Given how powerful mechanics liens are when collecting for nonpayment, many states offer avenues of protection for property owners to respond to these claims. These avenues include the ability to challenge the validity or the amount claimed. While disputes such as this are ongoing, another option is to bond off the claim. That way the lien no longer is attached to the property itself.
But are these actions mutually exclusive? Does posting a lien release bond wipe out the claim or change the remedies available? A recent Nevada Court of Appeals case offers some guidance on how bonding off a mechanics lien does not affect the rights of either the lien claimant or the property owner.
How Nevada property owners can respond to a mechanics lien
Once a lien has been filed and recorded according to Nevada’s mechanics lien law, it attaches to the improved party until the claim is satisfied, expunged, or expired. In Nevada, property owners are afforded some options when it comes to responding to a lien claim filed against their property.
The first is to file a motion to show cause under NRS §108.2275. This requires an expedited hearing to determine if the claim is frivolous or the amount claimed is excessive.
The debtor of the lien Claimant or a party in interest in the property subject to the notice of lien who believes the notice of lien is frivolous and was made without reasonable cause, or that the amount of the notice of lien is excessive, may apply by the motion to the district for an order directing the lien claimant to appear before the court to show cause why the relief requested should not be granted.
Another action property owners can take is to post a surety bond to release the claim from the property (i.,e. bonding off) under NRS §108.2415. This transfers the claim to a bond in order to free up their property title.
To obtain the release of a lien for which notice of lien has been recorded against the property, the principal and a surety must execute a surety bond in the amount equal to 1.5 times the lienable amount in the notice of lien… [and] the recording and service of the surety bond pursuant to [NRS 108.2415(1)] releases the property described in the surety bond from the lien and the surety bond shall be deemed to replace the property as security for the lien.
How these two options interact with each other was the issue at hand in the following Nevada Court of Appeals case.
Contractors reduced as excessive, even though the claim was bonded off
The case in question: Ascent Construction, Inc. v. Sonoma Springs Ltd.
Project Snapshot:
- Owner: Sonoma Springs Limited Partnership (Sonoma)
- Contractor: Ascent Construction, Inc. (Ascent)
A payment dispute arose between Ascent and Sonoma regarding a $4.5M construction contract. Subsequently, a notice of lien (and an amendment) was filed by Ascent claiming over $634K for the unpaid contract balance and the value of “additional or changed work, materials, and equipment.”
In response, Sonoma filed and sent a motion to show cause under NRS §108.2275. Additionally, Sonoma also posted a lien release bond pursuant to NRS §108.2413.
At the hearing to show cause the court concluded that the lien amount claimed by Ascent was excessive because it requested additional compensation for work that was already included in the original scope of work. Consequently, the lien amount was reduced to a little over $230K, and Ascent appealed.
Contractor claims court had no authority to reduce a bonded off lien
Ascent’s main argument on appeal was that the district court lacked authority to reduce the amount of the lien after a bond release was posted. They based this argument on the fact that when a lien claim is bonded off, it is released from the property.
Moreover, the expedited proceeding under a motion to show cause was only available for liens on real property; the court improperly reduced their claim. Ascent also argued that when a lien is bonded off in the full amount, this is basically an admission that the lien amount is correct: Therefore, the district court improperly reduced their claim.
Appeals Court: Lien release bonds don’t affect rights and remedies available to owners
The court began their analysis by pointing out the three potential outcomes of a hearing to show cause:
- The lien is found frivolous and expunged.
- The amount is found to be excessive and the claim is reduced.
- The claim is valid.
In any sense, the statute providing this hearing also states that “Proceedings conducted pursuant to this section do not affect any other rights or remedies available to the parties.”
Furthermore, posting a surety bond to release the claim is by no means an admission or acknowledgment of the lien claim. The bond amount required to release the claim is provided by statute and set according to the amount of the claim. Doing so does not preclude the owner from otherwise challenging the claim. In the court’s own words (emphasis ours):
… the act of obtaining a surety bond does not wipe the lien totally from existence. Rather, the lien still exists but some of the lienholder’s rights and duties have now been transferred to another entity through the bond.
Moreover, because the surety bond amount is determined by the lien amount, a property owner obligated to pay the bond fees is not barred from further challenging the lien amount simply because it sought to bond the property first.
To say that a subsequent surety bond precludes any inquiry into the validity of a lien would mean that the lien was not just released, but also ceases to exist, and we decline to follow that construction. NRS 108.2415 merely releases the lien from the real property and converts the lien holders interest in the real property into an interest in the surety bond.
The court ultimately concluded that nothing would preclude a court from reducing or exonerating a lien, even after the lien claim has been bonded off. Therefore, the district court didn’t err by reducing the lien amount after the lien was released and transferred to a surety bond.
Bonded off lien claims are still lien claims
Bonding off a lien is a quick (but mind you, expensive) option for property owners to get the cloud of lien released from the property title. But this is just a temporary solution. The claim itself is still intact — just against the bond as opposed to the property.
Furthermore, the act of posting a lien release bond is in no way an acknowledgment of the claim or the amount. This process merely changes how a collection can be made if the claim is successful.
There is a prevalent misconception that a bonded off lien claim is a bad thing. Lien claimants when faced with a bonded off claim need to hold steady. The claim for non-payment still exists, and your right to file a lawsuit to enforce the claim is still a valid option. But that doesn’t mean you’re in the clear.
As this case demonstrates, an owner who has bonded off your claim still has the right to challenge the amount or validity of the claim; regardless of what it is attached to.