Mechanic’s Liens and Leases Don’t Often Mix Well

Christopher G. Hill | Construction Law Musings

As those who read my “musings” here at this construction law blog are well aware, the topic of Virginia mechanic’s liens is one that is much discussed.  From the basic statutory requirements to the more technical aspects of these tricky beasts.  One aspect of mechanic’s liens that I have yet to discuss in detail it how these liens attach in the situation where the contractor does work for a lessee and not for the owner of the underlying fee interest in the property.

A recent case out of the Western District of Virginia federal court, McCarthy Building Companies Inc. v. TPE Virginia Land Holdings LLC,  discusses the interaction of Va. Code 43-20, work on a leasehold, and parties necessary to any litigation relating to a lien for the work on that leasehold. The basic facts, outlined more thoroughly in the linked opinion, are these.  MBC provided certain work to TPE Kentuck Solar, LLC on property leased from TPE Virginia Land Holdings, LLC.  The lease was for a fixed term and for a fixed amount regardless of the work performed at the property.  MBC was unpaid by the Kentuck entity and then recorded a lien on the property and then sued to enforce that lien and for unjust enrichment against TPE Land Holdings.  TPE Land Holding filed a motion to dismiss the mechanic’s lien and unjust enrichment counts.

The Court heard oral argument and then went into an analysis of the above-referenced statute and whether TPE Land Holdings was a necessary party that had any interest in the “property” subject to the lien.  The Court put the question as follows:

The question, therefore, is not who has an interest in the land generally; rather, the court must ask who has an interest in the “part” of the land that Kentuck possesses. Specifically: Who has an interest in Kentuck’s leasehold interest?

Upon review of the lease and the relationships among the parties, the Court determined that the only party with an interest in the leasehold was Kentuck and that no action on the lien could diminish the property interest in the underlying property owned by TPE Land Holdings.  In short, TPE Land Holdings gave up its interest in the leasehold when it leased the land to Kentuck.  Even in the event that the lien suit lead to foreclosure, the worst that could happen is a new tenant would take over the lease and TPE Land Holdings would have potentially worse luck enforcing the lease.  Even in this scenario title to the underlying land would not be affected by the lien or its enforcement.  Therefore, the Court stated, TPE Land Holdings is not a necessary party or even a proper party to the lien counts and must be dismissed.

The Court dismissed the unjust enrichment count as well.  The Court stated that due to the fixed nature of the lease payments along with the fact that MBC failed to plead the requisite elements of an unjust enrichment claim, key among them that TPE Land Holdings was aware it may have to pay for the work performed under the contract with Kentuck.  Aside from MBC’s failure to plead all of the elements of such a claim, the Court stated that nothing MBC did affected the value of the leasehold from the perspective of TPE Land Holdings given the way the lease was drafted such that the work at the property would not affect the lease payments or other lease aspects that were set long before the work was performed.

My take?  Aside from the usual advice to read the opinion in full and to consult an experienced Virginia construction attorney, this case is a good primer on the interaction of leases and Virginia mechanic’s liens.  I recommend it to your reading.

Using Lien and Bond Claims to Secure Project Payments

Jonathan Cheatham | Construction Executive

While suing in court for payment on a construction project is nothing new, the very notion of non-payment tends evokes images of hard-working contractors and subcontractors, working with tight margins, owed payment for services rendered and materials. Fortunately, for general contractors and subcontractors in the construction industry, there are better remedies for securing payment on a project before it becomes a bigger issue.

Construction projects, especially large public ones, usually include a dizzying array of general contractors, subcontractors and independent contractors, sometimes numbering more than a hundred entities. The inter-connected groups of companies working toward the goal of project completion require competent construction management in order to stay on time and on budget for completion. One of the project owner’s key tools used to ensure the process runs smoothly is the use of payment bonds and surety bonds.  

PAYMENT BONDS

Payment bonds ensure that contractors and subcontractors get paid for work performed in accordance with contract conditions. Disputes can occur before, during and even after the completion of work. Injunctive lawsuits, which contemplate the stoppage of work, would be detrimental to completing a public or private construction project of substantial size. Rather than having such minor disputes derail the entire project, the aggrieved party’s remedy is to file a claim against the payment bond, which offers a solution designed to keep the issue separate from the project’s completion. The payment bond also allows the project owner to transfer risk.

Payment bonds also act to vet contractors and subcontractors to project owners. Likewise, they also protect subcontractors from non-payment by the general contractor, thereby ensuring the timely completion of large construction projects. They also have the added value of increasing a contractor or subcontractor’s reputation over time, leading to better credit and increasing the likelihood of involvement of future construction projects.

