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Byrd Underground, L.L.C. v. Angaur, L.L.C.

Citation: 2014 NV 62Docket: 61978

Court: Nevada Supreme Court; August 7, 2014; Nevada; State Supreme Court

Original Court Document: View Document

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In the case before the Nevada Supreme Court, the priority of mechanics' liens based on the visible commencement of construction is under scrutiny. The court received certified questions from the U.S. Bankruptcy Court regarding whether placing dirt on a future construction site before obtaining building permits and hiring a general contractor qualifies as "commencement of construction" under NRS 108.22112. 

Three specific questions were posed:
1. Whether a mechanic's lien claimant can assert priority when dirt or materials are placed on a project site months before the necessary building permits are issued or a general contractor is engaged.
2. Whether the term "clearing and grading" used in a prior Nevada Supreme Court case (J.E. Dunn Northwest, Inc. v. Corus Construction Venture, LLC) was mistakenly used instead of "clearing and grubbing" and whether this statement was dictum.
3. Whether the grading performed in this case meets the criteria for visible "commencement of construction" to establish lien priority.

The court concluded that the prior statement regarding "clearing or grading" in J.E. Dunn was dictum, allowing for the possibility that grading may constitute visible commencement of construction. This finding influences the analysis of the other questions, indicating that grading could potentially support the priority of the mechanics' liens in question.

Contract dates and permit issuance dates are deemed irrelevant to the visible-commencement-of-construction test, although they may help clarify the scope of the work involved. The court refrains from addressing a third question due to the need to resolve a factual dispute regarding whether grading work constituted visible commencement of construction.

In the relevant facts, Angaur, LLC, and Balaji Properties Investment, LLC, purchased an unimproved parcel in Las Vegas. No significant activity occurred until 2006, when two third parties spread 200 to 300 truckloads of dirt on the property while working on other projects. The extent of this coverage remains unclear. Meanwhile, the owners solicited bids for a strip mall, with Byrd Underground, LLC, submitting a bid to a general contractor but ultimately not being selected. 

On November 2, 2006, Byrd dug test holes at Atlas Construction's request to assess the dirt/material already on-site for a revised bid. A contract was executed with Atlas on November 8, 2006. A site inspection on November 28, 2006, revealed the property was vacant, with no evidence of recent improvement work. The owners then secured a construction loan, and on November 29, 2006, a deed of trust was recorded. Byrd had not performed any work on the property prior to this date, apart from the test holes.

Subsequently, permits were issued, and Atlas incorporated some of the dirt into the project. In 2007, Atlas and Byrd entered into multiple subcontracts. Byrd and another subcontractor, Wells Cargo, Inc., provided services but were not compensated, leading them to file mechanic's lien actions, which resulted in judgments against the owners. Following the completion of the project, the owners filed for Chapter 11 bankruptcy. Their creditor schedules included secured claims, notably a first mortgage to US Bank and the lien claimants' judgments. The owners and US Bank reached a forbearance agreement and created a plan of reorganization, which the lien claimants contested, prompting an adversary complaint to determine lien priorities.

At the conclusion of discovery, US Bank and lien claimants submitted competing motions for summary judgment. The lien claimants sought clarification from the bankruptcy court regarding a potential misapplication of terminology in a prior ruling, specifically the distinction between "clearing and grubbing" and "clearing or grading," asserting that the former is an established term in the construction industry. They contended that evidence of soil being spread or graded on the property raises genuine issues of material fact about the commencement of construction, which could prevent summary judgment. The bankruptcy court subsequently certified questions to the relevant court.

Mechanics' liens in Nevada are designed to ensure payment for construction-related work. The lien claimants' entitlement to a lien is not disputed; however, the determination of whether such work has priority over other encumbrances is a separate issue. According to Nevada's mechanic's lien priority statute (NRS 108.225), mechanics' liens take precedence over encumbrances that arise after construction begins. If construction has commenced before a deed of trust is recorded, the mechanic's lien will have priority regardless of the recording date of the lien notice. Furthermore, it is established that a claimant does not need to perform work before the deed of trust is recorded, as liens relate back to the commencement date of construction.

The statutory definition of "commencement of construction" (NRS 108.22112) indicates that it occurs when work or materials related to a project are visible from a reasonable inspection of the site. The court in J.E. Dunn emphasized that visibility alone is the determining factor for establishing priority in mechanics' liens, supporting the policy interest in ensuring predictability in construction financing. Thus, the lien claimants may secure priority over the deed of trust if construction visibly commenced before the deed’s recordation on November 29, 2006.

Preconstruction activities performed by Dunn, the lien claimant, were evaluated under NRS 108.22112's visibility standard. The court affirmed that activities like clearing or grading do not signify the commencement of construction, as they fail to provide lenders with adequate notice of lienable work. Specifically, placing an architect's sign and removing power lines were deemed insufficient to establish visible construction commencement. 

The lien claimants contested the classification of clearing and grading as nonvisible work, arguing that the statutes only require visibility to a reasonable inspection for lien priority. The court acknowledged this point, asserting that such activities should be evaluated on a case-by-case basis rather than broadly categorized as nonvisible. 

NRS 108.225(1)(a) prioritizes mechanics' liens once construction visibly commences, while NRS 108.22188 defines "work of improvement" inclusively, recognizing preconstruction activities as part of the improvement process. The court emphasized that the entire "scheme of improvement" should be assessed comprehensively, rather than limiting the evaluation to whether activities are preparatory or structural. 

Consequently, grading work can be considered part of actual on-site construction and can establish the commencement of construction if it is visible during a reasonable site inspection, effectively notifying lenders of the initiation of lienable work. The court refused to rule out on-site grading as a means of notifying lenders that construction has begun.

The visibility requirement for lien priority under NRS 108.22112 applies to preconstruction activities, clarifying that clearing and grading may constitute visible commencement of construction. The court emphasizes that its previous statements in J.E. Dunn regarding these activities were merely dicta. The bankruptcy court's certified question concerns whether a mechanic's lien claimant can assert lien priority based on work or materials delivered prior to the issuance of a building permit and hiring of a general contractor. The lien claimants contend that NRS 108.225 and NRS 108.22112 focus on visibility, not on permit or contract dates. The court agrees, affirming that visibility of work performed, including preconstruction services, is essential for establishing lien priority over a deed of trust. Intent based on contract or permit dates is irrelevant to determining when construction commenced. However, contracts and permits can help define the scope of the work of improvement, which is necessary to establish when visible commencement occurred. Exclusions within contracts may impact the definition of the "work of improvement." The determination of scope may also consider the overall project purpose, permits, and the timing of activities relative to other construction efforts.

A mechanic's lien claimant can assert lien priority under NRS 108.225 if the work or materials related to the lien were placed or performed on-site months before the building permit was issued or the general contractor was hired, provided there was visible commencement of construction as defined by NRS 108.22112 and the prior work is part of the same improvement under NRS 108.22188. The court refrains from answering the third certified question regarding whether "grading" constitutes visible "commencement of construction" under NRS 108.22112, emphasizing that such questions involve factual determinations best left to the bankruptcy court. The answering court's role is limited to legal questions, while factual disputes must be resolved by the certifying court. The court clarified that its previous mention of "clearing or grading" in a prior case was non-binding and reiterated that grading can signify visible commencement of construction, depending on its visibility during reasonable site inspection. Contract and permit dates do not affect the visible-commencement test but may help define the work's scope. Ultimately, the court declines to determine if the specific circumstances meet the visible commencement criterion due to unresolved factual issues.