/opinions/HTMLFiles/COA/3673.htm

THE STATE OF SOUTH CAROLINA
In The Court of Appeals

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Zepsa Construction, Inc,        Respondent,

v.

Phillip A. Randazzo and Virginia M. Randazzo,        Appellants.

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Appeal From York County
John Buford Grier, Master-in-Equity

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Opinion No. 3673
Heard May 13, 2003 Filed September 15, 2003
Withdrawn, Substituted and Re-filed January 7, 2004

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AFFIRMED AS MODIFIED

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Douglas Gay, of Rock Hill; for Appellants.

S. Jackson Kimball, III, of Rock Hill; for Respondent.

CURETON, J.: In this action to foreclose a mechanics lien, the master ordered judgment against Phillip and Virginia Randazzo in the amount of $50,846.00, and awarded attorneys fees to Zepsa in the amount of $8,123.40. The Randazzos appeal, arguing the master erred in: (1) including lost profits and overhead in the amount of the mechanics lien; and (2) awarding attorneys fees to Zepsa. We affirm as modified.

FACTS

Phillip and Virginia Randazzo (collectively, Randazzos), owned and operated an Italian restaurant near Tega Cay Village Shopping Center in Fort Mill, South Carolina. In September 1996, they contacted Ed Zepsa, president of Zepsa Construction, Inc. (Zepsa) to inquire about the design and construction of a new restaurant. After several months of discussions and negotiations, the parties entered into on May 14, 1997, a written construction contract for Zepsa to build the restaurant. The agreed price was $610,000.00. The terms of the contract required a deposit in the amount of $61,000.00 to be paid when the contract was signed.

On May 29, 1997, the Randazzos gave written notice to proceed with construction. At that time, they provided Zepsa with a check for $21,000.00, representing part of the agreed deposit. Zepsa did not begin work at this time because the Randazzos had not paid the full deposit. By letter dated July 1, 1997, Zepsa agreed to accept the remainder of the deposit in two installments. These installments were to be paid at the time of the first two payment requests after construction began. Zepsa began work on the site on July 7, 1997. Between July 15 and August 2, 1997, Virginia Randazzo (Virginia) spoke by phone with either Ed Zepsa or the project manager on four occasions. During these conversations, she asked about terminating the contract due to the Randazzos marital problems, instructed Zepsa to stop work, and told Zepsa to continue to delay construction while the Randazzos tried to resolve their marital difficulties. On August 3, Virginia called Ed Zepsa and told him she did not want to continue with the project.

On August 4, the Randazzos contacted Ed Zepsa and instructed him to proceed with construction. In response, he submitted a payment request seeking payment of $8,674.00 for work that had been performed and $40,000.00 for the balance of the deposit. Also on August 4, Zepsa received a letter from the Randazzos attorney requesting that Zepsa abide by the deposit payment schedule and proceed with the work. Zepsa resumed work on the project.

On August 11, Zepsa submitted a payment request for work performed through July and included a request for the next deposit installment. No payment was made for this completed work or the deposit installments. By letter dated August 28, 1997, the Randazzos attorney gave notice of termination of the contract.

Zepsa timely filed a lis pendens and complaint on October 16, 1997. The complaint sought judgment against the Randazzos and foreclosure of a mechanics lien that Zepsa had previously filed and served. The matter was referred with finality to the master. At the hearing, Zepsa presented uncontested evidence that Zepsa performed construction work on the job site in the amount of $10,846.00. In his order dated January 22, 2001, the master granted Zepsa judgment against the Randazzos in the amount of $50,846.00, which included the unpaid balance for work already performed and payment for the remaining deposit balance of $40,000.00. By order dated March 22, 2001, the master awarded Zepsa attorneys fees in the amount of $8,123.40, and costs in the amount of $1,490.60. The Randazzos appeal.