LIENS

As a contractor or subcontractor, what are options if and when non-payment becomes an issue? On owner-funded construction projects, the subcontractor generally has two remedies available; filing a mechanic’s lien and making a claim against the payment bond. A mechanic’s lien is a secured interest in real property that ensures payments to a party who has improved the real estate with labor, materials or supplies. The mechanic’s lien creates a security interest in the improved real estate for the amount due and owed. Another advantage is that they are simple to file and easy to perfect. The liens are effective, inasmuch as they make it difficult for an owner to obtain continued project financing or a certificate of occupancy upon the completion of a project. 

A mechanic’s lien is ineffective, however, on a public project, where laws involving mechanic’s liens don’t apply and filing against the payment bond is usually the only remedy. Use of a mechanic’s lien is therefore generally effective for private construction projects. It’s important in many jurisdictions that the subcontractor filing a mechanic’s lien have some type of identifiable “contract” with the property owner, which forms the basis of eligibility to file a mechanic’s lien.

SURETY BOND CLAIMS

The second remedy is a claim filed against the project’s payment bond, especially used in situations involving large public projects. Payment bonds provide an underwritten payment guarantee for work performed and the specific amount due to any subcontractors. The payment bond creates a contractual obligation to pay the subcontractor, per the terms of the payment bond contract. A claim against the payment bond may be the exclusive remedy on large public projects. The procedure for filing a claim is contained within the language of the payment bond. 

FILING DEADLINES

Subcontractors should always be aware of the filing deadlines for both a mechanic’s lien and a claim against a payment bond. A failure to timely file and perfect a claim or lien is often a waiver, and therefore disqualifying to subcontractors seeking payment. A majority of jurisdictions have timetables for the timely filings of mechanic’s liens or claims against a payment bond that vary. 

It’s highly recommended to seek the advice of an attorney who specializes in construction law to determine the deadlines in the jurisdiction where the subcontractor has completed the work, but still seeks payment. These deadlines are typically set from the date of the last work performed by the subcontractor, so the completion date is important to document. Deadlines are generally between 90 days to one year following the last date of work.

Knowing legal remedies in the performance of unpaid work is crucial to the ongoing business practices of any contractor or subcontractor. Disputes will invariably arise, so protecting the company and business interests through the use of mechanic’s liens and claims against payment bonds ensure that rights are protected, remedies for non-payment exist and that they are enforceable. 

California Court of Appeal Addresses Remedies When Contractor Records Invalid Mechanic’s Lien

Blake Robinson | Davis Wright Tremaine

The California Court of Appeal recently discussed an owner’s remedies (and some limits to those remedies) when a contractor improperly records a mechanic’s lien. According to the court’s analysis, the owner’s primary remedy will generally be removal of the offending lien. Seeking damages, on the other hand, can backfire with an award of attorney fees in the contractor’s favor.

Given that California is often seen as the leading authority on one of the key issues in the case, it could have an effect in other states as well, including Oregon and Washington.

Case Background

In RGC Gaslamp, LLC v. Ehmcke Sheet Metal Co., Inc.,1 a subcontractor recorded a mechanic’s lien of over $250,000 for allegedly unpaid work, and the owner subsequently secured and recorded a bond to release the lien.

Two months later, the subcontractor recorded a second lien in the same amount as the first. Several months later, the subcontractor withdrew the second lien but recorded a third, again in the same amount. The owner responded by obtaining a bond to release the third lien. The subcontractor then withdrew the third lien and recorded a fourth lien, once again in the same amount.

After the fourth lien was filed, the owner filed a lawsuit for slander of title. (The owner asserted other claims, but they were mooted because the subcontractor released the fourth lien.) The subcontractor responded by filing what is known as an “anti-SLAPP” motion—a motion seeking early dismissal of a “Strategic Lawsuit against Public Participation.”

The trial court granted the motion, dismissed the owner’s slander of title lawsuit, and awarded the subcontractor its attorney fees.

The Court’s Ruling

On appeal, the Court of Appeal affirmed. The court’s ruling began by giving an overview of the mechanic’s lien and anti-SLAPP statutes:

  • With respect to mechanic’s liens, the court noted that, as a subcontractor on a private construction project, the subcontractor had a right to send a preliminary lien notice to the owner, record a mechanic’s lien, and file a lawsuit to foreclose the lien.
  • With respect to the anti-SLAPP statute, the court stated that the subcontractor (as the party that filed the anti-SLAPP motion) had to establish that the owner’s claim “arose from the [subcontractor’s] protected activity.” If the subcontractor succeeded in doing so, the owner then had the burden to prove that its claim had at least “minimal merit.”

