Court Invalidates Mechanic's Lien for Seeking Excessive Amount

by Sherman & Howard L.L.C.

A mechanic's lien is a very powerful tool for prime contractors, subcontractors, suppliers, and laborers to seek compensation for work provided on construction projects.  This tool, however, becomes excessive, invalid, and could lead to owners recovering costs and attorneys' fees if filed in excess of the contract price or without regard to conditions precedent.  A recent decision by the Colorado Court of Appeals in Byerly v. Bank of Colorado [1] provides important guidance for lien claimants in the mechanic's lien process. 

The case involved a contract between a developer and contractor for the development of a residential subdivision in Timnath, Colorado.  The contractor had entered into a written contract with the developer for $7,000 per month, plus 2.5 lots or the cash value of 2.5 lots for each phase of the project.  The contractor only could receive the lots as compensation if the developer was released from the construction loan.  Alternatively, the contractor could receive the cash value of the lots if the developer had repaid its construction loan and realized a net profit. 

The developer struggled to sell lots and did not pay the contractor's fee for several months.  The bank declared the developer to be in default.  Before completing the foreclosure process, the developer sent a letter to the contractor, stating that the contactor had "earned" the lots or cash value of the lots.  The contractor also recorded a mechanic's lien for the monthly fees and its estimated fair market value of the lot compensation. 

In the lawsuit to foreclose on the mechanic's lien, the bank argued the contractor was limited to asserting the contract value in the mechanic's lien and the mechanic's lien was excessive under C.R.S. § 38-22-128.  The Larimer County District Court interpreted the statute to entitle the contractor to assert a mechanic's lien for the "full value" of its services and labor, as well as found the contractor did not file an excessive lien.         

On appeal to the Colorado Court of Appeals, the court addressed two issues: (1) filing a lien in excess of the contract price and (2) filing an excessive lien.  First, the court addressed the value of a lien a prime contractor may seek.  C.R.S. § 38-22-101(2) authorizes a prime contractor to record a lien for up to the "entire contract price."  On the other hand, when the contract has not been recorded with the county clerk and recorder, C.R.S. § 38-22-101(3) authorizes "all persons" who provided labor and materials to "have a lien for the value thereof."  The court found that "persons" in C.R.S. § 38-22-101(3) references subcontractors, suppliers, and laborers, not prime contractors.  Accordingly, the court held the contract price is the maximum amount a prime contractor may assert in a mechanic's lien. 

Second, the court addressed the issue of whether the mechanic's lien filed by the contractor was excessive due to the failure to satisfy conditions precedent to the owner's duty to pay.  The Larimer County District Court found the contractor reasonably anticipated receiving the lots or cash value of the lots based on the developer's statement it had "earned" the lot compensation.  The Colorado Court of Appeals found that the contractor knew the conditions precedent had not occurred and reasonably would not occur.  The court focused on the contractor's admission it knew about an impending bankruptcy by the developer and foreclosure by the bank.  With such knowledge, "there was no reasonable possibility that the amount claimed in the lien filing was due at the time it was filed."  The court held the contractor filed an excessive lien, which rendered it invalid.   

Following Byerly, prime contractors must be cautious when determining the amount owed as part of a mechanic's lien.  If the value of the services and labor does not exceed the contract price, the amount of the mechanic's lien should be for the value of such services and labor.  However, if the value of the services and labor exceeds the contract price, the mechanic's lien must be limited to the contract price and any valid change orders.  Subcontractors, supplies, and laborers have that same limitation only if the prime contract is recorded.  Otherwise, their mechanic's lien may be filed for the value of the services and labor provided.  Additionally, all lien claimants must be cautious in filing mechanic's lien when there are conditions precedent to payment in written agreements.  Based on Byerly, contractors and owners may try to argue "pay if paid" clauses (which impose a condition precedent to payment) render a subcontractor or supplier mechanic's lien excessive and invalid.  A lien claimant risks a finding of an excessive and invalid mechanic's lien (and a potential adverse award of costs and attorneys' fees) when there is no reasonable possibility about the satisfaction of a condition precedent. 

 [1] Byerly v. Bank of Colorado, 2013 CA 35 (Colo. App. March 14, 2013).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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