STANDARD OF REVIEW

An action to foreclose a mechanics lien is a law case in South Carolina. Keeneys Metal Roofing, Inc. v. Palmieri, 345 S.C. 550, 553, 548 S.E.2d 900, 901 (Ct. App. 2001). In an action at law, tried without a jury, the judges findings will not be disturbed unless they are without evidentiary support. King v. PYA/Monarch, Inc., 317 S.C. 385, 388, 453 S.E.2d 885, 888 (1995). His findings are equivalent to those of a jury in an action at law. Id. at 389, 453 S.E.2d at 888.

DISCUSSION

I. Mechanics Lien

The Randazzos argue the master erred by including lost profits in the amount of the mechanics lien when only a small portion of the contract work was actually performed.

Section 29-5-10 of the South Carolina Code of Laws defines a mechanics lien. S.C. Code Ann. 29-5-10 (1991 & Supp. 2002). [1] This section provides in pertinent part:

(a) A person to whom a debt is due for labor performed or furnished or for materials furnished and actually used in the erection, alteration, or repair of a building or structure upon real estate or the boring and equipping of wells, by virtue of an agreement with, or by consent of, the owner of the building or structure, or a person having authority from, or rightfully acting for, the owner in procuring or furnishing the labor or materials shall have a lien upon the building or structure and upon the interest of the owner of the building or structure in the lot of land upon which it is situated to secure the payment of the debt due to him.

S.C. Code Ann. 29-5-10(a) (1991).

In the instant case, the master granted a judgment against the Randazzos in the amount of $50,846.00 based on two grounds. First, the master found Zepsas lost profits and overhead expenses were recoverable as an element of damages for the Randazzos breach of the construction contract. Secondly, the master concluded these elements of damage [were also] recoverable in a mechanics lien foreclosure action. The master reasoned:

Since Zepsa is entitled to profits and overhead expenses, there is a reasonable and equitable basis for claiming the balance of the deposit as an integral part of the payment due under the contract, unrelated to actual work performed. Thus, Zepsa is entitled to be paid the balance of the deposit due, along with the balance due for work which was performed.

Given Zepsas recovery in its mechanics lien action is limited to that as provided for in the mechanics lien statute, the question becomes whether the overhead expenses and lost profits were lienable items. In concluding these items were recoverable under a mechanics lien, the master relied on our Supreme Courts decision in Sentry Engg & Constr., Inc. v. Mariners Cay Dev. Corp., 287 S.C. 346, 338 S.E.2d 631 (1985). In Sentry, a builder, Sentry, and a developer executed two separate agreements for the construction of a condominium. The first agreement provided for the cost of the construction and the second provided for the additional compensation of overhead and profit. As the project neared completion, Sentry filed a mechanics lien for balances due under both agreements and change orders. Sentry exercised its right to arbitration and filed a claim in the amount of its mechanics lien. Sentry later amended its arbitration demand to include claims for damages for wrongful termination of the construction contract. The American Arbitration Association (AAA) found Sentry was entitled to $503,271.00. The circuit court adopted the AAAs award as a judgment, granted Sentry summary judgment on its mechanics lien foreclosure petition, assessed interest, and awarded Sentry attorney fees.

On appeal, the developer raised several issues, including the assertion the circuit court judge erred in holding that profit and overhead were components of debt under the mechanics lien statute. Id. at 349, 338 S.E.2d 633. Our Supreme Court rejected the developers argument. The Court held that overhead and profit, when stated as part of the contract price, are proper components of a mechanics lien. Id. at 352, 338 S.E.2d at 635. The Court found that [s]uch items, as such and standing by themselves, are nonlienable, but they become lienable when they are included in a contract price or are reflected in the reasonable value of labor or materials furnished. Id. at 352, 338 S.E.2d at 634 (quoting 53 Am. Jur. 2d Mechanics Liens 107 (1970)).

Based on our reading of Sentry, we believe the Supreme Court expanded the items that are recoverable under the mechanics lien statute to include overhead and profit. However, this holding is only available in the limited situation where the terms of overhead and profit are agreed upon by the parties and are subsequently embodied within a contract.

