Liens on Private Interests in Public-Private Partnership Projects

Across the country, Public-Private Partnerships (“P3s” – which you can read more about here) are gaining traction as an alternative means of financing and completing public projects.  Although Washington has been slow to implement P3s in its own public ventures, it is important to think about the effect this emerging procurement model might have on other, seemingly “settled” areas of the law.

It is a well-established principle in Washington that public property is not subject to a mechanic’s lien.[1]  This convention is not an altogether surprising one; providing suppliers of labor and material with the ability to encumber government property would severely undercut the state’s sovereign immunity.  But without a means of ensuring payment from the government, suppliers of material and labor would be hesitant to offer their services.  To overcome this problem, public projects use bonds and retainages.  These devices allow claimants to gain access to unpaid funds without affecting the government’s proprietary interests.

However, problems can arise when there is uncertainty as to which interest is public and which is private.  Public projects using the P3 method of delivery – where a comingling of public and private interests is possible, if not expected – present an important question:  Can a supplier of labor or materials record a lien against private interests in public projects?

A California case illustrates the crux of this issue.  In South Bay Expressway v. Otay River Constructors,[2] the California Department of Transportation contracted with a private developer to construct a toll road.  The franchise agreement gave the developer a 35-year lease, during which time it would operate the public road and collect tolls.  When the general contractor on the project recorded a lien on the developer’s leasehold interest in the toll road, the Court was charged with determining how far the exemption on public property liens extended.  Was the lien on the developer’s interest an impermissible encumbrance on public property or were the interests at stake distinguishable enough to permit the lien?

Reasoning that an encumbrance on private interests in public property did not offend principles of sovereign immunity, the Court found the lien to be permissible.  Central to the Court’s finding was the fact that the private interest in the toll road was a distinct one, wholly separable from the interest held by the public.  Because the Department of Transportation had granted its interest in the leasehold to the private developer, it was improper to think of the interest as a “public” one.

California’s treatment of this dilemma is not without its criticisms.  Some jurisdictions have questioned the wisdom in opening up public properties to de facto encumbrances.[3]  Furthermore, there are a number of potential scenarios in which the line separating public interests from private ones will be far less distinct.  If faced with these more complicated questions, courts will likely struggle to balance the needs of the state with principles of contractual freedom.

Comments:  It is unclear how a court in Washington would answer the question presented here.  Because the State has been slow in its implementation of P3 projects, it has not been required to resolve the same issues addressed by the court in South Bay Expressway.  Until the State confronts this issue via legislation or judicial ruling, parties to P3 projects would do well to clearly distinguish public and private interests affected by the agreement.

[1] See Hall & Olswang v. Aetna Cas. & Sur. Co., 161 Wash. 38, 47, 296 P. 162 (1931).

[2] 434 B.R. 589 (Bankr. S.D. Cal. 2010).

[3] See generally In re Paerdegat Boat & Racquet Club, Inc., 443 N.E.2d 477 (N.Y. 1982); Okla. Stat. tit. 61, § 1(A) (2012).

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