Today, in Weize Company, LLC v. Martz Supply Co., 09CA1369 (Colo. App. June 10, 2010), a division of the Colorado Court of Appeals held that a subcontractor suing to enforce its rights to a mechanics’ lien that has been substituted by a bond and thus discharged must still record a lis pendens. So, according to the Court of Appeals, bonding over a mechanics’ lien will not clear title, despite the clear language of the statute.
Prime contractor Colorado Regional Construction, Inc. (“CRC”), subcontracted with Weize Company, LLC (“Weize”). CCR failed to pay Weize for the work that Weize completed, so Weize recorded a mechanics lien and commenced a lawsuit. Weize’s supplier, Martz Supply Co. (“Martz”), also recorded a lien and joined in the lawsuit.
Weize filed its lawsuit in December of 2007. “Before year end, CRC substituted bonds for the liens and the court ordered the liens released.” Probably because the mechanics’ liens were released, neither Weize nor Martz recorded a lis pendens. The trial court entered a directed verdict in CCR’s favor as to the lien claims for failure to record a lis pendens, and the Court of Appeals affirmed. This author assumes that Weize and Martz were attempting to enforce their rights against the bond, and not foreclose their previously-discharged liens. When a lien is substituted, the lien claimant may bring an action against the bond (C.R.S. § 38-22-133), but the cause of action is essentially the same as a claim to foreclose a lien. Mountain Ranch Corp. v. Amalgam Enters., Inc., 143 P.3d 1065, 1068 (Colo. App. 2005).
In holding that a lis pendens still must be recorded even though a mechanics’ lien substitution bond had been approved and the liens discharged, the Court of Appeals in Weize relied on the plain languge of Section 38-22-110, which provides that:
No lien claimed by virtue of this article . . . shall hold the property longer than six months after the last work or labor is performed . . . unless an action has been commenced within that time to enforce the same, and unless also a notice stating that such action has been commenced is filed for record within that time in the office of the county clerk and recorder of the county in which said property is situate. (Emphasis by Court of Appeals).
There are some academic and practical problems with the Court’s decision.
Once a lien has been discharged, the lien is no longer “hold[ing] the property”. Instead, “upon the filing of a bond or undertaking . . . the real property described in such bond or undertaking shall be released from the lien . . . .” C.R.S. § 38-22-132 (emphasis added).
Recording a lis pendens seems completely contrary to the intent of the lien substitution provisions in the mechanics’ lien statute. The clear purpose for bonding a mechanics’ lien, as stated right in the statute itself, is to “release[ the property] from the lien and from any action brought to foreclose such lien.” C.R.S. § 38-22-132. Yet a “lis pendens notice effectively renders title unmarketable and prevents its transfer until the litigation is resolved or the notice is expunged.” Pierce v. Francis, 194 P.3d 505, 508 (Colo. App. 2008), citing Kerns v. Kerns, 53 P.3d 1157, 1164 n.6 (Colo. 2002).
In fact, it seems improper to record a lis pendens once the mechanics’ lien has been discharged. A lis pendens can only be recorded when “relief is claimed affecting the title to real property . . . .” C.R.S. § 38-35-110(1). Once a mechanics’ lien has been discharged, the bond becomes substituted security, and there is no longer any claim affecting real property.
upon the filing of a bond or undertaking . . . the real property described in such bond or undertaking shall be released from the lien and from any action brought to enforce such lien, and the bond or undertaking shall be substituted. . . . [T]he certificate of release [issued by the clerk] shall show that the property has been released from the lien and from any action brought to foreclose such lien.
C.R.S. § 38-22-132 (emphasis added). Thus, once the bond is approved, there can be no action to enforce the mechanics’ lien, and therefore no action affecting title to real property. As such, pursuant to Section 38-35-110(1), no lis pendens should be recorded.
The Court of Appeals, without referencing Section 38-22-132, reasoned that the bonding of the lien does not completely free up title. In doing so, however, the Court of Appeals relied on a section of the mechanics’ lien statute dealing with payment bonds, not substitution bonds. According to the Court:
despite bonding, the validity of a lien would still be of concern to a person interested in title to the liened property because the surety could become insolvent. In that event, “any lien claimant shall be entitled to enforce such lien claim in the same manner as if no bond had been filed.” § 38-22-129(5). Hence, if a lis pendens was not required, its absence could mislead a person seeking to obtain an interest in the liened property into concluding that even if the surety became insolvent, the property was not subject to a lien foreclosure action because the claimant here failed to [record a lis pendens].
Again, the Court’s reasoning is confusing, Once a mechanics’ lien substitution bond is approved and recorded, the property indeed is no longer subject to a lien foreclosure action. Instead of a mechanics’ lien foreclosure lawsuit, the former lien claimant can maintain an action upon the bond or undertaking. C.R.S. § 38-22-133.
Additionally, Section 38-22-129(5), which the Court of Appeals quotes above, applies only to situations where a general contractor obtains a payment bond prior to commencing work, and the payment bond surety becomes insolvent. Ironically, earlier in the opinion, the Court of Appeals clearly distinguishes payment bonds from lien release bonds in addressing CRC’s trust fund defense.
Weize also argued that having to record a lis pendens after a lien has been released would put it at risk of violating the spurious lien statute. The Court of Appeals rejected the argument, reasoning that “a lis pendens ‘provided for by specific Colorado . . . statute’ is excepted from the definition of a spurious lien.” The Court’s reasoning ignores the holding in Pierce v. Francis, 194 P.3d 505 (Colo. App. 2008), where a different division of the Court of Appeals specifically held that a notice of lis pendens is not exempted from the spurious lien statute. Specifically, the Court in Pierce held that “because a notice of lis pendens can be a spurious document, it falls under the spurious lien statute.” Id. at 508. Now in dicta, the Court in Weize suggests that a lis pendens is excepted from the spurious lien statute, thus creating a split of authority.
In addition to putting Weize at risk under the spurious lien statute, recording a lis pendens where there is no claim affecting title to real property could put Weize at risk for a slander of title claim by the property owner. Fountain v. Mojo, 687 P.2d 496, 500-01 (Colo. App. 1984) (improper filing of lis pendens can amount to tort of slander of title).
The holding in Weize may cause serious problems for property owners who want to free title from mechanics’ liens. As the appellate courts in Colorado have acknowledged, the recording of a lis pendens effectively renders title unmarketable. The reason a property owner bonds over a lien, or requires its general contractor to bond over a lien, is to free up title. That’s in fact what the statute says. But now, in light of Weize, bonding over a mechanics’ lien will no longer free up title, since the lien claimant will be required to record a lis pendens once an action is filed.