In view of the specific facts of the instant case, Sentry is inapplicable for several reasons. Significantly, the parties in Sentry entered into a separate agreement that specifically provided for the recovery of overhead and profit. In contrast, Zepsa and the Randazzos did not execute an agreement providing for overhead and profit. Their contract is silent concerning these items. Even though Ed Zepsa testified the deposit constituted compensation for pre-construction or up front work, his testimony is not determinative of the agreed upon terms of the contract. There is no evidence the parties agreed to pay $61,000.00 as an upfront cost. Additionally, the account statement of the contract does not list overhead and profit as terms, but instead indicates the $61,000.00 is an additional amount that represents 10% of the $610,000.00 contract price. Furthermore, the construction in Sentry was substantially completed whereas only $10,000.00 of the $610,000.00 Zepsa project had been completed.

Because we find Sentry distinguishable, Zepsa is limited to recovery provided for by the strict terms of the mechanics lien statute. This statute provides that debts for labor performed or materials furnished are lienable debts. Hardin Constr. Group, Inc. v. Carlisle Constr. Co., 300 S.C. 456, 457, 388 S.E.2d 794, 795 (1990); see Johnson v. Barnhill, 279 S.C. 242, 245, 306 S.E.2d 216, 218 (1983) (In order to establish a mechanics lien, it is generally necessary that the labor performed go into something which has attached to and become a part of the real estate, adding to the value thereof.); Tenny v. Anderson Water, Light & Power Co., 67 S.C. 11, 17, 45 S.E. 111, 113 (1903) (The extent of the remedy afforded by the [mechanics lien] act is to enforce the lien upon the property covered. (quoting Johnston v. Frazee, 20 S.C. 500 (1884))).

With respect to overhead and profits, the extent of a contractors recovery has been interpreted as follows:

A contractor is only allowed a privilege for claims expressly granted by the statute and equitable considerations do not enlarge such right. Generally, overhead costs and lost profits are not within the purview of a mechanics lien statute; but, where overhead costs and profits are provided for in the contract, they become subject to collection on a mechanics lien.

56 C.J.S. Mechanics Liens 196 (2000).

As testified to by Ed Zepsa, the $61,000.00 deposit was not associated with any labor performed. The master also recognized this fact given he stated in his order there is a reasonable and equitable basis for claiming the balance of the deposit as an integral part of the payment due under the contract, unrelated to actual work performed. Thus, we find the master erred in finding Zepsa was entitled to the balance of this amount under a mechanics lien action. Moreover, we note the mechanics lien statement of account, which outlines the amount that is recoverable, is not included in the Record on Appeal. Despite this omission from the record, there is a letter from Zepsas attorney to the Randazzos attorney that itemizes the amount of Zepsas claim. In this accounting, the Total due on work is valued at $10,846.00. Accordingly, Zepsas recovery under its mechanics lien action is limited to $10,846.00, an amount that the parties agree represents the work completed.

Our decision is consistent with the holdings in other jurisdictions. See, e.g., In re Regl Bldg. Sys., Inc., 273 B.R. 423, 443 (Bankr. D. Md. 2001), affg 320 F.3d 482 (4th Cir. 2003) ([A] claim for lost profits arising from a breach of contract based on wrongful termination of a contract before construction is completed cannot be asserted as a mechanics lien or as a claim payable from contractors trust.); Tilt-Up Concrete, Inc. v. Star City/Federal, Inc., 582 N.W.2d 604 (Neb. 1998) (concurring with other jurisdictions which deny lien for lost profits because they compensate a party for work not yet performed); Fortune v. Million Dev. Co., 768 P.2d 1194, 1197 (Ariz. Ct. App. 1989) (holding that a lien filed before completion of a contract is limited to the value of the labor or services actually furnished at the time the lien is filed . . . rather than the full contract price payable after completion of the contract); Bangor Roofing & Sheet Metal Co. v. Robbins Plumbing Co., 116 A.2d 664 (Me. 1955) (recognizing that overhead and lost profit standing by themselves are not lienable); see generally W. J. Dunn, Annotation, Amount For Which Mechanics Lien May Be Obtained Where Contract Has Been Terminated or Abandoned by Consent of Parties or Without Fault on Contractors Part, 51 A.L.R.2d 1009 (1957 & Supp. 2003) (discussing the following methods for valuing a mechanics lien where contract had been prematurely terminated: (1) amount of work performed up to the date work was stopped; (2) amount proportional to entire contract price; (3) amount of profit included in lien in limited jurisdictions; (4) amount of profit excluded; and (5) amount includes contract price less amount of completion).

