIEN IS CLAIMED (Street address, legal description or other information that will reasonably describe the property): . . . . . . . . . . . . . . . . . . . . . . .

5. NAME OF THE OWNER OR REPUTED OWNER (If not known state "unknown"): . . . . . . . . . . . . . . . .

6. THE LAST DATE ON WHICH LABOR WAS PERFORMED; PROFESSIONAL SERVICES WERE FURNISHED; CONTRIBUTIONS TO AN EMPLOYEE BENEFIT PLAN WERE DUE; OR MATERIAL, OR EQUIPMENT WAS FURNISHED: . . . . . . . . . . . . . . . . . . . .

7. PRINCIPAL AMOUNT FOR WHICH THE LIEN IS CLAIMED ((IS)) (EXCLUDING INTEREST, LATE FEES, COLLECTION FEES, LIEN RECORDING FEES, ATTORNEYS' FEES, OR OTHER COSTS OR CHARGES OTHER THAN THE PRINCIPAL BALANCE OWED): . . . .

8. IF THE CLAIMANT IS THE ASSIGNEE OF THIS CLAIM SO STATE HERE: . . . . . . . . . . . . . . . . . . . .

	. . . . . . ., Claimant
	. . . . . . . . . . . .
	. . . . . . . . . . . .
	(Phone number, address, city, and
	state of claimant)

. . . . . . . ., being sworn, says: I am the claimant (((or attorney of the claimant, or administrator, representative, or agent of the trustees of an employee benefit plan))) or person authorized to act on behalf of the claimant above named; I have read or heard and understand the foregoing claim, read and know the contents thereof, and believe the same to be true and correct and that the claim of lien is not frivolous and is made with reasonable cause, and is not clearly excessive under penalty of perjury.

(3) The period provided for recording the claim of lien is a period of limitation and no action to foreclose a lien shall be maintained unless the claim of lien is filed for recording within the ninety-day period stated. The lien claimant shall give a copy of the claim of lien to the owner or reputed owner by mailing it by certified or registered mail or by personal service within fourteen days of the time the claim of lien is filed for recording. Failure to do so results in a forfeiture of any right the claimant may have to attorneys' fees and costs against the owner under RCW 60.04.181.

(4) A lien claimant that, for any reason, includes any interest, late fee, cost, attorneys' fees, or similar charges as part of the principal amount for which the lien is claimed shall be deemed to have waived any right under contract or otherwise to such charges, and shall also forfeit any right the claimant may have to attorneys' fees and costs against the owner under RCW 60.04.181.

Sec. 6. FORECLOSURE. RCW 60.04.171 and 1992 c 126 s 11 are each amended to read as follows:

(1) The lien provided by this chapter, for which claims of lien have been recorded, may be foreclosed and enforced by a civil action in the court having jurisdiction in the manner prescribed for the judicial foreclosure of a mortgage.

(a) Except as provided in (b) of this subsection, the court shall have the power to order the sale of the property.

(b) In an action involving an improvement to an owner-occupied single-family residence, the court may not order the sale of property or removal of the improvement to the residence unless the court finds that the lien claimant has made reasonable efforts to recover its claim from the prime residential contractor or residential subcontractor, and any sureties.

(2) In any action brought to foreclose a lien, the owner shall be joined as a party. The interest in the real property of any person who, prior to the commencement of the action, has a recorded interest in the property, or any part thereof, shall not be foreclosed or affected unless they are joined as a party.

(3) A person shall not begin an action to foreclose a lien upon any property while a prior action begun to foreclose another lien on the same property is pending, but if not made a party plaintiff or defendant to the prior action, he or she may apply to the court to be joined as a party thereto, and his or her lien may be foreclosed in the same action. The filing of such application shall toll the running of the period of limitation established by RCW 60.04.141 until disposition of the application or other time set by the court. The court shall grant the application for joinder unless to do so would create an undue delay or cause hardship which cannot be cured by the imposition of costs or other conditions as the court deems just. If a lien foreclosure action is filed during the pendency of another such action, the court may, on its own motion or the motion of any party, consolidate actions upon such terms and conditions as the court deems just, unless to do so would create an undue delay or cause hardship which cannot be cured by the imposition of costs or other conditions. If consolidation of actions is not permissible under this section, the lien foreclosure action filed during the pendency of another such action shall not be dismissed if the filing was the result of mistake, inadvertence, surprise, excusable neglect, or irregularity. An action to foreclose a lien shall not be dismissed at the instance of a plaintiff therein to the prejudice of another party to the suit who claims a lien.

