Utah Court of Appeals to Lenders Relying Upon Their Own Boilerplate Lien Release Language in Form Draw Requests: Use the Legislature’s Form and Elements

by Snell & Wilmer

[authors: Stewart O. Peay and Mark O. Morris]

In Utah, to obtain a waiver of lien rights from a subcontractor, material man, laborer, supplier or any other potential mechanics’ lien claimant, a lender should use the lien waiver and release form incorporated in Utah Code Ann. §38-1a-802 in its draw request form. A Utah Court of Appeals decision last week found that “use of those forms provides a dependable safe harbor for lenders and others who wish to be assured that a contractor’s written waiver and release of statutory lien rights is enforceable under the act.” Lane Myers Construction, LLC v. Countrywide Home Loans, Inc., 2012 UT App 269 ¶16. The form language can be found here.

In Lane Myers, the contractor signed a draw request that included lien release language on which the lender relied in funding a draw. The contractor filed a lien anyway, and sought to perfect it. The trial court had granted summary judgment voiding the lien, finding that the lien release language in the draw request form, signed by the contractor, had substantially complied with the Utah statutory lien release requirements. The Court of Appeals reversed the trial court, however, finding that substantial compliance was insufficient. It explained that the statutory form should be used in most instances and gave specific requirements should a lender opt to use its own form. See Lane Myers, 2012 UT App 269 ¶17.

Should a lender choose not to use the specified forms and create its own release and waiver language, “the overarching standard for an enforceable waiver and release must be met; that is, it must be in substantially the form provided in” the statute. Lane Myers, 2012 UT App 269 ¶17. By providing the form in the statute, the legislature has directed that “a valid waiver and release at least contain each of the component parts the form includes, in substance and effect if not in the identical language.” Id. Thus, should a lender create its own waiver and release form, that form must first “include[] a statement that the document is intended to be a waiver and release in accordance with Utah law.” Id. at ¶18. Second, the form must set out “specific information pertinent to the particular lien rights subject to waiver and release including ‘Property Name,’ ‘Property Location,’ the identity of the ‘[Contractor]’s Customer,’ ‘Invoice/Payment Application Number,’ and ‘Payment Amount.’” Id. Third, the form must give “explicit notice to the contractor of the effect that signing the release will have on rights otherwise available to it under the mechanics’ lien act and the conditions upon which the waiver becomes effective.” Id. This information is found in the Act:

To the extent provided below, this document becomes effective to release and the undersigned is considered to waive any notice of lien or right under Utah Code Ann., Title 38, Chapter 1a, Preconstruction and Construction Liens, or any bond right under Utah Code Ann., Title 14, Contractors' Bonds, or Section 63G-6a-1103 related to payment rights the undersigned has on the above described Property once:

(1) the undersigned endorses a check in the above-referenced Payment Amount payable to the undersigned; and
(2) the check is paid by the depository institution on which it is drawn.

Utah Code Ann. §38-1a-802. Finally, “the form must require[] the contractor either to represent that all those who might have subordinate lien claims have been paid or to promise that the funds received in exchange for the waiver and release will be used to make such payments.” Id. Each of these four requirements need to be met so that the form waives and releases the lien rights and the contractor understands the consequences of signing a form releasing and waiving those rights.

The Lane Myers’ decision means that, for now, Utah courts will strictly protect the mechanics lien rights of subcontractors, material men, suppliers and others against waiver. There is a possibility that the lender will seek certiorari from the Utah Supreme Court to reverse the Court of Appeals, but, for now, lenders should be wary of using any wavier and release form that is different from that found in the statute.

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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