II. Attorneys Fees

The Randazzos argue the master erred by awarding attorneys fees to Zepsa and not to them.

The Randazzos raise this issue in conjunction with their first issue. They assert that [i]f this Court reverses the lower courts finding regarding the lien, the Appellants will become the prevailing party under the statute. The Randazzos do not make any argument that the master erred in awarding attorneys fees other than to contend that because we should reverse on the first issue, we should also reverse the award of attorneys fees.

The determination as to the amount of attorneys fees that should be awarded under the mechanics lien statute is addressed to the sound discretion of the trial court. Keeneys Metal Roofing, Inc., 345 S.C. 550, 553, 548 S.E.2d 900, 901 (Ct. App. 2001). The courts decision regarding such a matter will not be disturbed absent an abuse of discretion. Id.

In an action to foreclose a mechanics lien, the award of attorneys fees is governed by section 29-5-10(a). This section states in pertinent part, The costs which may arise in enforcing or defending against the lien under this chapter, including a reasonable attorneys fee, may be recovered by the prevailing party. S.C. Code Ann. 29-5-10(a) (1991).

Section 29-5-10(b) outlines the procedure for determining the prevailing party. The statute in effect at the time of this action provides in relevant part:

For purposes of the award of attorneys fees, the determination of the prevailing party is based on one verdict in the action. One verdict assumes some entitlement to the mechanics lien and the consideration of compulsory counterclaims. The party whose offer is closer to the verdict reached is considered the prevailing party in the action. If the difference between both offers and the verdict is equal, neither party is considered to be the prevailing party for purposes of determining the award of costs and attorneys fees.

If the plaintiff makes no written offer of settlement, the amount prayed for in his complaint is considered to be his final offer of settlement.

If the defendant makes no written offer of settlement, the value of his counterclaim is considered to be his negative offer of settlement. If the defendant has not asserted a counterclaim, his offer of settlement is considered to be zero.

S.C. Code Ann. 29-5-10(b) (Supp. 2002). [2]

In the instant case, Zepsa made a written offer of settlement for $40,000.00. Because the Randazzos did not make an offer of settlement, the value of their counterclaims, $88,000, is considered a negative offer of settlement. As previously discussed, the $40,000.00 deposit should not have been included as part of the mechanics lien and, thus, Zepsa should have been awarded $10,864.00. Even excluding the amount of the deposit, Zepsa still remains the prevailing party and was properly awarded attorneys fees. Given the Randazzos do not challenge the amount of the award of attorneys fees, we affirm the masters decision.

CONCLUSION

In view of the foregoing analysis, we hold the master erred in awarding $50,486.00 to Zepsa for its mechanics lien. Because the $40,000 balance of the agreed upon deposit, which the parties characterized as overhead expenses and lost profit, was not a term of the construction contract, it was not a proper lienable item under the mechanics lien statute. The master did, however, correctly award $10,864.00 to Zepsa for the value of work that had been completed on the project. Finally, we affirm the masters decision to award Zepsa attorneys fees given it was the prevailing party under the mechanics lien statute.

AFFIRMED AS MODIFIED.

HEARN, C.J. and STILWELL, J., concur.

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