Separate Account Requirement For Mechanics' And Materialmen's Liens

By: Jim Busch

As part of the Official Code of Georgia Annotated (O.C.G.A.) 44-14-361, in order to properly file and enforce lien rights, the lienor must maintain separate accounts on sales transactions. This requirement is designed to require suppliers to keep accurate records of not only what materials were sold to whom, but what materials were used at which individual project or lot.

Under Georgia statutory law, a supplier must segregate by invoice number the identity of materials used in each project or property improved by a contractor or subcontractor. In addition, when payment is made by a contractor, a supplier must inquire as to how the payment is be credited to avoid misapplication of the payment. A supplier who fails to maintain separate accounts for its customers and uses only one general account for purchases and credits all payments to the general account as opposed to each crediting the accounts of each property improved, loses its right to lien the properties supplied.

This statute also requires that each of the separate accounts of a contractor be credited at the time of payment. Thus, a supplier who fails to maintain separate accounts and after the fact attempts to separate the accounts and payments will lose its lien rights.

A supplier will not satisfy the statute by indicating to the contractor how a payment will be applied without direction from the contractor. A supplier, therefore, cannot dictate how payments will be applied to an account. Rather, if the contractor has a preference or a specific desire on the application of a payment, the supplier must honor the contractors request or risk losing lien rights. In addition, there is some Georgia case law that indicates that the supplier is obligated to make a reasonable effort to determine from the contractor how a payment should be applied.

Therefore, if a supplier honors all specific requests for payment application and makes a reasonable effort to determine how non-specific payments should be applied, then the supplier has preserved its lien rights. Further, although not specifically stated in statute or case law, a supplier would appear to be able to apply payments at its discretion where the contractor has not made a specific indication of where the payment should be applied and a reasonable inquiry has failed to determine how said payment should be applied.

It should be noted that the above requirements only apply to cases where it is shown that the contractor paid to the supplier from money received from the property owner in a sufficient amount to pay the supplier in full for all materials purchased and used in the owner’s property. Therefore, the burden is on the property owner, in order to defeat a lien, to show that the owner paid the contractor in full and to trace the payment by the contractor to the supplier.

The problem with treating the separate account requirement as having limited application is that the supplier generally will not know of the final payment status between the contractor and the property owner until after the fact. Thus, a prudent supplier should always maintain accounts so as to be able to determine that contractor “A” has an outstanding balance of “X” which can be broken down to an exact dollar amount for each individual project or lot number. This dollar amount determined to have been delivered to or utilized in an individual project or lot is the only amount which can be used to lien those individual projects or lots.

Mr. Busch is an attorney specializing in commercial and construction litigation for Busch, Reed, Jones & Leeper, P.C. in Marietta, Georgia