Opinion ID: 2633607
Heading Depth: 3
Heading Rank: 2

Heading: Whether the Dismissal of 808 Development's Lien Application was Contrary to the Legislative Intent of the Statute

Text: 808 Development asserts that the circuit court erred in strictly applying the statutory requirements to its construction agreement. Relying on Jack Endo Elec., Inc. v. Lear Siegler, Inc., 59 Haw. 612, 585 P.2d 1265 (1978), 808 Development urges this court to examine the statute's legislative history to determine whether the statute at issue is mandatory or directory. ASB and Owners maintain that the circuit court's ruling was wholly consistent with the plain language of HRS § 444-25.5 and that this court's decision in Jack Endo is consistent with the circuit court's determination that 808 Development was required to comply with the statute. Historically this court has strictly construed the procedural requirements of the mechanic's and materialman's liens law, while liberally construing the remedial portions thereof. Moore v. Tablada, 68 Haw. 228, 229, 708 P.2d 140, 141 (1985) (citing Hawai`i Carpenters' Trust Funds v. Aloe Dev. Corp., 63 Haw. 566, 572-73, 633 P.2d 1106, 1110 (1981); Lewers & Cooke, Ltd. v. Wong Wong, 22 Haw. 765, 768 (1915)). As previously indicated, HRS § 444-25.5 states that licensed contractors shall provide verbal notice and disclosure of lien rights and bonding options and shall obtain a signed writing that includes the information explained verbally. Generally, the word shall as used in statutes is construed as imperative or mandatory. See Leslie v. Bd. of Appeals of County of Hawai`i, 109 Hawai`i 384, 393-94, 126 P.3d 1071, 1080-81 (2006); Coon v. City & County of Honolulu, 98 Hawai`i 233, 256, 47 P.3d 348, 371 (2002). In certain situations, however, the word shall may be construed as directory. See Jack Endo, 59 Haw. at 617, 585 P.2d at 1270. [I]f the provision is mandatory, the failure to follow it will render the proceeding to which it relates illegal and void. If the provision is directory, however, the observance of the provision will not be necessary to the validity of the proceeding. . . . In determining whether a statute is mandatory or directory[,] the intention of the legislature must be ascertained. The legislative intent may be determined from a consideration of the entire act, its nature, its object, and the consequences that would result from construing it one way or the other. In general, a statute is directory rather than mandatory if the provisions of the statute do not relate to the essence of the thing to be done or where no substantial rights depend on compliance with the particular provisions and no injury can result from ignoring them. Id. at 616-17, 585 P.2d at 1269 (citations, internal quotation marks, and ellipsis omitted). In other words, [a] crucial difference between statutes considered directory and those deemed mandatory arises from the consequences of noncompliance. A failure to follow the former is unattended by serious legal consequences; a neglect of the latter may invalidate a transaction or subject the transgressor to legal liabilities. Where there is a manifest necessity for strict compliance or a clear expectancy thereof, the provision is accorded mandatory status and the administrative agency's power to act may hinge upon precise adherence to the law. . . . And the word shall may be held to be merely directory, when no advantage is lost, when no right is destroyed, when no benefit is sacrificed, either to the public or to the individual, by giving it that construction. Perry v. Planning Comm'n of the County of Hawai`i, 62 Haw. 666, 676-77, 619 P.2d 95, 103 (1980) (emphases added) (citations and some internal quotation marks omitted). In Jack Endo, this court determined that a provision in HRS § 507-43 (Supp.1973) was directory. 59 Haw. at 618-19, 585 P.2d at 1270. HRS § 507-43 required any person claiming a lien to provide a copy of the lien application and notice of lien upon the owner of the property and any person with an interest therein and upon the party or parties who contracted for the improvements[.] The contractor had provided notice of the lien application to the lessee of the property and the developer who had contracted for supplies, but failed to provide notice to the fee owner. This court held that: [The contractor's] failure to name and serve notice of the lien on the fee owner of the subject property resulted in exempting the interest of the fee owner from the lien. Consequently, the fee owner was not substantially prejudiced by not receiving notice of the lien. Thus, the notice provision of HRS § 507-43 (Supp.1973) calling for the naming and service of notice upon the owner of fee title to the property and upon the party or parties who contracted for the improvements if other than the fee owner is directory rather than mandatory. Further, the failure to strictly comply with the directory provisions of the statute will not invalidate the lien as to [the developer] and [the lessee]. [The developer and the lessee] were properly named and served with notice of the lien. The lien is only effective as to their respective interests in the subject property. Id. (emphasis in original). In sum, the determination of whether HRS § 444-25.5's requirements are mandatory or directory