The Lien blog recently posted about an interesting New York mechanics lien case in which the court refused to invalidate a mechanics lien until it had “credible evidence” that the claimant exaggerated the amount it claimed it was owed.  A recent case under Colorado mechanics lien law also addressed the issue of exaggerated liens.

What Is an “Exaggerated Lien” Under Colorado Mechanics Lien Law?

Colorado law states that an exaggerated lien is:

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for an amount greater than is due without a reasonable possibility that said amount claimed is due and with the knowledge that said amount claimed is greater than that amount then due, and that fact is shown in any proceeding under [Colorado mechanics lien law]

This definition, of course, leads to another question: How do courts or the parties prove how much a lien claimant is due?

According to Colorado law, all construction contracts worth more than $500 must be made in writing, and that written contract is a good place to start when determining the amount due to a mechanics lien claimant.  When a written construction contract exists, a mechanics lien may be exaggerated when the amount claimed in the lien exceeds the amount specified in the contract.

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What Are the Consequences of Filing an Exaggerated Lien Under Colorado Mechanics Lien Law?

Under Colorado mechanics lien law, lien claimants have two very good reasons not to file exaggerated mechanics liens:

  1. First, if the court holds that the mechanics lien is indeed exaggerated, the lien claimant “shall forfeit all rights to such lien.”  In other words, the entire lien will be declared invalid.
  2. Second, a party that files an exaggerated mechanics lien is also responsible for paying court costs and the opposing party’s attorney fees.

The message the legislature is sending through this Colorado mechanics lien law provision is crystal clear: Lien claimants must either claim the amounts that they are owed under a contract or lose their lien rights. Lien claimants must either claim in good faith the amounts that they are owed under a contract or lose their lien rights .

How a Recent Case Applied the Law

A recent case heard by the Colorado Court of Appeals, Divison V, Byerly v. Bank of Colorado, applied Colorado mechanics lien law regarding exaggerated liens.

In that case, Wildwing Development hired Byerly as a contractor in a residential subdivision construction project.  Although the details are somewhat complicated, the multi-million dollar project simply didn’t attract enough interest and eventually Wildwing started missing payments owed to Byerly.  As a result, Byerly filed a mechanics lien in the amount of $824,000, which it later reduced to $641,000.

The contract between Wildwing and Byerly, however, had a few extra twists.  Specifically, although Byerly was to be paid $7,000 per month for its services, it could also receive any cash it was owed in subdivision property instead.  Additionally, Byerly was to receive an additional amount called “Lot Compensation” if and when the town in which the subdivision was located “accepts and signs off on all subdivision infrastructure improvements” completed by Byerly.

At the time Byerly filed its lien, the contractor was owed $84,000 in unpaid monthly compensation.  However, Byerly also “anticipated” that it would further be owed $557,000 in Lot Compensation even though the town had not yet “signed off” on Byerly’s work.  Thus, it filed a mechanics lien consisting of those two amounts.

Ignoring the fact that the town had not yet signed off on the Lot Compensation work, the lower court determined that the “value” of Byerly’s work at the time it filed its mechanics lien was $417,095 and thus held the lien to be worth that amount.

In a spirited opinion the appeals court reversed the trial court’s holding.  Instead of looking at the reasonable value of the work Byerly performed at the time it filed its lien as the lower court did, the appeals court relied on the Colorado mechanics lien law described above.  Specifically, the court noted that the amount claimed in a lien cannot exceed the contract amount a contractor or subcontractor is owed.

In this case, the contractual amount Byerly was owed was limited to the monthly payments Wildwing was supposed to make, or $84,000 in total.  The fact that Byerly “anticipated” being owed additional money or property, the court held, was completely irrelevant; Byerly should not have included those “anticipated” amounts in its mechanics lien since Colorado law states that the maximum amount for a mechanics lien is the contract price.

Because there was no reasonably possibility that Byerly was owed more than what the contract stipulated and Byerly intentionally exaggerated the amount it claimed in the lien, the court held that Byerly filed an exaggerated lien.  The court concluded that by doing so Byerly forfeited its lien rights.

Moving Forward From Byerly

There are only two but nonetheless extremely important take-aways we learn from Byerly:

  1. First, under Colorado mechanics lien law lien claimants must be very careful to include the right amount the claimant is owed in the mechanics lien itself.  This amount should only exceed the contract price in extremely limited circumstances.  If a Colorado court concludes that this amount exceeds the contract price, that there was no reasonable explanation for the exaggeration, and that the exaggeration was intentional, the court will declare the entire lien invalid.  
  2. Second, even if a contract sets forth that if certain conditions are met the contractor or subcontractor will receive additional compensation, if those conditions have not yet been met at the time the lien is filed the lien claimant cannot include that additional compensation in its mechanics lien.  Presumably, the subcontractor would have to wait for those conditions to be met before filing a mechanics lien for the entire amount or pursue alternative remedies for getting paid.

Although lien law can often be complicated, in this case Colorado mechanics lien law is actually fairly straightforward: In almost all instances, either limit the amount claimed in the mechanics liens to the contract price or lose your lien rights entirely.