An Examination of a Recent Court Decision Discharging a Mechanic’s Lien

As previously discussed in this blog, after a property owner files an application to discharge a mechanic’s lien, a hearing is held in which the contractor is required to demonstrate that there is “probable cause to sustain the validity of the lien.”  Sheriff v. Harris, 2014 WL 566150, *5 (Jan. 13, 2014).  “The legal idea of probable cause is a bona fide belief in the existence of facts essential under the law for the action and such as would warrant a man of ordinary caution, prudence and judgment, under the circumstances, in entertaining it.” Id.  The requirement of “probable cause” is a lower burden of proof than would be required at a full trial on the merits; however, the Sheriff decision evidences that a low burden of proof is not the same as requiring no proof at all.  Nonetheless, the decision of illustrative of the evidence that must be presented to establish “probable cause” to sustain a lien.

The court in Sheriff noted that, “[t]o establish probable cause to support a mechanic’s lien, a person must first show that he is entitled to claim a lien.”  Id.  According to Conn.

An Explanation of The Home Improvement Act’s Licensed Contractor Exception

Chapter 400 of the Connecticut General Statutes is known as the Home Improvement Act.  “The purpose of the Home Improvement Act is to ensure that home improvements are performed by qualified people.”  Santa Fuel, Inc. v. Varga, 77 Conn.App. 474, 495 (Conn.App.,2003).  A “[h]ome improvement contract” means an agreement between a contractor and an owner for the performance of a home improvement.”  Conn. Gen. Stat. § 20-419.  As a general rule, a home improvement contract is not enforceable against a homeowner unless the contract complies with the writing requirements of the Home Improvement Act.  Laser Contracting, LLC v. Torrance Family Ltd. Partnership, 108 Conn.App. 222, 226, (Conn.App.,2008).

The Home Improvement Act serves a valid purpose but may be heavy handed in its application.  In holding that the failure to comply with the statutory requirements for a home improvement contract bars all recovery, including claims sounding in implied contract and unjust enrichment, the Connecticut Supreme Court said the following:

We recognize that our decision may lead to a harsh result where a contractor in good faith but in ignorance of the law performs valuable home improvements without complying with § 20-429. 

It is Not Always Clear Cut Which Services May Be the Basis of a Mechanic’s Lien

Conn. Gen. Stat. § 49-33 provides that those furnishing labor, materials or services for the improvement of real property are entitled to claim a lien on said premises.  “Prior to the statute’s amendment by the legislature in 1974, our cases construing the language of § 49–33 required, as a condition of lienability, that the work done be incorporated in or utilized in the building (or the appurtenance ) to be constructed, raised, removed or repaired.”  Santa Fuel, Inc. v. Varga, 77 Conn.App. 474, 482, 823 A.2d 1249, 1255 (Conn.App., 2003).  In 1974, the legislature amended Conn. Gen. Stat. § 49-33; however, “the 1974 amendment was not intended to expand the scope of [our mechanic’s lien laws] to include persons whose services do not enhance the property in some physical manner or lay the groundwork for the physical enhancement of the property.”  Nickel Mine Brook Associates v. Joseph E. Sakal, P.C., 217 Conn. 361, 363-364, 585 A.2d 1210, 1212 (Conn.,1991).  For that reason, numerous services pertaining to land cannot be the basis for a mechanic’s lien such as pipe removal, temporary electrical work, trash removal, cleaning services, and lawn mowing.  See Landscape Management Services, Inc.

Arbitrators May Amend or Correct Their “Final” Decisions

Arbitration Awards May Be Amended by the Arbitrator

Arbitration is a procedure by which parties to a contract agree in advance that any disputes arising out of that agreement will be submitted to a private individual or a panel of private individuals to issue a final decision referred to as an “award” that is final and binding upon the parties.  Much like a court trial, in an arbitraiton, a single arbitrator or panel of arbitrators will hear testimony and take evidence presented by the parties or their legal counsel and then make findings of fact and law that lead to one party prevailing over the other.

Arbitration has become a very popular dispute resolution procedure in construction contract disputes because of its intended efficiency and finality.  In general, the courts favor arbitration and, as a result, judicial interference in arbitration awards is very limited.  In Connecticut, as in most states, a court will only vacate, modify or correct an arbitration award for a handful of statutory reasons, which do not include re-litigating the matter.  In other words, you cannot convince a court to throw out an arbitration award merely by pointing out the arbitrator made a mistake of fact or law. 

A Connecticut Court Grants Defendant’s Motion To Stay An Application To Discharge Mechanic’s Lien Pending Arbitration

As regular readers of this blog know, a mechanic’s lien provides a contractor with a security interest in the real property where its work was performed.  Because, however, it is not the intent of the mechanic’s lien laws to restrict the free transfer of title of real property, there are two statutory procedures by which an owner may obtain a release of a mechanic’s lien.  Specifically, the property owner may seek to substitute a surety bond for the lien or the property owner may seek an order discharging or reducing the lien.  In CDO Properties, LLC v. Bogaert Construction Co., Inc., Docket No. CV 13-6018411 (JD of New London), the Court issued a decision staying the property owner’s application for discharge of a mechanic’s lien.  Based upon this decision, an owner’s attempt to promptly discharge a lien may be thwarted or delayed by a court and an owner may be forced to live with a lien until after arbitration.

