WHAT COULD BE more sacred to a vendor or contractor than the right to file a mechanic’s lien? How could a court even think about limiting that right? Well, it has happened this year and may happen again.
The Supreme Court of Rhode Island did it, in the case of DeSimone Electric Inc. v. CMG Inc., 2004WL422908 (2/9/04). The lawsuit wasn’t all that unusual — the plaintiff electrician had done a lot of work for the defendant developer and didn’t get paid all he thought he was due. He filed a lien and then filed a lawsuit to enforce the lien. The developer counter-sued for damages due to the electrician’s lack of performance.
Although there were other issues in the case, the one that caught my eye was the argument raised by the developer that, even if it owed the money, DeSimone should not be allowed to foreclose on its lien because the lien was unconstitutional.
This sort of argument is not new. Many, many courts have heard lawyers for property owners complain that it is fundamentally unfair to allow someone to tie up their property with a mechanic’s lien without having to first prove that the lien is valid. Technically, the argument is that this amounts to a denial of “procedural due process” and violates the 14th Amendment. Courts routinely reject this argument. The reasoning is that the interest of the party filing the lien in protecting its right to be paid out of the value of the property — that its work improved — outweighs the interest of the property owner. The Rhode Island court went the other way.
The Rhode Island court relied on a decision in Connecticut v. Doehr, 501 U.S. 1 (1991), where the U.S. Supreme Court said three factors were to be weighed in deciding if a statutory scheme such as a mechanic’s lien would violate the Constitution:
- What is the property interest being infringed by the process? In almost every case, it is the owner’s ability to sell, refinance, lease, etc. its property that is adversely affected by the filing of a lien.
- What is the risk of damage to the owner by an erroneous lien? In most cases, the owner has promised its lender that it will not allow any liens to be filed against the property, so the mechanic’s lien throws the owner into default of its loan agreement. It can also force the owner to buy a bond to protect a buyer or new lender on the property against possible harm.
- What is the need of the filer of the lien to tie up that particular property, and does the government action of creating the process play a big role? (Remember, the 14th Amendment only prohibits governmental action to deprive us of due process of law.)
The Rhode Island Supreme Court had previously decided in 2003 that the state’s mechanic’s lien statute met all the tests to be unconstitutional, because the statute did not require a hearing to prove the validity of the lien either before or immediately after filing, and because the property owner had to be the one to initiate the hearing. Even though the state legislature amended the statute in July 2003 to deal with these problems, the court found that it didn’t go far enough. It was still invalid because it made no provision for a hearing before the filing of the lien, did not say precisely when after a lien was filed there would be a hearing and still required the property owner to ask for the hearing.
States that have refused to strike down mechanic’s lien statutes have relied on the fact that they are “different” than other liens, in that owners are generally on notice of the possibility that mechanic’s liens could be filed and the contractors filing them have a special, pre-existing interest in the specific property due to their improvement of it. Most such statutes give the property owner a means of getting a prompt hearing.
Such specific rulings have been made by courts in New York (Carl A. Morse Inc. v. Rentar Industrial Development Corp., 391 N.Y.S. 2d 425 [2nd Dept 1977]), Indiana (Haimbaugh Landscaping Inc. v. Jegen, 653 N.E. 2d 95, 104 [Ind. Ct App. 1995]), Georgia (Tucker Door & Trim Corp. v. 15th St. Co., 221 S.E.2d 433 [Ga. 1975]), California (Connolly Development Inc. v. Superior Court, 553 P.2d 637 [Ca. 1976]) and Tennessee (Silverman v. Gossett, 553 S.W.2d 581 [Tenn 1977]).
Despite these court cases, I expect that the Rhode Island decision will result in many more arguments being raised by owners (especially in states that haven’t ruled on the issue) that their rights are being infringed upon by mechanic’s lien statutes. There is seldom much of a penalty attached to filing an improper lien, and the damage to the property owner can be real.
One way around the problem would be to require a bond to be posted by the lien claimant in an amount large enough to cover the reasonably foreseeable damage to the owner (such as higher interest payments on a construction loan if permanent financing is prevented) but then to allow the cost of the bond to be assessed against the property owner if the lien is upheld.
Because this is such a sore subject, I doubt that either the lien filers or the property owners will ever think that any middle ground is fair. But having the courts take the matter out of their hands is a risky way to operate too.
Susan McGreevy is a partner at Husch & Eppenberger, Kansas City, Mo., tel. 816/421-4800, e-mail to [email protected].