Posted In: Real Estate
Industry: Construction

RE&C In Review: Crossing the Line - Contractor Liability and Mechanic's Liens

By James T. Dixon & Sarah M. Sears (Summer Associate) on January 25, 2021

Reposted from constructionexec.com, July 10, 2020, a publication of Associated Builders and Contractors. Copyright 2020. All rights reserved.

On those occasions when a contractor must record a mechanic’s lien, the response from the property owner often involves an immediate claim that the lien is invalid or even slanderous. It is important, then, for contractors to have an understanding of the contours of the claims owners rely upon, not only to understand what the owner is communicating when it makes the claim, but also to understand the line between a valid lien and one that exposes the contractor to liability. To provide that understanding, this article summarizes the law in the four most populous states. That summary shows that owners have several claims at their disposal and that action that exposes a contractor to liability tends to be extreme.

Are the statements made within the lien protected by a legal privilege?

A threshold question is whether statements within a lien can expose a contractor to liability at all.

In California, the statements within a mechanic’s lien are almost completely protected by the litigation privilege. That privilege is intended to allow individuals and entities to be frank about the problems they are litigating without fear of reprisal. The protection is almost complete because only one exception has been recognized. A court in California may not apply the privilege if it determines that the lien claimant failed to contemplate a lawsuit in good faith and with serious consideration when recording the lien.  

New York may apply the privilege without exception, since a trial court determined in 2019, after reviewing the law elsewhere, that statements within a mechanic’s lien were unconditionally protected by the litigation privilege. Just six years earlier, a different court had indicated, without referencing the privilege, that an owner had many common law claims that it could assert. If and how the New York courts apply the 2019 decision will be critical. However, even if it is applied without exception, a New York statute gives owners a remedy if they can prove that the contractor willfully inflated the lien amount. We will discuss the application of that statute in the next section. 

Florida courts review the application of the privilege on a case-by-case basis. There is a legal presumption that the statements in litigation or in anticipation of litigation, even if they turn out to be false, are protected unless they are made maliciously. While malicious conduct will create an exception to the application of the privilege, the protection is still robust because proof of malicious conduct sets a high hurdle for owners to clear.

Texas is like Florida in its application of the privilege through a case-by-case analysis of malice. However, Texas, like New York, provides owners with a statutory claim if they can prove that the lien was fraudulent. We will also discuss the application of that statute in the next section.

In New York, Texas, and states like them, contractors can proceed with knowledge that they cannot record, respectively, a willfully exaggerated lien or a fraudulent lien because of statutory remedies to which the privilege does not apply. In all four of these states, and states like them, contractors will have to understand if and how the litigation privilege applies to the content of their mechanic’s lien in order to understand the risks involved.   

What constitutes actionable conduct?

New York cases addressing the statutory remedy deal squarely with the sort of conduct that constitutes willful exaggeration. It is the property owner’s burden to establish deliberate and willful exaggeration of the amount due, and the statute is construed in the contractor’s favor. As a result, actionable conduct tends to be extreme. In one case, the contractor knowingly included inflated mark-ups in his claim and stated that he was “entitled to mark it up to whatever number I want.” 

Under the Texas statute, in order to demonstrate that a lien is fraudulent the owner must show that the contractor knew the document was fraudulent, intended that the document would be perceived as legitimate, intended to cause financial, physical or mental damage, and intended to defraud the owner. Examples of actionable conduct in Texas include a lien from an engineer who did not have a right to record one and a lien from a contractor who did not credit partial payments received before recording the lien. 

One Florida case involved a lien placed by a homeowners association on a particular condo. The association proved every element other than malice, so that became the focus of the case. Other tension in the relationship ancillary to the lien (e.g. – disputes about parking spaces) did not convince the court that the condo owner acted with malice, so the slander of title claim failed. In the mechanic’s lien context, this shows that the minor squabbles that can arise during a project may not lead to a finding of malice.

Cases in which a lien on property is found to be malicious are generally extreme. For example, in Texas, an ex-wife placed a judgment lien on her ex-husband’s home in the amount owed under their divorce settlement. After she received payment in full, she refused to remove the lien, causing the ex-husband’s sale of the home to fall through. The court found that the ex-wife’s behavior was malicious—a rare example of an award of damages to a property owner. In the mechanic’s lien context, the lesson is that contractors should promptly release a lien that has been satisfied.          

From this, we can see a range of actions that will place a contractor at risk. While New York’s statute looks to willful exaggeration and Texas’s statute looks to fraud, cases from those states show conduct that could also be malicious. Looking at these decisions collectively it can be seen that minor disputes during the project may not satisfy a showing of malice, risky conduct includes adding arbitrary and excessive mark-ups, maintaining a lien when the statute is clear that you cannot, refusing to release a lien that has been satisfied, and purposefully refusing to apply payments when setting forth the amount due.

How do the courts define harm?

In situations where the contractor’s conduct is inappropriate, and outside of statutory violations, the owner must additionally demonstrate that it has suffered some form of harm as a result. Most commonly, an owner may claim that the lien lowered the property’s value, delayed or destroyed a sale, or delayed or otherwise impacted a refinancing opportunity. Texas, Florida, and New York require a showing of quantifiable financial losses (“special damages”) to support a claim for slander of title. These can be lost customers or costs that arise when an owner has to expend attorney’s fees and court costs to remove a meritless lien and restore the property’s value. One of the major markets, Texas, requires an owner to prove it lost a specific sale as a result of the false lien. 

The statutory claims are different, though, and they provide their own identifiable damages that are distinct from property value and lost opportunity claims. New York’s willful exaggeration statute allows an owner to recover the cost of any discharge bond, the amount of the exaggeration, and attorney’s fees. In Texas, under its statutory fraud claim, an owner can recover up to $10,000.00 for its actual damages, punitive damages as set by the court, and its attorney’s fees. 

In California there must be “immediate pecuniary loss” from a false statement in order for it to qualify as slander of title. While the definition of damages is phrased differently there, the loss of a sale or the payment of attorney’s fees to remove the improper document still fit California’s definition. Note that in the case discussing this, the court determined that a lis pendens filed in relation to an arbitration proceeding was not protected by the litigation privilege. 

Conclusion

This analysis indicates that each jurisdiction is going to have its own mix of rules. Construction executives should consult counsel on these questions when they are moving forward to prepare a lien. They should confirm that they have a right to record a lien, since in some states second or third tier subcontractors do not and in many states preliminary notices are required. They should also carefully verify the information that is stated in the lien, whether it is the first date of work, the last date of work, the amount of the lien, or some other required element. Knowledge is power, and in these situations knowledge of the applicable law gives a construction executive the ability to avoid risk when recording a mechanic’s lien claim. 

This blog is intended to provide information generally and to identify general legal requirements. It is not intended as a form of, or as a substitute for legal advice. Such advice should always come from in-house or retained counsel. Moreover, if this Blog in any way seems to contradict advice of counsel, counsel's opinion should control over anything written herein. No attorney client relationship is created or implied by this Blog. © 2024 Brouse McDowell. All rights reserved.

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