Addressing the first step in the anti-SLAPP analysis, the court stated that “[s]tatements made in preparation for litigation or in anticipation of bringing an action” are protected statements. The court held that because recording a mechanic’s lien is a prerequisite to filing a foreclosure lawsuit, recording a lien is a “protected prelitigation statement.” Significantly, the court held this was true regardless whether the subcontractor had any right to file the liens or actually intended to foreclose them.

Moving to the second step in the anti-SLAPP analysis, the court concluded that the owner had not shown that its slander of title claim had even “minimal merit.” California Civil Code § 47(b) provides a “litigation privilege” for communications made in a “judicial proceeding.”

Because recording a mechanic’s lien is a prerequisite to filing a foreclosure action, the lien recording falls within the litigation privilege, absent evidence that the party recording the lien had no intention of actually foreclosing it. Because the owner produced no such evidence, the litigation privilege applied, the owner’s claim lacked even minimal merit, and the Court of Appeal affirmed the trial court’s ruling. This resulted not only in dismissal of the owner’s lawsuit but also an award of attorney fees to the subcontractor.

Although it rejected the owner’s slander of title claim, the Court of Appeal did provide guidance on steps an owner can take in the face of an invalid lien. The court noted several options:

  • After receiving a preliminary notice of the lien, an owner can “seek declaratory and injunctive relief challenging the validity of the lien.”
  • If a contractor files duplicative liens before the owner files a release bond, the owner can ask a court to order the contractor “to post a single bond to release all duplicative liens.”
  • If a contractor files a lawsuit to foreclose an invalid lien, the owner can file a motion in response, seeking a court order releasing the lien.

Conclusion

As RGC demonstrates, an owner must proceed carefully before suing a contractor over an invalid lien. Otherwise, the owner might face an anti-SLAPP motion, early dismissal of the lawsuit, and a money judgment awarding the contractor its legal fees.

Contractors faced with such a lawsuit, on the other hand, should consider whether to file an anti-SLAPP motion in response. Notably, while RGC is not binding outside of California, California decisions on anti-SLAPP matters are often considered persuasive authority in states (such as Oregon and Washington) that modeled their anti-SLAPP statutes after California’s.2

FOOTNOTES

1  56 Cal.App.5th 413, 270 Cal.Rptr.3d 425 (4th Dist., 2020).
2  See, e.g., Handy v. Lane County, 360 Or. 605, 618-19 n. 12, 385 P.3d 1016 (2016); Alaska Structures, Inc. v. Hedlund, 180 Wash. App. 591, 599, 323 P.3d 1082 (2014).

Owner’s Slander of Title Claim Against Contractor Recording Four Separate Mechanics Liens Fails Under the Anti-SLAPP Statute

Garret Murai | California Construction Law Blog

Most mechanics lien actions follow a pretty standard process:

  1. A mechanics lien claimant, either a contractor subcontractor, material supplier, or laborer, performs work but is not paid;
  2. Mechanics lien claimant records a mechanics lien on the property in which work was performed; and
  3. Within 90 days thereafter files suit to foreclose on the mechanics lien.

Sometimes, either before or after a mechanics lien claimant files suit, the owner will record a mechanics lien release bond, in which case mechanics lien claimant files suit against the release bond.

But what if a  mechanics lien claimant records a mechanics lien, the owner records a mechanics lien release bond, and the mechanics lien claimant records three different but identical mechanics liens thereafter? Is this even legal?

One owner clearly didn’t think so and filed suit against a mechanics lien claimant for quiet title, slander of title, and declaratory and injunctive relief, which, while slightly different claims, were all premised on the ground that the lien claimant had impermissibly recorded its three mechanics liens after the owner had recorded its mechanics lien release bond.

The RGC Gaslamp, LLC Case

In RGC Gaslamp, LLC v. Ehmcke Sheet Metal Co., Inc., Case Nos. D075615 and D076594 (October 23, 2020) subcontractor Ehmcke Sheet Metal Company performed sheet metal fabrication and installation work at a luxury hotel located in downtown San Diego, California. In September 2017, Ehmcke recorded a mechanics lien in the amount of $257,978 for unpaid work. In response, the owner of the hotel, RGC Gaslamp, LLC, recorded a mechanics lien release bond releasing the mechanics lien.

