Home > Uncategorized > “If you don’t pay me, I will file a Lien!” Construction Liens: When is filing a lien “Vexatious”?

“If you don’t pay me, I will file a Lien!” Construction Liens: When is filing a lien “Vexatious”?

I had good news today – a client of mine that I recorded a construction lien for told me that it was enough leverage to get the property owner to pay the amount owed.  Good news, and now I will discharge the lien.
Conversely,
I had a client who recently retained a renovation company to perform some work on his building. He should have gotten references, like through the local HBA http://www.mygrhome.com/, Regardless, my client hired an individual with a bad track record, unlicensed, and with a criminal record.
As you might imagine, the company performed substandard work, and when my client refused to pay – threatened to file a lien on my client’s Property.
Undoubtedly, the company likely thought this threat would provide leverage to get paid, however, the company likely didn’t realize the negative consequences if it proceeded to file a lien in bad faith, or as the Construction Lien Act calls it “Vexatiously
A Recent unpublished decision from the Michigan Court of Appeals  illustrates the possible consequences of filing a construction lien “vexatiously” :   Polaris Constr., Inc. v. Delicata, 308254, 2013 WL 3107537 (Mich. Ct. App. June 20, 2013)
I. Facts
This case arose from water damage to a commercial building in Detroit.
Defendant, Delicata, owned the building and leased a portion of it to Confidential, Inc. (Confidential), which operated a nightclub and restaurant in the leased space.

On January 19, 2009, a water pipe in the nightclub burst, causing damage to both the nightclub and restaurant as well as to a portion of the building not leased to Confidential. (*Important fact)

After the water damage was discovered, Peter Arabo, Confidential’s president, contacted Plaintiff, Polaris Construction to perform the remediation work.
Robert Kato, plaintiff’s head of operations, met with Arabo and defendant at the building. According to Kato and Arabo, defendant authorized plaintiff to proceed with the remediation work.
Pursuant to the terms of its lease agreement with defendant, Confidential maintained insurance coverage that included coverage for water damage to the leased premises.
Confidential filed a claim with its insurer, Badger Mutual Insurance Company, which paid $254,989 to plaintiff and Confidential for the remediation work.
At issue in this case is whether defendant had a contract with plaintiff to perform remediation work on the nonleased portion of the building and whether defendant owed plaintiff $120,000, which was the balance of the total contract amount of $374,989 for the entire building.
Plaintiff filed a claim of lien against the property in the amount of $120,000 and filed a complaint against defendant seeking foreclosure of the lien and alleging breach of contract, unjust enrichment, and fraud.

 
Defendant filed a motion to dismiss arguing:

  • no enforceable contract existed between he and plaintiff for the work performed.
  • Regarding plaintiff’s unjust enrichment claim, that the work that plaintiff performed did not directly benefit defendant;
  • that plaintiff’s lien foreclosure claim failed because plaintiff did not serve a notice of furnishing as required by MCL 570.1111(4), and its lien was therefore invalid, filed vexatiously, and therefore should result in sanctions to the plaintiff.

 

The trial court granted defendant’s motion and awarded defendant attorney fees and costs totaling $29,183.94.

Essentially, the trial court told the Plaintiff – you had no legitimate reason to file and foreclose on your construction lien, and therefore you should be responsible for paying the attorney fees incurred.

 

The Court of Appeals found differently, and reversed, holding that, Plaintiff had valid arguments for a unilateral contract, as well as unjust enrichment claims.

 

II. Law 

“VEXATIOUS LIEN”

 

MCL 570.1118(2) provides:

In an action to enforce a construction lien through foreclosure, the court shall examine each claim and defense that is presented and determine the amount, if any, due to each lien claimant or to any mortgagee or holder of an encumbrance and their respective priorities. The court may allow reasonable attorneys’ fees to a lien claimant who is the prevailing party. The court also may allow reasonable attorneys’ fees to a prevailing defendant if the court determines the lien claimant’s action to enforce a construction lien under this section was vexatious. [Emphasis added.]

A vexatious proceeding within the meaning of MCL 570.1118(2) is “a proceeding undertaken ‘without any reasonable basis for belief that there was a meritorious issue to be determined….’ “ ER Zeiler Excavating, 270 Mich.App at 652, quoting MCR 7.216(C)(1)(a).
The Court of Appeals held that the lien was invalid, although not for the reason the trial court found, but because Plaintiff failed to provide a sworn statement to Defendant (a prerequisite to foreclosing on a lien).
However, given the meritorious arguments that Plaintiff had regarding a breach of contract and unjust enrichment claim, the Court held that the lien was not filed vexatiously, or in bad faith, and removed the sanctions imposed by the trial court.
III. Lessons
There are several:
1. Draft your contracts carefully! This applies to any business.
2. Contractors – go to your attorney before filing a construction lien – make sure you comply with the prerequisites of the Construction Lien Act.  Yes, the CLA is a “remedial statute” however, there are sections, like timing of filing liens, and providing sworn statements, which must be strictly complied with.
3. This is a subset of number 2, Don’t file a lien simply because you think the party will pay.  They  might pay, but if the only reason you are filing it is to get them to pay you, and you do not have a valid reason for filing the lien you could be held responsible for filing a lien “vexatiously” and have to pay their attorney fees.

 

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