mechanics-lien-construction

Earlier this month attorney Bill Fig published an article in the Oregon Daily Journal of Commerce titled “The downside of construction liens.”  In it, he argued that industry participants “do not fully understand the ‘foreclosure piece’ of the lien process” and “rely too heavily on the payment protection they perceive a lien provides.” Bill Fig, in other words, isn’t bullish on liens.

Is he right?

This article will explore the “foreclosure piece” of the lien process and discuss just how much payment protection a mechanics lien claim provides.

Ignoring The Mechanics Lien Because Of Foreclosure Woes Is Like Not Playing Basketball Because You May Get Bitten By A Shark

In Fig’s article, mechanics lien claims are seemingly grouped into two categories: Those that require foreclosure and those that do not, and for those claims requiring foreclosure, Fig’s forecast is grim:

The first potential issue is that, if the lien claim is disputed, the lien must ultimately be foreclosed. This means filing a lawsuit in the circuit court in which the project is located to obtain an order from the court foreclosing the lien and ordering the sheriff to sell the encumbered property to pay the lien claim. The foreclosure lawsuit essentially boils down to a breach of contract claim secured by the property.

As you might suspect, this legal process can be both expensive and time-consuming. Most civil cases in Oregon take 10 months to a year to get to trial. I would be very surprised if a lien foreclosure action could be tried through judgment for less than $50,000 in attorney fees and court costs.

There are two fundamental flaws to Fig’s discussion.

First, the odds are strongly in the claimants favor that the construction lien claim will be resolved prior to a foreclosure lawsuit. In surveys we’ve conducted about lien filings, 47% of notice of intent to lien demands are met with payment within 20 days, and over 64% of lien flings are paid within 60 days without any further collection or legal action. In other words, if a supplier has 100 unpaid projects, sending a notice of intent to lien demand will reduce the open receivables to 53 projects, and lien filings will reduce it down further to 19 accounts.

If a supplier has 100 unpaid projects, sending a notice of intent to lien demand will reduce the open receivables to 53 projects, and lien filings will reduce it down further to 19 accounts.

This is significant, because even of the remaining 19 accounts, a good number of those will likely be resolved before formal litigation is commenced.

Second, however, once litigation is commenced, it is highly unlikely that the action will be “tried through judgement.”  The odds are extraordinarily great that the lawsuit will be resolved prior to this.

Lots of data will confirm this statement. Take, for instance, the 2004 article from the Journal of Empirical Legal Studies titled “The Vanishing Trail,” which states that the percentage of civil cases that proceed to trail is less than 1.8% as of 2002, and there is evidence that this percentage is in a continued decline. This was confirmed by a contemporaneously published article in the American Bar Association Litigation Journal, also titled “The Vanishing Trial.

Accordingly, if you proceed with a lawsuit to foreclose on a mechanics lien claim, you’ll have less than a 1.8% chance that you’ll actually go the distance. That means 1.8 out of 100 mechanics lien foreclosure lawsuits will result in a civil judgment.  Using our example above, it’s highly likely that none of your 19 remaining projects would require a full trail.

That’s why the heading to this section says that ignoring the mechanics lien because of foreclosure fears is like not playing basketball because you fear getting bit by a shark. It’s unlikely, and it’s too much fun to play basketball.  See what our resident trivia whiz said about this “foreclosure fear” in a weekly Ask Nate episode a few weeks back:

The Problems With Litigation Has Nothing To Do With Your Construction Lien

One thing that really bothers me about this article’s mentality is that it makes the reader feel like the construction lien has a downside because it may need litigation. Litigation sucks because it is litigation, and this really has very little to do with the construction lien claim.

Litigation sucks because it is litigation, and this really has very little to do with the construction lien claim.

If you’re in a construction dispute or any type of dispute and you’re forced into litigation, you have a problem. This is not a secret.  Study after study shows that it’s a much better idea to settle legal claims than to prosecute them in court. Perhaps that is one reason why so few claims actually get tried: because only insane people will go through that process that long.

Bill Fig’s “Downside of Construction Liens” article suggests that potential litigation is the first reason why construction liens have a downside and/or offer ill-perceived “payment protections.” But let me ask this: What does the general problem and expense of litigation have to do with the upside or downside of a mechanics lien claim?  The answer is absolutely nothing.

Fig may call the “foreclosure piece” of the mechanics lien claim a “downside,” but the reality is that he can offer no alternative. The alternative to a mechanics lien claims is…ligation. At least the mechanics lien claim gives suppliers and subcontractors a pretty good chance at getting paid before litigation is required. See, for example, the article we previously wrote on the 17 Ways A Mechanics Lien Works To Get You Paid.

Lien Priority Issues Rarely Matter

Fig’s first critique of the mechanics lien is that foreclosure may be necessary. The second critique is more of the same: “not all construction liens receive super priority.”

Lien Priority is a complicated subject that depends greatly on the details of your particular dispute. Sometimes a state will give “super priority” to mechanics lien claimants, which means that their claim will outrank all lender claims. Other times, the ranking of claims is done sequentially based on when they are filed.

When rubber meets the road, filing a mechanics lien is your best choice to get the attention you need and the money you deserve.

The ranking of your mechanics lien claim, however, matters very little because it is only relevant if you need to foreclose upon the lien. The likelihood of that was just discussed in the previous two sections. Nevertheless, even in situations when claims require foreclosure and the rank of a lien claim is junior to a lender, the mechanics lien is still worthwhile because it at least puts your company’s hat in the ring. You’re more likely to recover some amount through a settlement arrangement or through the foreclosure than you’d ever be without the construction lien claim.

Conclusion

If you haven’t figured this out, I strongly disagree with Fig’s “The Downside of Construction Liens” article.

Construction lien claims are the most effective collections tool available to contractors and suppliers when confronted with unpaid projects. Sure, they may not work every time. Sure, foreclosing a mechanics lien claim is expensive and a big headache. Notwithstanding this, having a mechanics lien opens up multiple collection lanes, and not having a lien claim leaves you with only one: sue your customer.  It’s a no brainer.

I will say that Fig concludes his article with something I do agree with, saying:

A construction lien is, indeed, an important arrow in the construction professional’s quiver of account receivable collection remedies. However, the savvy construction professional, particularly in the repair and remodel industry, wisely does not rely solely on a construction lien to receive or guarantee payment.

I wholeheartedly agree with the statement that relying solely on the mechanics lien is not a good idea. Credit professionals should have strong credit and collection policies in place, credit intake standards, credit monitoring procedures, strong billing practices, strong non-payment followup procedures, collection procedures, and more. But when rubber meets the road, filing a mechanics lien is your best choice to get the attention you need and the money you deserve.

What Do You Think?

I’m interesting in hearing what you think about construction liens.  Bill Fig believes there are downsides because a lien claim may require foreclosure and litigation.  I’ve heard others state that the downsides to liens are that they spend relationship capital with others on the project or that the cost of compliance is too great.

What do you think?

Are there downsides?  If so, what are they?  And when does your company believe that the benefits outweigh those downsides, such that the mechanics lien becomes a necessary evil?