That’s when things started to go a bit crazy.

  • In December 2017, Ehmcke recorded a second mechanics lien identical to the first;
  • Later, in April 2018, Ehmcke released the first and second mechanics lien and recorded a third mechanics for the same work. Once again, RGC records a mechanics lien release bond releasing the third mechanics lien.
  • Then, in July 2018, Ehmcke released the third mechanics lien and recorded a fourth mechanics lien identical to the first, second and third mechanics liens.

In response, RGC filed suit against Ehmcke for quiet title, slander of title, and declaratory and injunctive relief, claiming that by recording four separate mechanics liens, all for the same work and all in the same amount, and by doing so requiring RGC to record two mechanics lien release bonds, rendered the “statutory protections afforded to owners under Civil Code section 8424 illusory.

While the action was pending, Ehmcke released its fourth mechanics lien. In opposition to the complaint, RGC filed an anti-SLAPP motion. “SLAPP,” which stands for Strategic Lawsuits Against Public Participation, is a motion designed to provide for early dismissal of lawsuits filed against people for the exercise of First Amendment rights.

In its anti-SLAPP motion, Ehmcke included a declaration by its Vice President, Billy Taylor, who stated that before hiring counsel it was not properly advised of the legal and statutory scheme regulating mechanic’s lien law in California, that after retaining counsel Ehmcke promptly released its fourth mechanics lien because it was untimely, and that Ehmcke did not intend to record any additional mechanics liens on the project. In addition, Ehmcke contended in its anti-SLAPP motion that, while it erroneously recorded its four mechanics lien, its activity in doing so was protected petitioning activity.

In its opposition, RGC contended that Ehmcke’s action of filing four duplicative mechanics liens was neither protected petitioning activity under the anti-SLAPP statute codified at Civil Code section 425.16, because the mechanics lien statute made no provision for repeat liens after an owner records a mechanics lien release bond, nor covered by the litigation privilege codified at Civil Code section 47, since none of the four mechanics liens were recorded during the course of litigation.

During the hearing, the trial court granted Ehmcke’s anti-SLAPP motion, while expressing discomfort that an owner like RGC would have no judicial remedy when faced with duplicative liens, and awarded Ehmcke’s $30,000 in attorney’s fees under the anti-SLAPP statute and $1,062 in costs as the prevailing party.

RGC appealed.

The Appeal

On appeal, the 4th District Court of Appeal explained that, under the anti-SLAPP statute codified at Civil Code 425.16, an anti-SLAPP motion involves shifting burdens of proof:

In the first step, the moving defendant bears the burden to establish that the challenged claim arises from the defendant’s protected activity. If the defendant carries its threshold burden, the burden then shifts to the plaintiff to demonstrate that its claims have minimal merit. “The court, without resolving evidentiary conflicts, must determine whether the plaintiff’s showing, if accepted by the trier of fact, would be sufficient to sustain a favorable judgment.” If a plaintiff does not make that showing, a court will strike the claim. A defendant that prevails on an anti-SLAPP motion to strike is generally entitled to recover attorney’s fees and costs.

As to the first prong, explained the 4th District, “courts consider whether a defendant has made a prima facie showing that activity underlying a plaintiffs causes of action is statutorily protected, ‘not whether it has shown that its acts are ultimately lawful.’” Thus, while Ehmcke’s fourth mechanics lien may have been released because it was untimely recorded, whether Ehmcke’s fourth mechanics lien was invalid or not was irrelevant. Further, explained the Court, while the mechanics lien statute does not address whether a mechanics lien claimant can record duplicative mechanics liens after a mechanics lien release bond is recorded is similarly irrelevant under the first prong of the anti-SLAPP statute since the lawfulness of such activity is not at issue.

Rather, held the Court of Appeal, “[t]he filing of a mechanics lien is a necessary prerequisite to bringing a foreclosure action” and “[a]s such, it is a protected prelitigation statement preparatory to filing a judicial proceeding.”

As to the second prong, explained the 4th District, because Ehmcke had released its fourth mechanics lien, RGC’s quiet title and declaratory and injunctive relief claims were rendered moot, leaving only RGC’s claim for slander of title.  As to RGC’s remaining claim for slander of title, under the second prong of the anti-SLAPP statute, explained the Court, RGC had the burden of showing that its claim had “minimal merit” including that “any asserted defenses . . . were inapplicable as a matter of law” or “make a prima facie showing that, if accepted, would negate such defenses.”

