Determining the amount of a lien, or what costs can be included in the lien amount, is a complex process – and one that has been addressed several times by this blog. Recently, Scott offered some thoughts on whether the amount of a mechanic’s lien should be directly tied to the value of the labor or work furnished. While this sounds like a relatively straight forward and inarguable rule, it turns out that it does not always apply. Other costs, like attorney’s fees, the preparation costs and fees of a company like zlien, filing fees, interest, and the like have been discussed here, here, here, and here, among other places. While this is already a complex determination, it may be even more difficult in Nebraska.
Nebraska has a kind of “carrot and stick” approach to the amount allowed in the lien claim – and even goes so far as to “encourage” the property owner to breach their contract with the lien claimant by, basically, giving the property owner the ability to adjust the lien amount. Wow.
At first, it appears that Nebraska sticks closely to the idea the the lien should be for the amount unpaid under the contract. In fact, the statute clearly states that the lien is “for the unpaid part of [the] contract price,” where “contract price is defined as
the amount agreed upon by the contracting parties for performing services and furnishing materials covered by the contract, increased or diminished by the price of change orders or extras, amounts attributable to altered specifications, or breach of contract, including but not limited to defects in workmanship or materials. Liquidation of damages between the owner and a prime contractor does not diminish the contract price as to other claimants. If no price is agreed upon by the contracting parties, contract price shall mean the reasonable value of all services or materials covered by the contract.
This is all well and good, and is potentially beneficial to the lien claimant. By specifically contemplating the lien including amounts for breach of contract, the Nebraska lien claimant is in a pretty good position. Not only can he claim a lien on the amount unpaid under the contract (note that this is not the same as the value of the major or materials already furnished to the project), some type of further damage incurred by any potential breach of the contract is specifically allowed.
BUT, and this is a big but…
Nebraska case law has placed a limitation on this provision. Despite what the statute says, there is a big catch. The lien claimant is only allowed to include the value of the labor and or material actually furnished and incorporated into the project until the contract has been “substantially performed.” That is, until substantial performance occurs, the Nebraska statutory definition of contract price and the statutory amount of lien are rendered meaningless. Not only are the “extra” breach of contract damages not allowed, neither is the amount agreed to in the contract beyond what has been incorporated into the project.
So what’s the big deal?
This is the big deal. The property owner is put in a position where he can drastically reduce the amount allowable in the lien claim. All he has to do is breach the contract with the lien claimant prior to the point of “substantial completion.” The clearly provides an incentive for the property owner to act in bad faith, and willfully and wrongfully breach a contract, if he can have the remaining contract work completed for less than the amount required under the contract.
It’s not that the Nebraska Supreme Court has not thought of this situation, or even that they don’t care…It’s worse than that for the lien claimant. The Nebraska Supreme Court has directly looked at this issue, and decided that the property of the owner should be immune from encumbrance related to damages incurred for a breach of a contract related to its improvement. This is true whether or not the breach was made in bad faith, and specifically for this reason. The Nebraska Supreme Court has admitted as much in Tilt-Up Concrete, Inc. v. Star City/Federal, Inc., 582 N.W.2d 604 (Neb. 1998).
This is, in this blogger’s opinion, a poor result. While some of the arguments in favor of this interpretation are defensible, the problem is that the statute specifically contemplates breach of contract damages, and then the court took those damages away in the vast majority of cases. And, not only that, specifically gave the property owner the ability to take those damages away by doing the very thing that was supposed to give rise to those damages.
Just another wrinkle in the wacky world of mechanic’s liens.