March 21, 2016
1. Priorities
If you are talking about priorities, then something went wrong. This discussion usually only happens when there is some sort of owner or lender meltdown where there may not be enough money to pay everybody. If your project is going south, you need to know the law in that state. In some states, if a deed of trust is recorded on the property before any work commences, themechanics lien claimants will likely be wiped out in a foreclosure action by the bank. Some states give mechanics liens priority over the security interests of banks and other secured lenders, even when the lien is established after the lender’s security interest.
2. Competing Liens
As with priorities, this discussion usually happens only when there is not enough equity in the property to make everybody whole. If there are several mechanics liens on the project, generally they will all relate back to the same point in time. Shortfalls are made up on a pro-rata basis.
3. Owner Bankruptcy
Owner bankruptcy should not preclude a claimant from filing a mechanics lien in accordance with state law. However, it may impact whether a claimant can pursue a claim outside of bankruptcy because of bankruptcy statute’s automatic stay provisions.
4. Things To Consider When Counter-Claims, Construction Defect Claims, or Other Contract Claims Exist
Lien claims can create or become part of other litigation involving the project. If this happens, strap yourself in, it will be a long ride. Lien claims are frequently met with counter-claims for delay, construction defect, or some other form of contract litigation . These counter-claims could involve ones surety. If there is a counter-claim against you, you need to look at it very closely. Maybe the counter-claim is without merit but do not automatically make this assumption. Sometimes who is the plaintiff and who is the defendant is simply based on who gets to the courthouse first keep this in mind if you are served with a counter-claim, Too often the knee jerk reaction is “it’s a bunch of b.s.,” when in fact there could be some merit to the counter-claim. Also, if there are construction defect allegations, make sure you think about tendering to your liability insurance carrier. You will lose some control of the case but the carrier will have to defend, which will save on costs and attorneys’ fees.
5. What To Do When The Sureties Get Involved
A surety will get involved when there is a release bond in place for the lien, or if there is a crosscomplaint against the claimant’s own surety. There can also be a payment bond on the whole project. A surety bond is not like an insurance policy. Whereas an insurance company can pay a settlement and have very few options to recoup its payment from the insured, a surety will seek to collect its payment from the bond principal. Usually the surety and the principal are represented by the same counsel, otherwise, the principal will have to end up paying for the surety’s attorney too. If your surety is named in an action, you should confirm that you will defend the surety through counsel of your choice. This is normally acceptable to the surety.
Additionally, make sure your attorney keeps the bonding company advised of all significant developments and seeks approval of any settlements. If you do something that prejudices the surety, the surety may no longer have an obligation to the bond principal, so it is important that the surety be kept in the loop every step of the way.
6. Prompt Payment and Attorneys’ Fees
It is important to know that statutory prompt payment penalties may exist if undisputed amounts are not paid to a claimant. Owners and Prime Contractors need to resist the urge to withhold any more than what they are lawfully entitled. Thus, if a lien is for $100,000, and it is clear the claimant is owed $50,000, the failure to pay the claimant the undisputed amount could subject the owner or Prime Contractor to penalties in the form of interest and attorneys’ fees. Prompt payment penalties can exceed 20% of the principal amount per year.
Attorneys’ fees are a major component to construction lien cases. Most contracts have a prevailing party attorneys’ fees provision. Some states allow for recovery of attorneys’ fees by statute in prompt payment cases and on lien and bond claims. You need to be aware of these issues at the beginning of any case as the attorneys’ fees component will at some point rear its ugly head and be a big markup in the settlement discussions.