When a general contractor or lower tier subcontractor or supplier records a mechanic’s lien attachment on property, security for the lienor’s hoped-for judgment is achieved – but often something more, and perhaps unintended, is achieved. The resulting cloud on the owner’s title prevents a sale or refinancing of the property, and ties it up in a way that usually impacts the flow of funds needed for project completion. Draws on a construction loan may halt. Sales of units in multi-unit projects needed to raise funds for completion may cease.
This impact on the project can give the lienor leverage to coerce a favorable settlement if, as is often the case, the mechanic’s lien attachment survives an initial challenge and thus will remain in place for the duration of the litigation. The problem is not solved by prime contract provisions requiring a general contractor to promptly clear any lower tier mechanic’s liens or face having payments withheld. If an initial court challenge to the lien fails, the general contractor may well be coerced into an unfavorable settlement of the lienor’s claim.
Because such leverage is widely viewed as an unwarranted extension of the lien’s purpose to provide security for payment, many states have statutes authorizing lien release bonds, allowing an owner or general contractor to discharge the lien by substituting a bond. Massachusetts, for example, has statutes providing for two types of lien release bonds – a “blanket” lien bond pursuant to G. L. c. 254, § 12 which prevents any mechanic’s liens from attaching to the property, and a “target” lien bond pursuant to G. L. c. 254, § 14 which dissolves a particular lien that has already attached to a property.
A New Hampshire statute, RSA 511:48, provides for petitioning the court to allow substitution of a bond for an attachment, but the statute is not specific to mechanic’s liens – and a number of Superior Court cases have declined to allow substitution of a bond for a mechanic’s lien. Consolidated Electrical Distributors Inc. v. SES Concord Company; Adam Windows & Doors, Inc. v. Eclipse Construction, Inc.; HPB Construction, LLC v. Berkshire-Amherst, LLC; Metro Walls, Inc. v. The MacMillin Company, LLC. There are a few Superior Court cases going the other way. Moynihan Lumber of Plaistow, LLC v. DeStefano & Assoc., Inc.; B & B Drywall, Inc. v Calamar Construction Management, Inc. Until our Supreme Court weighs in, the law on this question will remain uncertain.
If a lienor cannot be forced to give up his lien in exchange for a bond, how about in exchange for an escrow of cash? Courts will rarely grapple with this question, because most lienors will jump at the offer (a cash escrow is a far easier path to payment than a sheriff’s sale of the liened property after judgment) – but the issue has been litigated in Superior Court a few times by plaintiffs who preferred leverage to eventual ease of collection. Results are mixed. McCusker v. In-Home Restored, Refound + Reinvented Furniture + Accessories, LLC and S & J Enterprises, Inc. v. Delle Chiaie both required the cash escrow substitution, while A & E Flooring, Inc. v. SAMCO Holdings, LLC declined to do so.
Bonds and cash may well be adequate payment substitutes for lien rights, but whether a plaintiff should be compelled to forego the leverage a lien provides is a different question. Before giving an answer, it may be useful to consider what happens to lien rights when owners require general contractors to furnish a payment bond up front. To my knowledge no New Hampshire court has ever held that the mere existence of the bond deprives subcontractors and suppliers of their statutory lien rights. Were it otherwise, every payment bond would automatically convert every subcontract on the bonded project into a “no lien” subcontract. Parties are free to bargain for “no lien” subcontracts, essentially waiving the right to a mechanic’s lien up front; see Duke/Fluor Daniel v. Hawkeye Funding, Ltd. Partnership, 150 N.H. 581 (2004). If they didn’t bargain for that waiver, courts are loathe to allow a payment bond to force the same result.
This impact on the project can give the lienor leverage to coerce a favorable settlement if, as is often the case, the mechanic’s lien attachment survives an initial challenge and thus will remain in place for the duration of the litigation. The problem is not solved by prime contract provisions requiring a general contractor to promptly clear any lower tier mechanic’s liens or face having payments withheld. If an initial court challenge to the lien fails, the general contractor may well be coerced into an unfavorable settlement of the lienor’s claim.
Because such leverage is widely viewed as an unwarranted extension of the lien’s purpose to provide security for payment, many states have statutes authorizing lien release bonds, allowing an owner or general contractor to discharge the lien by substituting a bond. Massachusetts, for example, has statutes providing for two types of lien release bonds – a “blanket” lien bond pursuant to G. L. c. 254, § 12 which prevents any mechanic’s liens from attaching to the property, and a “target” lien bond pursuant to G. L. c. 254, § 14 which dissolves a particular lien that has already attached to a property.
A New Hampshire statute, RSA 511:48, provides for petitioning the court to allow substitution of a bond for an attachment, but the statute is not specific to mechanic’s liens – and a number of Superior Court cases have declined to allow substitution of a bond for a mechanic’s lien. Consolidated Electrical Distributors Inc. v. SES Concord Company; Adam Windows & Doors, Inc. v. Eclipse Construction, Inc.; HPB Construction, LLC v. Berkshire-Amherst, LLC; Metro Walls, Inc. v. The MacMillin Company, LLC. There are a few Superior Court cases going the other way. Moynihan Lumber of Plaistow, LLC v. DeStefano & Assoc., Inc.; B & B Drywall, Inc. v Calamar Construction Management, Inc. Until our Supreme Court weighs in, the law on this question will remain uncertain.
If a lienor cannot be forced to give up his lien in exchange for a bond, how about in exchange for an escrow of cash? Courts will rarely grapple with this question, because most lienors will jump at the offer (a cash escrow is a far easier path to payment than a sheriff’s sale of the liened property after judgment) – but the issue has been litigated in Superior Court a few times by plaintiffs who preferred leverage to eventual ease of collection. Results are mixed. McCusker v. In-Home Restored, Refound + Reinvented Furniture + Accessories, LLC and S & J Enterprises, Inc. v. Delle Chiaie both required the cash escrow substitution, while A & E Flooring, Inc. v. SAMCO Holdings, LLC declined to do so.
Bonds and cash may well be adequate payment substitutes for lien rights, but whether a plaintiff should be compelled to forego the leverage a lien provides is a different question. Before giving an answer, it may be useful to consider what happens to lien rights when owners require general contractors to furnish a payment bond up front. To my knowledge no New Hampshire court has ever held that the mere existence of the bond deprives subcontractors and suppliers of their statutory lien rights. Were it otherwise, every payment bond would automatically convert every subcontract on the bonded project into a “no lien” subcontract. Parties are free to bargain for “no lien” subcontracts, essentially waiving the right to a mechanic’s lien up front; see Duke/Fluor Daniel v. Hawkeye Funding, Ltd. Partnership, 150 N.H. 581 (2004). If they didn’t bargain for that waiver, courts are loathe to allow a payment bond to force the same result.
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