In prior articles, I explained four general steps to preserving and enforcing a construction lien (also known as a mechanic’s lien) in Utah. These steps include: 1) filing a preliminary notice; 2) recording a notice of construction lien; 3) filing a lawsuit and recording a lis pendens; and 4) prevailing in that lien foreclosure lawsuit. The final steps are selling the property and divvying up the proceeds to pay the outstanding lien claims. This article briefly discusses these final steps and related issues.
How is the Lien Amount Decided?
The main purposes of a trial on a construction lien lawsuit is to determine the reasonable value of the services provided by the lien claimant. This amount may be the contract price, or it may be a factual determination of what constitutes the reasonable value of the work. It may be the contract price minus any cost to repair defects or to complete unfinished work. The judge or jury will decide this fact.
Is the Lien Amount the Judgment Amount?
Once the trial ends and if the jury or judge decides that there is some value to the unpaid services or work after applying any reductions, the court will award payment in this amount—plus or minus other costs. Before the final judgment is entered, the parties will argue about who won the case and is the successful party (i.e. the prevailing party) and entitled to attorney fees. These attorney fees to the successful party are a huge consideration before launching into a lawsuit and can make a loser out of either party.
Determining who the successful party is may be more complex than you might think, and it’s up to the judge. For example, if a lien claimant seeks payment of $100,000 but only receives an award of $10,000, it might be the losing party and the other party the successful party. And if a party only wins $10,000 and has to pay the defending and successful party’s attorney fees of $30,000, these attorney fees eliminates the awarded lien claim amount. The result is a net loss of $20,000 through a judgment payment to the party defending the lien.
Usually, however, if a lien claimant prevails and is owed money, the judge deems the lien claimant to be the successful party and awards it attorney fees and costs. A court then enters a final judgment which is the reasonable value of the services provided plus the attorney fees and costs incurred to recover this amount.
Where Do Funds to Pay the Lien Claimants Come From?
If the property owner or another party involved in the lawsuit does not pay that judgment amount, the underlying property can be sold, and the sale proceeds are used to pay all lien claimants. The court orders the property to be sold in the same manner as a mortgage foreclosure, subject to the right of redemption.
What if the Sale Proceeds Are Insufficient?
If the proceeds generated from the foreclosure sale, after paying associated costs, do not satisfy all the lien claims of the various lien claimants (there may be more than one lien claimant on any given construction project), the proceeds are paid in the following order: 1) subcontractors who are laborers but have not furnished any materials (such as a subcontractor who came in and framed a building using wood supplied by the general contractor); then 2) all other subcontractors and parties who have provided materials; then 3) original contractors—those that contracted directly with the property owner.
For example, let’s suppose that a property is sold and $100,000 remains to pay lien claimants. Let’s also suppose there is a framer who didn’t supply any wood claiming a lien for $30,000, a supplier who provided all the wood for the project claiming a lien of $50,000, and a general contractor claiming a lien of $30,000. The framer would get paid in full, leaving $70,000 remaining. Then the supplier would get paid in full, leaving $20,000 remaining. The general contractor would then only get $20,000, with $10,000 unpaid.
In the above example, what can the general contractor do? If any party does not get paid in full from the proceeds of the lien foreclosure sale, it can still seek payment from the party who hired it. This claim would not be a lien claim but rather a breach of contract claim. So, in the above example, the general contractor who only recovered $20,000 of the $30,000 lien claim could seek payment form the owner (or whoever hired him).
Also, if an entire “class” of lien claimants is not paid in full, and there are only some funds available to pay a class, the funds are divided up pro rata. For instance, let’s tweak the example above. Let’s suppose there are two suppliers with claims of $50,000 each and there is only $100,000 to pay all lien claimants. After the framer took the first $30,000, there would then be $70,000 to satisfy the next class of lien claimants, which here are the suppliers. Since the two suppliers claim equal amounts of $50,000, they split the $70,000 equally. They each get $35,000, and the general contractor gets nothing.
What if the Sale Proceeds Are More than the Lien Claims?
If the sale proceeds exceed the amount of the various lien claims, the owner receives the remainder.
Need Help with a Construction Lien Foreclosure Lawsuit or Other Lien Issues?
I have briefly explained only a portion of many steps in preserving and enforcing a construction lien claim. I have not explained in any depth the beginning steps, nor do any of my articles explain this process in all the necessary depth. Properly addressing a lien foreclosure and lien rights is difficult, so it is wise to consult with an attorney with construction lien experience. I am happy to help, and I offer a free consultation. My direct dial is 801.365.1021, and you can e-mail me at [email protected].