Monday, June 14, 2010

MECHANICS' LIENS: BONDING AROUND LIEN DOES NOT CURE FAILURE TO RECORD LIS PENDENS

Under Colorado law, in order to preserve mechanics' lien rights, a mechanics' lien claimant must commence an action to enforce the mechanics' lien and record a lis pendens within six months after completion of the project. C.R.S. sec. 38-22-110. The general contractor or owner of the property against which a mechanics' lien is recorded may obtain the release of the mechanics' lien by filing with the court a surety bond or other undertaking (e.g., a letter of credit) in the amount of 150% of the lien claim and costs allowed to date. C.R.S. sec. 38-22-131.

The Colorado Court of Appeals recently upheld the dismissal of a mechanics' lien foreclosure action because the plaintiff failed to record a lis pendens within the statutory six-month period, even though trial court ordered the release of the mechanics' lien following submission of a surety bond by the general contractor. Weize Company, LLC v. Colorado Regional Construction, Inc., 09CA1369 (June 10, 2010). The plaintiff acknowledged that it did not record a lis pendens but argued that filing a lis pendens was "superfluous" because proceeding against the bond would not affect title to the property, and therefore not recording a lis pendens did not interfere with the statute's purpose of making titles to real property "more safe, secure and marketable." The Court of Appeals, in rejecting this argument, stated that "the validity of a lien would still be of concern to a person interested in title to the liened property because the surety could become insolvent. In that event, 'any lien claimant shall be entitled to enforce such lien claim in the same manner as if no bond had been filed.'" Id. at 18, quoting, C.R.S. sec. 38-22-129(5). This rationale confuses the type of bond at issue. C.R.S. sec. 38-22-129(5) applies to performance and payment bonds, not lien release bonds. Also, the lien release bond statute plainly states that the lien is released and the property is discharged from the action to foreclose such lien. C.R.S. sec. 38-22-132. No exception like that provided for payment and performance bonds is specified for lien release bonds.

The Court of Appeals concluded that the legislature did not intend to provide any exception to the lis pendens requirement and found no case implying any such exception. This strict construction may cause problems with clearing mechanics' liens via lien release bonds, because the lis pendens makes the property unmarketable. Until the Supreme Court or General Assembly weighs in on this issue, the lien claimant will need to record a lis pendens whether or not a lien release bond was recorded prior to commencement of the foreclosure action. This will cause the general contractor and/or property owner to have to take the additional step of obtaining an order releasing the lis pendens.

Posted By: Brent W. Houston, Esq.