Inflated Mechanic’s Liens

Watch out!

If you are going to file a mechanic’s lien, make certain that the dollar amount of your lien reflects only the balance remaining due, based on either the contract or the reasonable value of labor, services, materials and other lienable items which you have provided.

Otherwise, the penalty for filing an overstated lien in Colorado is severe: the forfeiture of all lien rights and liability for the attorneys’ fees incurred by the other party in defending against the exaggerated lien claim.

Those penalties were imposed on a general contractor in Heating & Plumbing Engineers, Inc. v. H.J. Wilson Company, 698 P.2d 1364 (Colo. App. 1984) (cert. denied). In that case, the general contractor’s attorney had filed a mechanic’s lien for the full amount of the proposed contract ($ 1.7 Million) when a dispute arose concerning the basis for change order payments. However, at the time the mechanic’s lien was filed only a small amount of construction or construction-related work had been performed.

The original lien amount in that case was reduced, by amendment, to approximately $44,000, but the trial court ruled that only $180 of beneficial work had been accomplished and decided that the mechanic’s lien amount was therefore excessive. It ruled that the lien was forfeited and awarded the property owner a whopping $65,754 in attorneys’ fees.

On appeal of that case, the forfeiture ruling and attorney’s fee award were affirmed and the appeals court ruled that the owner was additionally entitled to expenses incurred for travel and other litigation-related activities of its attorneys. Application to the Colorado Supreme Court for further review was rejected.

Two separate sections of the Colorado mechanic’s lien statute forbid the filing of a lien in greater amounts than reasonably due. One of the sections requires an intent to cheat or defraud by the lien claimant, but the other does not.

In an earlier Colorado Court of Appeals decision [Concrete Contractors, Inc. v. EB. Roberts Construction Co., 664 P.2d 722 (Colo. App. 1982)], it was held that the element of intent to cheat or defraud was necessary to invoke the penalty provisions-even though the attorney’s fee penalty allowance appears in the statutory section which does not require such intent.

However, the Colorado Supreme Court recently stated (in a footnote) that the later-adopted statutory provisions-which did not require any intent to cheat or defraud-would control. We must therefore assume that mere overstatement may be sufficient to invoke penalties, regardless of the intent of the lien claimant.

Under the Colorado mechanic’s lien statute, a lien is allowed for the reasonable value of labor, services and materials furnished in connection with construction of improvements on real property. What about contractor claims for damages or for additional costs incurred because of delay or acceleration? This issue has not been decided by any Colorado appellate court. Conservative practice would therefore suggest that the lien dollar amount should not include damages or claims which did not add value to the construction.

The philosophy underlying the imposition of penalties for exaggerated mechanic’s lien claims is to protect real estate against phony or exaggerated encumbrances. Recorded liens cloud titles, interfering with the owners’ ability to sell, lease or mortgage their property. Generally, it is expensive to clear titles from unwarranted liens. In recognition of these problems, punitive measures have been established by the legislature to deter the filing of excessive liens.

A word to the wise: Don’t exaggerate!

1 E.B. Roberts Construction Co. v. Concrete Contractors, Inc., 704 P.2d 859, 864 footnote 5 (Colo. IYSS).

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