Recently, Division II of the Court of Appeals held that the priority of a lien for unpaid engineering services pertaining to a Contract with five subsequent Amendments dates back to the first commencement of services. This dispute involves the priority of a mechanic’s lien filed by an engineering firm, Gibbs & Olson, Inc. (“G&O”), and the Deed of Trust of a lender, First-Citizens’ Bank & Trust Company (“First-Citizens”).[i] Winlock planned to turn its 50-acre pasture into a 200-lot subdivision. In February 2005, Winlock received a proposal from G&O for engineering and survey services.
In July, the parties executed a Contract based on the February proposal. The Contract required G&O to provide preliminary design work for the entire 50-acre project. It also required G&O to help obtain government approval for the entire project, and provide final design work and other engineering work on portions of the project. It contained contract estimates for the cost of completion of the design work and a description of further engineering services necessary to complete the entire project to be accomplished in five phases. The Contract provided for future Amendments, and stated:
Following completion of the Final Design Phase Services, and after receipt of written authorization from [Winlock], [G&O] shall prepare an amendment to this Agreement for completion of the construction phase and operational phase services. Upon approval of the Amendment, [G&O] shall proceed with the work on this project.
The contract price for the initial work was $112,000 and any costs exceeding that amount needed Winlock’s approval.
Prior to January 10, 2006, Winlock provided G&O’s engineering work to First-Citizens’ predecessor, Venture Bank, to support Winlock’s loan application. Venture Bank had notice that G&O began work on the project before the $3,700,000 loan from Venture Bank was approved. On January 10, 2006, Venture Bank’s Deed of Trust was recorded against the property. Venture did not obtain a subordination agreement from G&O.
As the first phase progressed, Winlock and G&O revised the scope and cost of the work. The revisions were memorialized in written Amendments. In April 2006, the parties agreed to three such Amendments. By June 2006, G&O completed the first phase of the development and Winlock paid G&O in full for it.
In September 2006, the parties agreed to two more Amendments. The first paragraph of each Amendment provided:
This Amendment revising the Scope of Work, Schedule, and Budget for Engineering Services is hereby attached to and made a part of the Agreement for Engineering Services dated July 22, 2005, between [Winlock] and [G&O]. This Amendment authorizes [G&O] to perform Construction … Services for [Winlock], as more fully described herein.
From July 2006 through January 2008, G&O continued performing its obligations under the Amendments, but after October 2006, Winlock made only one more payment. Winlock assured G&O that it was working on financing and that G&O would eventually be pay. Finally, on February 4, 2008, G&O stopped work for lack of payment. At that time, Winlock owed G&O $155,755.59, plus interest. In March 2008, G&O recorded a lien. In July 2008, G&O sued to foreclose the lien.
Winlock also defaulted on its loan with Venture Bank and Venture Bank foreclosed its Deed of Trust. In August 2009, Venture Bank filed its Trustee’s Deed and became the owner of the 50-acre parcel. In May 2010, Venture Bank transferred its ownership to First-Citizens by filing a Receiver’s Deed. First-Citizens was then substituted for Venture Bank in G&O’s foreclosure suit.
At trial, the issue was whether First-Citizen’s Deed of Trust had priority over G&O’s lien. The trial court found that there was a single contract between Winlock and G&O, and that G&O’s mechanic’s lien had priority over First-Citizens’ Deed of Trust. The trial court also found that G&O reasonably mitigated its damages.
The Court of Appeals affirmed. The Court found that substantial evidence showed that the July 2005 Contract and its subsequent Amendments were part of the single Contract. The Court further found that the priority of G&O’s lien dated from its first commencement of services and, because such services were prior to the recording of First Citizens’ Deed of Trust, G&O’s mechanic’s lien had priority over the Deed of Trust.
The Court further rejected First Citizens’ claim that G&O failed to mitigate its damages by continuing to perform work when it was not paid. In rendering its opinion, the Court quoted from the Washington Supreme Court’s opinion in Labriola v. Pollard Grp., Inc.:
A wide latitude of discretion must be allowed to the person who by another’s wrong has been forced into a predicament where he is faced with a probability of injury or loss. Only the conduct of a reasonable man is required of him. If a choice of two reasonable courses presents itself, the person who is wronged and forced the choice cannot complain that one rather than the other is chosen.
152 Wn.2d 828, 840, 100 P.3d 791 (2004). The Court found that G&O’s choice to continue working was not unreasonable under the circumstances. If G&O had not continued to work and abandoned the project, G&O would have been harmed because the properties would not be sellable. G&O understood that Winlock was working on financing and that it would eventually pay G&O.
[i] Scott’s Excavating Vancouver, LLC v. Winlock Properties, LLC, __ Wn. App. __, 308 P.3d 791 (Division 2, August 27, 2013).