involves a consideration of: (1) the nature and object of the statute; (2) whether the provisions relate to the essence of the statute's purpose; (3) the consequences of noncompliance; and (4) whether the substantial rights of the parties depend on compliance with the statute. First, the provisions of HRS § 444-25.5(a) are procedural and not remedial inasmuch as they relate to the specific actions a contractor must take to preserve its right to a lien. See Moore, 68 Haw. at 229, 708 P.2d at 141. Second, the express purpose of HRS § 444-25.5 is to have an informed homeowner who can and will avoid the double pay situations caused when the homeowner pays the prime contractor, the prime contractor does not pay the sub-contractors and/or materialmen, and the latter assert their lien rights against the homeowner. Hiraga, 96 Hawai`i at 369, 31 P.3d at 226 (citation omitted); see Sen. Stand. Com. Rep. No. 717, in 1975 Senate Journal, at 1104. Thus, the statute's notice and disclosure requirements under HRS § 444-25.5(a) relate to the essence of the statute, i.e., the education of homeowners. Third, the consequences to the contractor for failure to comply with such requirements are unenforceability of the contract and exposure to the penalties under HRS § 480-13 (Supp. 2000), which provides: Suits by persons injured; amount of recovery, injunctions. . . . . (b) Any consumer who is injured by any unfair or deceptive act or practice forbidden or declared unlawful by section 480-2: (1) May sue for damages sustained by the consumer and, if the judgment is for the plaintiff, the plaintiff shall be awarded a sum not less than $1,000 or threefold damages by the plaintiff sustained, whichever sum is the greater, and reasonable attorneys' fees together with the costs of suit[.] (Bold emphasis in original.) (Underscored emphasis added.) And, finally, the substantial rights of the parties are affected because a contractor's ability to attach a lien to the homeowner's property depend[s] on compliance with the particular provisions of HRS § 444-25.5. Moreover, an injury that can result from ignoring the statutory provisions is that a homeowner who has not been provided the requisite notice and disclosure may have his or her property subject to a mechanic's lien that could result in the homeowner being placed in precisely the kind of double pay situation that the legislature intended to protect against. Given the above factors, the express statutory provisions of HRS § 444-25.5 should be construed as mandatory rather than directory. The ICA reached the same conclusion in Hiraga. In that case, a contractor sought to impose a mechanic's lien against the homeowner's property. Although the contractor admittedly failed to obtain a signed disclosure notice under HRS § 444-25.5, he argued that, because he had discussed lien and bonding rights with the owner, the owner did not need the protections of that statute, and, therefore, he was entitled to a mechanic's lien. The ICA acknowledged that the verbal disclosure arguably met HRS § 444-25.5's purpose of ensuring that homeowners are educated to avoid facing double pay situations. Hiraga, 96 Hawai`i at 369, 31 P.3d at 226. However, the ICA concluded that: HRS § 444-25.5 requires the contractor to give the homeowner specific oral information and to obtain the homeowner's signature on a written form containing specified information printed in specified size type. The oral and written information pertain to the lien rights of all parties performing under the contract and the homeowner's option to demand bonding on the project, how the bond would protect the homeowner[,] and the approximate expense of the bond. [ The contractor] contends that the requirements of HRS § 444-25.5 are not of interest in the instant case because this is a dispute solely between the homeowner and the contractor. However, even assuming no sub-contractors are involved, there is no indication that no materialmen are involved. Moreover, HRS § 444-25.5 does not exempt from its requirements situations where neither sub-contractors or materialmen are involved. Id. at 371, 31 P.3d at 228 (emphases added). The ICA further noted that, even though the contractor was not entitled to a lien against the property, it was not completely without remedy inasmuch as it was still free to pursue its claims in quantum meruit. Id. at 372, 31 P.3d at 229. Here, as in Hiraga, the circuit court dismissed 808 Development's lien application, but acknowledged that it is entitled to pursue its quantum meruit claims. 808 Development contends that the circuit court's ruling is inconsistent with Hiraga because it explicitly found that the construction contract was not void.  Such contention lacks merit because the circuit court did not so find. Rather, the court simply stated that it was not saying there's an unenforceable or void contract but that it was saying a lien doesn't attach. Thus, the circuit court limited its ruling to a determination that the lien did not attach to the property but that 808 Development was entitled to pursue its claims in quantum meruit, which is consistent with the holding in Hiraga. Accordingly, we hold that the circuit court properly dismissed 808 Development's lien application pursuant to the mandatory language found in HRS § 444-25.5.