Here, Ehmcke claimed that RGC’s slander of title of claim was without merit because its fourth mechanics lien, even if invalid and later released, was a privileged activity under the litigation privilege. The Court of appeal agreed explaining:

Codified at section 47, subdivision (b), the litigation privilege applies to communications made as part of a “judicial proceeding.” Its principal purpose is to afford litigants and witnesses “utmost freedom of access to the courts without fear of being harassed subsequently by derivative tort actions. The privilege is absolute, providing a defense to all torts except malicious protection and applying “to all publications, irrespective of their maliciousness.” In general, the privilege applies “to any communication (1) made in judicial or quasi judicial proceedings; (2) by litigants or other participants authorized by law; (3) to achieve the objects of the litigation; and (4) that [has] some connection or logical relation to the action.” “The privilege “is not limited to statements made during a trial or other proceedings, but may extend to steps taken prior thereto, or afterwards.”

Citing to the case, Frank Pisano & Associates v. Taggart (1972) 29 Cal.App.3d 1 (holding that the recording of a mechanics lien is protected under the  litigation privilege against a claim for disparagement of title), the Court of Appeal held that RGC had not shown the litigation privilege was inapplicable as a matter of law to its slander of title claim.

 Conclusion

So there you have it. You can challenge (defensively) the merits of a mechanics lien, but you can’t claim (offensively) that the act of recording the mechanics liens was a slander of title, even a mechanics lien recorded four times over again, and even when recorded after the recording of two mechanics lien release bonds.

This can be a frustrating outcome for owners, who may feel that a contractor is “playing games” by recording multiple mechanics liens, sometimes after a mechanics lien release bond is recorded (as was the case in the RGC Gaslamp case), or in wildly differing amounts, knowing that it costs an owner time and money to secure a mechanics lien release bond each time a new mechanics lien is recorded, or recording mechanics liens in excessive amounts, knowing that the premium paid by an owner for a mechanics lien release bond is based on the value of the mechanics lien. Unfortunately, while an owner has a defensive game that it can play, they really don’t have an offensive one.

Georgia Legislature Amends Mechanic’s Lien Law

J. David Pugh and Connor J. Rose | Buildsmart

An important update to Georgia’s statutory lien waiver laws took effect on January 1, 2021. The amendment to Georgia’s mechanic’s lien law alters the form for interim and final lien waivers. Essentially, the new statute clarifies that lien waivers only waive lien or bond rights against the property and do not waive the right to file a lawsuit for nonpayment or other claims. The law also extends the deadline to file an affidavit of nonpayment from 60 days to 90 days.

Georgia’s legislature and governor were prompted to amend the lien law following a controversial 2019 Court of Appeals of Georgia decision in which a contractor sued a property owner for nonpayment. The contractor signed an interim lien waiver at the time it submitted its invoice. Although the contractor never received payment, it failed to record an affidavit of nonpayment or a claim of lien within 60 days of executing its lien waiver. The contractor then filed suit for breach of contract for nonpayment. The court dismissed the contractor’s lawsuit holding that the contractor had waived its contract claim by the interim final lien waiver and subsequent failure to file an affidavit of nonpayment.

In that 2019 decision, the court relied on two provisions of the old law to reach its verdict. The first provision stated that the “waiver or release shall be binding against the claimant for all purposes.” The second provision stated that the “amounts shall be conclusively deemed paid in full…sixty days after the date of the execution…unless…claimant files a claim of lien, or files…an affidavit of nonpayment.” The court held that based on statutory plain language the second provision automatically extinguished not just the plaintiff’s lien rights but also all of the plaintiff’s underlying claims for payment when the affidavit of nonpayment was not timely filed to nullify the lien waiver. Thus, under the old Georgia lien law, failure to file a claim of lien or affidavit of nonpayment on time after signing an interim lien waiver waives all claims and results in the underlying debt being deemed satisfied.

On August 5, 2020, the Georgia legislature enacted amendments (Senate Bill 315) to the Lien Waiver Act that expressly limit applicable waivers and releases under the Lien Waiver Statute to just mechanic lien and bond rights. This change allows claimants to retain any other contractual claims or rights to collect sums owed even if their lien rights are lost. This change has resulted in the deletion of language on the statutory lien waiver form that the sum owed is “conclusively deemed paid” if an affidavit of nonpayment is not timely filed. The time to file an affidavit of nonpayment or claim of lien has been extended to 90 days.