Defending Mechanic's Liens
Disgruntled contractors and suppliers sometimes record excessive or improper liens attempting to gain leverage in a payment dispute. This can be very disruptive. There are a lot of defenses.
How to Bond Around the Lien.
A recorded mechanic's lien can prevent the sale of a property or generate pressure from a lender. The mechanic's lien statute provides the option to substitute a bond in place of the lien. Specifically, C.R.S. sec. 38-22-131 provides: "Whenever a mechanic's lien has been filed in accordance with this article, the owner ... may, at any time, file with the clerk of the district court of the county wherein the property is situated a corporate surety bond or any other undertaking which has been approved by a judge of said district court."
The process works like this: First, the owner purchases a bond. There are several bonding companies who sell such bonds. They usually require a fee of approximately 3% per year and collateral. Once the bond is purchased, the owner can initiate an action to substitute the bond in place of the mechanic's lien. These are granted as a matter of course. The court will order the mechanic's lien discharged. This clears the title of the property and allows the sale to proceed and/or satisfies the lender. Any leverage created by the lien evaporates.
Because mechanic's liens are so disruptive, the statute provides for an expedited hearing. C.R.S. sec 38-22-113 states: "The court, whenever the issues in such case are made up, shall advance the cause to the head of the docket for trial and may proceed to hear and determine said liens and claims or may refer the same to a magistrate to ascertain and report upon said liens and claims and the amounts justly due thereon." Here's how it works: The owner files a complaint for declaratory relief (which also has an expedited process) and requests discharge of the mechanic's lien. The court will set an evidentiary hearing to determine if the lien is valid. At that hearing the contractor or supplier will be required to prove that it is entitled to the amount claimed. As explained in the next section, if it becomes apparent that the lien is knowingly excessive, there are severe penalties.
What Happens if the Lien is Excessive?
Often, a contractor or supplier will inflate the amount of a lien to retaliate or create leverage. There are severe penalties for doing so.
The mechanic's lien statute states: "Any person who files a lien ... for an amount greater than is due without a reasonable possibility that said amount claimed is due and with the knowledge that said amount claimed is greater than the amount then due, ... shall forfeit all rights to such lien plus such person shall be liable to the person against whom the lien was filed in an amount equal to the costs and all attorney's fees." If a contractor or supplier intentionally inflates the amount of the lien, they lose all lien rights and are forced to pay the owner's attorney fees.
Once the contractor or supplier records the lien, the mistake has been made and it is hard to undo. Documents usually tell the tale. The contractor or supplier will be required to produce evidence showing all direct costs on the project. Comparing those costs to the amount claimed will reveal the inflation. The contractor or supplier at that point is in an impossible position. The best move is to withdraw the lien to minimize the attorney fee liability. It is incredibly embarrassing. By doing so the claimant acknowledges that they falsely inflated the amount, shredding their credibility. But refusing to do so exposes the claimant to a huge attorney fee award. Once it becomes clear that the lien is excessive, settlement discussions usually follow.
How are Single Family Residences Treated Differently?
The statute treats single family residences differently. Where a mechanic's lien is recorded against someone's home, it is an absolute defense if the owner paid the general contractor for the work or the materials. C.R.S. sec. 38-22-113(4). For instance, if the general contractor runs off with the construction proceeds, a homeowner is no forced to pay twice. Presumably, the legislature felt it was fair for a owner of a commercial project project to bear this burden. That's business. But we do not impose that same risk on homeowners.