Sec. 7. INFORMATIONAL MATERIALS ON CONSTRUCTION LIEN LAWS; COPIES; LIABILITY. RCW 60.04.255 and 1988 c 270 s 2 are each amended to read as follows:

(1) Every real property lender shall provide a copy of the informational material described in RCW 60.04.250 to all persons obtaining loans, the proceeds of which are to be used for residential construction or residential repair or remodeling.

(2) Every contractor shall provide a copy of the informational material described in RCW 60.04.250 to customers required to receive contractor disclosure notice under RCW 18.27.114.

(3) Before issuing building permits for improvements to single-family residences of residential homeowners, every permitting agency shall require residential homeowners to acknowledge personally and in writing that they received a copy of the informational material described in RCW 60.040.250. The permitting agency shall retain a copy of such acknowledgments in the permitting agency's files relating to the residential homeowners' permit applications.

(4) No cause of action may lie against the state, a real property lender, ((or)) a contractor, or a permitting agency arising from the provisions of RCW 60.04.250 and this section.

(((4))) (5) For the purpose of this section, "real property lender" means a bank, savings bank, savings and loan association, credit union, mortgage company, or other corporation, association, partnership, or individual that makes loans secured by real property in this state.

NEW SECTION. Sec. 8. LEGISLATIVE TASK FORCE. (1) A joint legislative task force is created to review laws governing mechanics’ and materialmen’s liens, as set forth in chapter 60.04 RCW, and laws governing contractor registration, as set forth in chapter 18.27 RCW, and to consider how such laws can better protect residential homeowners involved in the construction or remodeling of their homes.

(a) One member from each caucus of the senate, appointed by the president of the senate;

(b) One member from each caucus of the house of representatives, appointed by the speaker of the house of representatives;

(c) Representatives of residential homeowners, prime residential contractors, residential subcontractors, and suppliers appointed jointly by the president of the senate and the speaker of the house of representatives; and

(3) The department shall cooperate with the task force and provide such technical expertise as the task force chair may reasonably require.

(a) Strategies for making residential homeowners more aware of the potential for liens against their homes if prime residential contractors fail to pay suppliers and residential subcontractors as promised;

(b) Opportunities for helping residential homeowners become better educated about ways to protect themselves from financial mismanagement by prime residential contractors who do not comply with industry standards for financial management; and

(c) Other proposals, including revisions to laws governing mechanics’ and materialmen’s liens, to protect the interests of residential homeowners and others involved in the construction or remodeling of homes.

(5) The task force shall use legislative facilities and staff from senate committee services and the office of program research. Legislative members of the task force shall be reimbursed for travel expenses in accordance with RCW 44.04.120. Nonlegislative members, except those representing an employer or organization, are entitled to be reimbursed for travel expenses in accordance with RCW 43.03.050 and 43.03.060, such reimbursement to be paid jointly by the senate and the house of representatives.

(6) The task force shall report its findings and recommendations to the legislature by December 1, 2005.

NEW SECTION. Sec. 9. CAPTIONS. Captions used in this act are not any part of the law.

(2) Section 8 of this act is necessary for the immediate preservation of the public peace, health, or safety, or support of the state government and its existing public institutions, and takes effect immediately."

Deletes provisions amending laws governing certain construction liens and contractor registration, except:

• Provisions requiring that, prior to ordering foreclosure, the court find that reasonable efforts were made to recover amounts not yet paid from the prime residential contractor or residential subcontractor.

Modifies findings to be consistent with sections establishing fiduciary duties and personal responsibility.

Modifies the definitions of “prime residential contractor” and “residential subcontractor” to limit the persons that may be held personally liable to the contractor and the contractor’s principals, partners, officers, directors, members, vice principals, and certain agents with control over amounts received from residential homeowners.

Clarifies that prime residential contractors and residential subcontractors are personally liable only for lien claims involving violations of the fiduciary duties owed to residential homeowners.

Provides that, before issuing building permits for improvements to single-family residences of residential homeowners, permitting agencies must require residential homeowners to acknowledge personally and in writing that they received a copy of certain informational material about liens.

Moves new definitions to section containing other definitions used in laws governing certain construction liens.

Establishes a joint legislative task force to review laws governing certain construction liens and laws governing contractor registration, and to consider how such laws can better protect residential homeowners involved in the construction or remodeling of their homes; requires the task force/department to report its findings and recommendations to the legislature by December 1, 2005.