Eight-balled by a lien

August 15, 2007 6:56 AM

Hired a contractor for a major renovation. Job was completed on time and according to spec. Then--at the end of the affair--my property is slapped with a lien for nonpayment by a third-party supplier!

During the project, I handed the contractor checks and pre-determined intervals, and he was responsible for paying off suppliers and subs. With this particular snafu, my best guess is that he funneled one of my checks to a creditor from an older project, rather than paying the supplier as he should have. His bad.

My contract indemnifies me against claims from suppliers and subs, so legally, my case is airtight. If the lien drags on, I'll unleash my lawyer and thrash it out in arbitration, if necessary. I'm sure that I'd come out the winner in a legal dispute.

But here's the rub: the contractor is in dire financial straights, from what I hear. Maybe facing bankruptcy. I doubt he could pay off the bill to the supplier, even if he was forced to by the courts.

Could I somehow effect a transfer of the lien (called a "mechanic's lien" or "construction lien" in legal parlance) from my property to the contractor's business? Or is there another way of getting the lien off my back that doesn't involve trying to squeeze funds out of the financially strapped contractor?

Also, assuming I can't clear up this problem immediately, what are the ramifications of the lien down the road? I'm not planing to pull equity out of the property, sell, refinance, etc., so I don't think I need to be too worried now. But are there other issues I may have overlooked?

I know you're not a lawyer or my lawyer, and that I should lawyer up. In fact, I'm already in the process of lawyering up with the attorney who drew up the original contract, but I want to ask everybody's opinion on this to get additional perspectives.

posted by Gordion Knott to home & garden (12 comments total)

if the contractor was supposed to pay the supplier out of your pay to him, then yes, you should be able to place against him.
posted by parmanparman at 7:25 AM on August 15, 2007

Have you spoken with the contractor? It's possible its an accounting error. This is number one.
posted by letahl at 7:58 AM on August 15, 2007

Yes, I've been in contact with the contractor (repeatedly). No, it's not an error.
posted by Gordion Knott at 8:01 AM on August 15, 2007

Bummer. Legal up if you can't promptly negotiate a solution with the subcontractor.

And don't delay, even if you aren't selling your home, etc., soon, for these reasons:

1) the statute of limitations on contract claims (in court) is shorter than tort claims, in some states as short as a year. if you want to clear up the lien when you are ready to sell your place, it'll be too late to use a legal remedy.

2) if the contracting company goes bankrupt, your contract will be useless. you won't be able to get any money out of a nonexistent company, so no idemnification.

3) the subcontractor will be more willing to settle before the contracting company goes backrupt than after (i.e., because you can assign your claim to them, and they may be in a better position to go after the contracting company).
posted by letahl at 8:16 AM on August 15, 2007

Also, one thing to think about is that if the contractor did anything fradulent, then you may be able to file suit against him personally, which may go farther than suing the company.
posted by letahl at 8:18 AM on August 15, 2007

Where are you located? In some jurisdictions, if he is a licensed contractor, and you obtain a judgement against him, as a creditor you have the option of recovering your loss from his contractor's bond. In California the bond is $12,500. If he's having financial troubles, you should seriously consider starting legal proceeding immediately - he may stop paying his bond surety company, in which case they'll withdraw the surety from his bond. Withdrawal of the surety from his bond would likely result in the suspension of his contractor's license — in fact this may already have occurred (thus the third-party lien from the subcontractor). Have you checked his licensing status with the appropriate licensing board recently?
posted by RichardP at 9:12 AM on August 15, 2007

Is/Was there not a holdback? Here (Ontario), it's typical that there's a 10% holdback for a few months as sort of a lever to keep the contractor interested in doing any warranty work.

If the contractor did good work and followed the contract properly, and stayed reasonably within budget, I would guess that he/she is an honest person who does intend to pay the supplier, assuming they remain solvent.

In our reno there was one situation where the contractor wasn't able to pay the supplier on time. I contacted both parties and was able to help negotiate a resolution, where i paid the supplier directly and this came out of my next payment to the contractor.

My expectation is that if you can get the contractor and supplier talking, the problem can be resolved.

By all means talk to a lawyer about what the possibilities and limitations are. Also be 100% sure that the lien is proper - that it truly is for your reno, and that the amount owing is genuine.
posted by Artful Codger at 9:26 AM on August 15, 2007

You are legally on the hook for any unpaid bills to sub-contractors. The indemnity clause with your prime contractor is only as good as his credit. If he goes out of business, you still are required to pay the sub-contractor and suppliers bills. In a sense, you end up paying the bills twice. Many contractors operate while only one check from bankruptcy. They need the next job to pay off the previous one and have no cash or credit of their own to tide them over.

