September 6, 2009
If A Construction Lien is Bonded…Does that Circumvent Payment to an Claimant?
Typically, a construction lien is filed to have a number of desired effects: (1) To prevent the sale or transfer of the property; (2) To hold multiple parties without contractual privity liable for the debt; and (3) To provide contractors with a faster and more direct remedy against parties in litigation.
But if a homeowner (or other interested party) files a bond in response to the lien, does that defeat the purposes of the lien itself?
Quite simply, no.
What is a lien bond?
Most mechanic liens statutes give property owners and other interested parties in a construction project the ability to file a bond in response to a party’s filing of a mechanic’s lien. Most states require the amount of the bond to equal more than 100% the lien claim.
In Louisiana, for example, a lien bond must be 125% the amount of a claim. In Washington, the bond must be 150% the claim amount.
The bond itself is deposited with the recorder or clerk’s office and theoretically “takes the place” of the lien. A filed bond, therefore, usually has the effect of eliminating any barriers to the sale or transfer of property and nullifying any rights to sue parties without contractual privity.
So, if a lien can be bonded and all of the lien’s benefits nullified…what’s the point of the lien?
The Bond’s Benefits
While the lien bond acts to nullify some positive aspects of a party’s claim of lien, it does not defeat the purpose of the lien statutes. The claimant loses some benefits of the lien itself, but it gains the benefits of the bond.
Here are some benefits of the bond:
- The entire amount in dispute (plus an additional amount – 25%, 50%, etc.) is filed with the court, and is securely awaiting determination of ownership. This means that upon a court award, you won’t have to spend any money “collecting” the judgment. The money is there.
- The lawsuit to foreclose or enforce your lien becomes a lot less complicated. Sometimes, a subcontractor’s lien claim can include a handful of parties (owners, GCs, suppliers, etc.). The more parties in litigation, the more expense and procedural hurdles. When a lien is bonded, it reduces the litigation to a one-on-one dispute and narrows the scope (and expense) of the action.
In short, while a bonded lien does not prevent the sale or transfer of property and may reduce the number of parties a claimant can sue….the bond also eliminates the need for those remedies. It places the entire amount in dispute (plus sum) into the reach of the claimant, and the claimant can move forward in a clean and uncomplicated procedural action to recover the funds.
If your lien is bonded, it has already succeeded to some degree (it has produced the cash). Now, it’s only a matter of proving that the cash is yours.
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