Appeal from the Circuit Court for Baltimore County, William M. Nickerson, Judge.
Wilner, Bloom and Rosalyn B. Bell, JJ.
Ridge Sheet Metal Company, Inc., a subcontractor, was denied a mechanic's lien for work done on a new residence of John and Lynn Morrell. Ridge appealed the denial of the lien.
The Morrells contracted with Hunter Associates, Inc., prime contractor, for the erection of a single family private residence on land that they owned. The full contract price was set at $125,000. The parties utilized a standard American Institute of Architects (A.I.A.) contract. Under that contract, periodic progress payments were to be made by the Morrells to Hunter based on applications for payment. The contract provided that 80 percent of the amount claimed and certified as work completed would be paid over to Hunter while a 20 percent balance would be retained. Article 6 of the contract defined final payment as the entire unpaid balance including the retainage and provided for this payment to be made when the work had been completed and the contract had been fully performed. Hunter began work on April 22, 1985, and the Morrells, by checks drawn by the lending bank payable to the owner and the contractor,*fn1 made periodic progress payments in accordance with the contract.
In response to an invitation to bid by Hunter, Ridge proposed to install a heat pump for $4,175. Approximately one-half of this amount was due on completion of the rough-in and duct work and the balance was due on completion of the job. The bid was accepted and a contract was entered into between Ridge and Hunter on June 17, 1985.
The rough-in and duct work was completed and on June 28, 1985, Ridge billed Hunter $2,085 for the first payment under the contract.
On July 26, the Morrells made the scheduled progress payment to Hunter. By the latter date, Hunter had been paid 80 percent of the amount applied for, or $74,659.13. The Morrells, through the lending bank, held $18,664.78 as retainage.
Hunter experienced financial difficulties and ceased work shortly after receiving the last progress payment. It had not paid Ridge the $2,085 to which Ridge was entitled. As a result, the Morrells received from Ridge on August 22 a Notice to Owner or Owner's Agent of Intention to Claim a Lien. Thereafter, Ridge filed a Petition to Establish Mechanic's Lien. The Morrells refused to pay Ridge.
At trial, to establish it qualified for a lien, Ridge offered testimony through its vice president that it had performed the rough-in and duct work in accordance with the contract.*fn2 The date of the last work by Ridge was July 17. The vice president also stated that Ridge had not received any money from Hunter or the Morrells for that work.
The Morrells opposed the establishment of a mechanic's lien arguing that they had already paid Hunter all that they were required to pay, that the contract was never completed and thus they were entitled to keep the retainage. John Morrell admitted that the work the prime contractor performed was substantially in keeping with the payment applications and that before endorsing progress checks to the prime contractor, he went to the job site to confirm that the work had been done.*fn3 Twenty percent of the progress
payments was held back and all billings had been paid.*fn4 The president of Hunter, James Hunter III, corroborated Morrell's statement that Hunter had received all four progress payments and that 20 percent was held back as retainage.
The Morrells introduced into evidence two letters from James Hunter addressed to them. One letter was dated August 11, 1985 which authorized the Morrells to employ another contractor and expressed apologies for not completing the work. The second letter dated September 11, 1985 stated that "John Morrell owes Hunter Assoc. no money. . . ." Hunter conceded at trial that this was true despite the 20 percent outstanding retainage.
At the conclusion, the court denied the lien, ruling that the Morrells owed no money to Hunter and, even though they held the retainage, they were not indebted under the contract as required under the mechanic's lien statute to establish a lien.
On appeal Ridge argues two points in challenging the denial of the lien:
"1. Should the retainage held by Appellees be considered in determining whether full payment has been made at the time the Notice of Intention to Claim a Lien is received?
2. Should the retainage held by Appellees be considered in determining whether Appellees are indebted under the contract?"
Preliminarily we will set out the previous and current statutory framework for mechanic's liens as applicable to this situation.
Prior to 1982, the purpose behind the mechanic's lien law was clear. The mechanic's lien law, codified at Md. Real Prop. Code Ann., § 9-101 et seq. (1974, 1981 Repl. Vol.) was enacted to protect subcontractors (mechanics) and materialmen. Reisterstown Lumber Co. v. Reeder, 224 Md. 499, 507, 168 A.2d 385 (1961). In general, the law was "designed to encourage construction by ensuring that those who contribute[d] to a project [were] compensated for their efforts." Barry Properties, Inc. v. The Fick Bros. Roofing Co., 277 Md. 15, 18, 353 A.2d 222 (1976). Specifically, the law sought to "protect materialmen who are not in a position to protect themselves if the owner negligently pays the [prime] contractor without first ascertaining that the materialmen have been paid." Dickerson Lumber Co., Inc. v. Herson, 230 Md. 487, 491, 187 A.2d 689 (1963). The theory behind the law was that because the owner reaped the benefit of the materials and had ultimate control of the funds, the owner should serve as a ...