808 Development maintains that the purpose [of HRS § 444-25.5] . . . is to educate homeowners about potential `double-pay' situations and to reduce the number of claims against the Contractor's Recovery Fund, [14] and not to protect non-paying homeowners such as Murakami and Isobe. 808 Development further asserts that Owners are not the type of homeowners the legislature meant for the statute to protect because they are sophisticated developer[s], fully educated about lien and bond rights, who gave the contractor legal advice for the contract at issue, to avoid payments [for] improvements to [their] property. In support of its aforementioned contentions, 808 Development relies upon Overberg Decorating Center, Inc. v. Selbah Properties, 741 S.W.2d 879 (Mo.Ct. App.1987), for the proposition that strict compliance with HRS § 444-25.5 is not necessary where the owner is sophisticated and knowledgeable about lien and bonding issues. ASB asserts that, if this court were to permit the attachment of 808 Development's mechanic's lien, such holding would create a vague case-by-case standard that is less practical than the bright-line standard set forth by the ICA in Hiraga because homeowners do not divide neatly into two discrete categories of `knowledgeable about lien and bonding rights' and `not knowledgeable about lien and bonding rights.' ASB further argues that HRS § 444-25.5 is a consumer protection statute and, thus, it is designed to protect  all consumers, not just the unsophisticated ones. (Emphases in original.) In its reply brief, 808 Development counters that, by ruling in its favor, this court need not create a vague case-by-case standard because the holding could be limited to the unusual circumstances of the instant case. The plain language of HRS § 444-25.5 does not provide any exceptions to the statutory requirements that would exempt sophisticated homeowners or anyone else from its protections. Moreover, 808 Development's reliance on Overberg does not support its contention. In Overberg, the Missouri Court of Appeals allowed a mechanic's lien to attach despite the contractor's failure to provide the owner with the required statutory notice. Under the Revised Statutes of Missouri (RSMo) § 429.012, an original contractor must provide the owner with written notice regarding lien rights prior to the first invoice as a condition precedent to the validity of a mechanic's lien. Overberg, 741 S.W.2d at 880. In that case, the contractor agreed to deliver certain labor and materials to the owner. The parties disputed whether a contract provision discussing lien obligations fulfilled the notice requirements. The Overberg court concluded that the contractor had substantially complied with the statutory notice requirements and that it went further by providing the owner with protection from hidden liens. Id. at 881. The court further noted that the owner was a sophisticated corporation that the legislature did not intend to protect with the notice requirements, but limited its holding to the particular circumstances of that case. Id. In White River Development Co. v. Meco Systems, Inc., 806 S.W.2d 735 (Mo.Ct.App. 1991) [hereinafter, White River ], the Missouri Court of Appeals addressed the effect of its prior holding in Overberg on a situation involving a contractor who had not complied with the notice requirements and sought to assert a lien against a knowledgeable developer. The White River court noted that: Meco [(the contractor)] admits that it did not give the notice. Relying primarily upon [ Overberg ], Meco contends that as White was a knowledgeable developer who understood the mechanic's lien law, the notice was not required. Although Overberg contains language supporting Meco's position, there, notice substantially equivalent to that required in the statute was given. As Meco suggests, the purpose of the statute is to warn inexperienced property owners of the danger to them which lurks in the mechanics' lien statute. However, the statute does not limit the necessity of this notice to those inexperienced with, or having lack of knowledge about, the mechanics' lien laws. The statute has no exceptions. When a statute is without exceptions, courts should not create them. Allowing a lien when there was not substantial compliance with this section would add another issue to each mechanic's lien case, the property owner's knowledge of the mechanic's lien law. It seems unlikely the legislature intended such a result, as there are no limitations or exceptions to the giving of the notice. Meco is not entitled to a mechanic's lien. Id. at 738 (citations and internal quotation marks omitted) (emphases added). In Gauzy Excavating and Grading Co. v. Kersten Homes, Inc., 934 S.W.2d 303 (Mo.1996) (en banc) [hereinafter, Gauzy ], the Missouri Supreme Court echoed the appeals court's holding in White River. In Gauzy, a mechanic's lien was invalidated over the contractor's objection that its escrow agreement with the developer provided even greater protection than that provided by the statutory notice. Id. at 305. In requiring strict compliance with the statutory notice requirements, the Missouri Supreme Court stated that: Even under Overberg, the original contractor must provide 1) notice in writing and 2) notice that comports with the words used in the statute. Gauzy [(the contractor)] failed to satisfy these conditions. As stated, the Court of Appeals emphasized that its holding in Overberg should be limited to its facts. . . . We decline to extend Overberg . . . . To do so would run contrary to the longstanding precedent of requiring strict compliance with the statute. That precedent is based in part on a concern that recognition of exceptions to the statute that excuse knowledgeable developers and others who are sophisticated in the areas of real estate and construction will likely result in a plethora of case-by-case determinations. The bright-line rule mandated by the statute gives the best guidance to owners and contractors alike. Id. at 305-06 (emphasis added) (citations omitted). In the instant case, as in White River and Gauzy, the contractor, 808 Development, did not comply with or even substantially comply with the statutory notice requirements for mechanic's liens. In addition, like the Missouri statute, HRS § 444-25.5 provides no limitations or exceptions to the notice requirements. Therefore, we believe that the Missouri courts' concerns that (1) [a]llowing a lien when there was not substantial compliance with [the notice requirements] would add another issue to each mechanic's lien case, White River, 806 S.W.2d at 738, and (2) the recognition of exceptions to [HRS § 444-25.5] that excuse knowledgeable developers and others . . . will likely result in a plethora of case-by-case determinations[,] Gauzy, 934 S.W.2d at 305-06, are applicable here. Consequently, we decline to create an exception to the clear statutory requirements of HRS § 444-25.5 and, instead, adhere to a bright-line standard that provides clear guidance to owners and contractors alike. Furthermore, as the circuit court stated, 808 Development may still pursue its claims in quantum meruit; therefore, 808 Development is not without a remedy. Accordingly, we hold that the circuit court's dismissal of 808 Development's lien application was not absurd and unjust.