Collecting fees in hard times - using mechanics' liens to collect contractor payments

Mechanic' liens are one of the best tools a contractor has to collect unpaid fees. It creates a public record of the amount owed and shows up on any searches of the title to the property. However, the mere filing of a lien does not assure payment. If a transfer of the property is about to occur, the lien may persuade the owner to pay or settle. If the work was done in a co-op or condominium, the Board may exert pressure to have the lien removed. If nothing is happening with the property through, the lien may just sit and the non-payment issue will not be resolved.

Contractors cannot assume that because a lien is accepted for filing it means that the lien is valid. The clerk accepting the lien for filing has no way to determine its validity. The lien can be challenged if there are defects in the information in the lien or it is improperly served. It can be challenged for being willfully exaggerated. If that allegation is proven, the contractor may be subject to treble damages. Therefore, it is important that contractors use legal counsel well-versed in this area of the law to prepare and file liens.

I always advise clients to try to work out a resolution before resorting to liens or litigation. This may involve a letter from the contractor to the client or from the contractor's attorney to the client. Buildings owners generally respond to such letters.

Contractors should be open to the possibility of settling a fee dispute, especially if there may be major litigation otherwise. Sometimes clients have genuine cash flow problems and may agree to a fee payment schedule, even if they cannot pay all at once. This can all be appropriately documented by legal counsel.

If the contract provides for arbitration of disputes, this may be a viable option to resolve the dispute in less time than the courts might take and less expensively. A well-run arbitration can be an excellent tool in resolving a construction case because there is a special panel of arbitrators skilled in construction-related matters to hear the case. of course, collecting on the award or judgment may be a different matter. However, you cannot begin the collection process until you have an award or judgment to work with.

In the absence of an arbitration clause, a lawsuit to foreclose on the lien is the other option. If a fee dispute needs to be litigated in court, it may take several years before a judgment is obtained. However, a settlement can be agreed upon at any time, even on the day of trial.

The filing of a petition in bankruptcy can put a damper on the collection process. Any litigation matters between the parties will be stayed. The creditors must then wait for the bankruptcy process to run its course in order to find out what funds are available and the likely percentage of payment relative to what is owed. Thus the expression "The creditor received 50 cents on the dollar."

It may be even less nowadays.

It is important to have a knowledgeable attorney who can examine every angle. For example, the company a contractor did work for may have filed for bankruptcy, but the owner of the company may have signed a personal guarantee for the construction work.

It is also worthwhile to work with a law firm which specializes in the construction industry. A firm which understands the construction industry will be able to defend or file motions to vacate mechanic's liens, actions to foreclose liens and other intricate matters more easily than one which does not often encounter such issues.

C.Jaye Berger, the founder of Law Offices C. Jaye Berger, is a New York City attorney specializing in building construction, real estate and environmental law. The firm represents contractors, architects, interior designers, owners and developers. Berger is currently writing a book about hazardous substances in buildings.

COPYRIGHT 1992 Hagedorn Publication
COPYRIGHT 2004 Gale Group