Your only choice is to get a lawyer and go after the contractor and hope he can come up with the money to pay off the bills. In the mean time, the subs and suppliers may be adding on finance charges that make matters worse. A lawyer will tell you whether you are better off paying the bills yourself and trying to recover the money after the fact or whether you should delay and try to get the contractor to pay.

This is a common problem with building contractors. For future reference, you should demand lien waivers from all sub-contractors and suppliers before making your final payment to the contractor. This ensures that they have been paid before you pay off the contractor.

Another thing you can do, which everyone hates but is very effective, is to write the check with both the contractor and subs names. This requires both to endorse the check before it can be cashed.
posted by JackFlash at 9:26 AM on August 15, 2007 [3 favorites]

Liens are quick and cheap and get results when the owner still owes money to the contractor or if the owner wants to re-fi or sell. They are not judgments. The holder still has to move in court to enforce it and try to collect, then you have to defend yourself. In certain cases you do not have to react to them knee-jerk. If the amount is not that great, then it also may not be worth it for the supplier to lawyer up and chase the money, he may just be hoping you still owe the contractor money and will pay him instead. And in some States you can have the lien removed if the holder does not act to enforce it within one year. And I guarantee that IF the supplier does move to enforce the first move will merely be a shot across your bow either with or without a lawyer in the form of a strongly worded letter you may or may not choose to ignore.

If the supplier does move on you you should first make a low counter offer on the amount (get the actual amount of the bills - sometimes the lien amount can have "anticipated legal fees" added to it) because at that moment in time he has not committed to large legal fees yet and may be happy to get whatever he can. Material suppliers routinely mark-up 50 - 100% because they have to hold that inventory for long periods sometimes and are entitled to a decent mark-up for that risk. So they might very well accept an offer of 30-50% to cover their costs and call it a day. Then you have your lawyer write up the release of lien paperwork stating the agreed amount is payment in full for all the invoices etc etc.

Then comes your contractor; you need to assess if the amount of the lien is smaller than the legal fees you'll generate getting a judgment on your contractor.

Of course your lawyer will give you all the details regarding your State's options of recourse but if the amount is great enough you really do need to go after the contractor. We'll assume you didn't hold a retainage or get release of liens for the amounts you paid. Be careful, have your lawyer check first; many general liability insurance carriers have dropped "contractual indemnification" obligations in recent years and if that's the case here that clause in your contract is relatively useless (you do have the contractors insurance certificates with the policy numbers, right?) and you will have to go after the contractor's company or the guy personally which may both be a dry run.

Next time get notarized release of liens. It may seem like an uncomfortable step being all demanding and all but you are living the consequences. Best of luck.

IANAL, but I did stay at a Holiday Inn once!
posted by Kensational at 12:56 PM on August 15, 2007

This is going to suck to read...

Based on your comments, if your contractor did not have a Performance Bond, you are going to end up paying the debt- unless you plan on dying before you sell the property.

I don't know of any contract you could of signed that could globally include a sub-contractor of your contractor. You can not transfer this lien to the contractor unless you want to give him the property where the work occured.

On the upshot you are only responsible for labor cost and construction materails. Everything else the sub has to eat- though I doubt that is going to come to much.

You might want to find out who else is going to come a calling. It would be highly unusual if only one sub didn't get what he was due.
posted by bkeene12 at 1:02 PM on August 15, 2007

I forgot, if the supplier moves to enforce the lien, make him first prove to you that the unpaid invoices do pertain to your property, if he is thinking you are open to working it out in good faith - and you are - he will send you copies.

I've seen contractors tell suppliers the wrong Job Address on material pick-ups to mask the actual location. The supplier is innocent but thinks that stuff went to you. Verify the material lists before making a counter offer.
posted by Kensational at 1:03 PM on August 15, 2007

If you can, find out what other liens this supplier has filed in your area.

If it has filed a number, then you could argue that its business practices are negligent, in that it has not made a good faith effort to extend credit only to honest and upstanding contractors. If you find they have done this with the same principals over and over again, whether or not those principals are operating contracting companies with different names, that could amount to fraud (their collusion would allow the contractor to consistently be low bidder, because the bid would not need to reflect materials costs). If you find a pattern like that, threaten to go to the state attorney general unless they remove the lien.
posted by jamjam at 3:17 PM on August 15, 2007 [1 favorite]