- Posted by Scott MacDonald
- On April 22, 2019
It is one of those dreaded business situations that plagues the construction industry, especially in times of economic downturn—what to do when a lower-tier entity files a lien against a property then disappears. It has happened to countless owners, general contractors, subcontractors, and even some particularly unlucky sub-tier subcontractors and suppliers. Here is how it arises: a project is moving along, then performance or payment issues arise, and a company that is over extended or unwilling to continue work stops performance, walks off the job, and files a lien against the property for whatever amounts were allegedly unpaid. Often, the allegedly unpaid sums were legitimately withheld due to a good faith dispute over payment/performance, and it is not unusual for the defaulting entity to not be entitled to any of the sums claimed in the lien. Regardless, the lien stays on the property, and pressure is applied from the “upstream” entities to the party who contracted with the defaulting entity to “deal” with the lien.
Oftentimes, a contract will require the parties to “deal” with a lien by obtaining a lien release bond (“release bond”). For those lucky enough to not have encountered this issue, a release bond is a nifty statutory device whereby a surety agrees to record a release bond for the full claimed amount of the lien, with the release bond substituting in for the liened property, effectively discharging the property from liability under the lien. In other words, the lien is released from the property and attaches to the release bond. If the lien claimant recovers on its lien, it is technically satisfied by the surety providing the release bond (or the party who agrees to indemnify and defend the release bond). In exchange for delivering the release bond, the surety demands yearly premiums be paid on the release bond amount.
Simply obtaining a release bond does not solve the problem for whichever unlucky party must “deal” with the lien, since the lien still exists. Generally, at this stage the lien claimant files a lawsuit to foreclose its lien, and the parties work out the issue one way or another, ultimately resulting in recording a formal “Release of Lien” with the county recorder’s office.
The problem arises when the defaulting entity has gone broke, or for other reasons does not want to incur the cost of pursuing its lien claim and does absolutely nothing with its lien—neither filing suit nor releasing its lien. At this point, Washington law does provide some protection by requiring all liens to be formally “foreclosed” in a lawsuit eight months from the date the lien is recorded. If the lien claimant fails to “foreclose” on its lien by filing a lawsuit within that eight-month period, the lien is effectively void. That said, even when the eight-month period has run, the county recorder’s office does not formally release or otherwise invalidate the lien in its systems, meaning the lien is still recorded, as is the release bond, it simply cannot be enforced by the claimant. Because both the release bond and the underlying lien still technically exist in the County’s records, the surety providing the release bond will continue charging premiums.
An even worse situation arises when a lien claimant files its lawsuit within the eight-month period and then disappears. Because the eight-month period to foreclose has been satisfied, the party “dealing” with the lien now must bring an expensive dispositive motion in litigation requesting the court invalidate the lien and the claimant’s lawsuit. Although in counties with mandatory case schedules (such as King), a party who disappears may forfeit their case at an earlier stage. For those counties which do not have mandatory case calendars (such as Snohomish or Kitsap), these cases and the underlying liens will sit until some expensive action is taken. Making matters worse, because the disappearing lien claimant almost certainly has no money, the party who has to defend against the lien will incur the time and costs of pursuing these expensive motions without any reliable way to recover the costs against the claimant.
Once litigation is filed to foreclose the lien, there is only one remaining Washington statute protecting parties from disappearing lien claimants. RCW 60.04.141 allows a court, “in its discretion,” to dismiss a lien foreclosure action for “want of prosecution” if a lien claim is not brought to judgment within two years of the date the lawsuit is filed. The difference between the eight-month deadline to foreclose a lien and the two-year period to bring that foreclosure action to judgment is significant—the eight-month deadline automatically nullifies a lien, while the two-year period only voids a lien if a court exercises its discretion to do so.
As noted above, until a lien is formally released by the county recorder’s office, a release bond surety will continue charging costly premiums on a yearly basis. Adding insult to injury, because the lien claimant has disappeared and likely has no money, the premiums are paid without any legitimate hope of recouping them from the disappearing lien claimant.
So, the question arises: how does a party defending against a lien where the party has “disappeared” avoid incurring additional premiums short of the significant expense of going to court to obtain a formal judgment releasing the lien? The answer is simple and surprisingly cost effective: once either the eight-month or two-year periods applied in RCW 60.04.141 have run, simply draft a letter to the bonding company requesting it to forgo collecting additional premiums.
Why would a bonding company agree to forgo collecting premiums on a release bond where the lien has not been formally released in the county recorder’s office? The answer is again simple: because although the lien is still technically recorded, as is the release bond, the lien cannot be enforced, and therefore the bonding company carries no residual risk that it would need to satisfy any amounts under the lien. The letter should clearly state the reason for the request to forgo premiums, as well as the relevant facts regarding the eight-month or two-year statutes. Although a surety is not guaranteed to accept the request to forgo premiums, it is in all instances worth a try.
COMMENT: A letter requesting the release bond surety forgo premiums is a deceptively simple device to mitigate one of the most frustrating situations businesses and their lawyers face. Care should be taken in laying out the letter to the surety, with attention paid to the facts and the way in which the law is presented for the surety’s analysis. This is especially true when requesting the surety forgo premiums under the two-year period, which is technically up to the discretion of the court to enforce. Due to the legal and factual nuances of the two-year period, the assistance of a lawyer is encouraged to avoid making overreaching representations for the surety’s consideration.