The decision was based upon the Connecticut General Statutes, which require the court to stay any legal proceeding if the dispute is subject to an agreement to arbitrate.  Conn. Gen. Stat. § 52-409 states:

If any action for legal or equitable relief or other proceeding is brought by any party to a written agreement to arbitrate,

The Appeal of A Decision Discharging a Mechanic’s Lien Can Potentially Be Rendered Moot

As previously discussed in this blog, anyone that has furnished labor, materials, or services for the improvement of real property and has not been paid for its work may file a mechanic’s lien against the subject property.  The owner of said property may then make application to the court to obtain a discharge of said mechanic’s lien.  If the property owner prevails, the contractor that filed the mechanic’s lien has a statutory right to file an appeal.

As the Connecticut Supreme Court explained in Lichtman v. Beni, “an order entered pursuant to § 49–35b is a final judgment for the purposes of appeal.”  Lichtman v. Beni, 280 Conn. 25, 32 (2006).  Conn. Gen. Stat. §49–35c “requires that an appeal be taken within seven days of the court’s judgment, but provides an automatic stay during that period.”  Id.  However, a contractor seeking to appeal an order discharging its mechanic’s lien must also use to seven stay period to obtain an order preventing the owner from recording the court order discharging its mechanic’s lien.

If the contractor does not file an additional motion requesting that the court stay the order discharging the mechanic’s lien,

If Your Mechanic’s Lien is Discharged, You’ve Lost the Battle But Not the War

After a mechanic’s lien is filed, an owner has two options.  The owner can wait because, if the lien is not foreclosed within a year, it evaporates by operation of law; or, the owner can file an application with the court seeking an order discharging the lien.  If the owner files an application for discharge, the court will hold a hearing during which the contractor “shall first be required to establish that there is probable cause to sustain the validity of his lien,” and, if that occurs, the owner must “prove by clear and convincing evidence that the validity of the lien should not be sustained or the amount of the lien claimed is excessive and should be reduced.”  Conn. Gen. Stat. §49-35b.  Thus, if a lien is discharged, either there was not “probable cause” to sustain the lien or the owner was able to present “clear and convincing evidence” that the lien should be discharged.  In either case, it is evidence that the contractor’s claim for the underlying debt was weak.

The question then is whether a contractor may commence its own action against the owner to the collects the amounts that had been secured by a mechanic’s lien that had been discharged after a hearing.  

Construction Claims May Come From A Variety of Sources

Most construction claims arise out of the contractual relationship between the parties.  Some arise out of claims of negligence.  There are other situations where a contractor may be held liable for damages that stem from nothing more than having engaged in certain activities.  Such claims are based upon the idea that “strict liability” applies to “ultra-hazardous activities.”  In both situations, i.e. claims based upon negligence and claims based upon strict liability, the first party performs an act or omission that results in damage to the life or property of the second party.  With a negligence claim, in order to be held liable, the first party must owe the second party a duty that is breached by the first party’s act or omission.  For example, if a contractor is working on scaffolding above a sidewalk, the contractor must use reasonable care to make sure that nothing falls on the people below and, in that situation, the contractor would only be held liable if something fell due to the failure to exercise reasonable care and not solely because something fell.  With a strict liability claim, however, all that is required is for the contractor to be held liable is for the contractor to be engaged in the activity that caused the harm.

Understanding Unabsorbed Home Office Overhead

It is readily apparent that – if a project is delayed – the contractor is losing money.  The increased direct costs associated with the labor and equipment on site are obvious. The more complex question arises when considering the effect a delayed project has on a contractor’s recovery of its home office overhead, where “home office overhead” is defined as the cost of the contractor’s main office including, but not limited to, rent, utilities, executive and management salaries, staff, office equipment, office supplies, taxes, insurance, etc.  Everyone intuitively understands that a delayed project increases such costs in the same manner that that delays increase the project’s direct costs but increases in home office overhead cannot be directly correlated to any one project because a contractor typically has several projects with overlapping schedules underway at any given time.  Over the years, courts have attempted to determine the damages necessary “to compensate a contractor for its indirect costs that cannot be allocated to a particular contract for the period during which the government has made contractual performance impossible.”  Charles G. Williams Constr., Inc. v. White, 326 F.3d 1376, 1380-1381 (Fed. Cir. 2003).  “As a result, there are at least nine formulas that have been used,

Contractors Have Statutory Rights That They May Assert During Payment Disputes

A recurring problem in the construction industry is the failure of owners to issue timely payments.  The problem not only affects contractors but also the subcontractors and/or suppliers who have to wait for the money to pass through the project’s general contractor and/or a higher tier subcontractor.  Most contractors are aware of their right to secure payment of the monies owed through a mechanic’s lien (private work) or by filing a payment bond claim (public work or private work if applicable) but there are statutory rights of which contractors should be aware.

Connecticut General States § 42-158i defines a “construction contract” as “any contract for the construction, renovation or rehabilitation in this state on or after October 1, 1999, including any improvements to real property that are associated with such construction, renovation or rehabilitation, or any subcontract for construction, renovation or rehabilitation between an owner and a contractor, or between a contractor and a subcontractor or subcontractors, or between a subcontractor and any other subcontractor” but excludes contracts between a contractor and any local, state, or federal government, and it excludes contracts for building residential structures with less than 4 units.  Id.

According to § 42-158i,