A Texas appeals court issued a decision last week commenting on a situation that happens quite frequently in mechanics lien law across the country. In Lyda Swinerton Builders, Inc. v. Cathay Bank, a contractor filed a mechanics lien, got paid, and released the mechanics lien; and thereafter, continued to perform work which led to an additional mechanics lien. The owner argued that the previous release prohibited a future lien filing, and the Texas appeals court disagreed.

Carefulness Required When Releasing Mechanics Lien Claims If Not Fully Paid Or Furnishing Additional Materials or Labor

The mechanics lien laws are written pretty well, but they sometimes do not contemplate very practical situations. For example, a common catch-22 arises when a builder or developer is ready to pay off a mechanics lien. The paying party wants the lien released before distributing funds, and the liening party wants the funds before releasing the lien. This happens all the time and the mechanics lien laws in every state are silent on a procedure.

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Since the lien laws are silent about this, the best advise is to be careful with the language of the mechanics lien release. Be certain you are only waiving and releasing the current lien, and that (i) you are otherwise fully paid at the time of the release; and (ii) you do not release any future rights within the cancelation. The situation in the Lyda Swinerton Builders case is another example of the law coming up short in a practical situation.

Mechanics lien claims are sometimes filed at the very end of a party’s furnishing, but payment issues come up in the middle of projects just as often as they come up at the end. The parties may resort to liens and disputes, but the dust frequently settles, and the parties want to proceed forward with the project and their relationship. This sometimes means that a party will have to release their lien and then start on the project again. What if another payment dispute arises? Can a second lien be filed on the same project even after the party has already filed and released a mechanics lien?

This question arises often on construction projects. Since the lien laws are silent on this circumstance the best advise is to be very careful with the language of the mechanics lien release. Be certain that you are only waiving and releasing the current lien, and that (i) you are otherwise fully paid at the time of the release; and (ii) you do not release any future rights within the cancelation.  Of course, whether you have the legal ability to release a future right is another question discussed at length in our publication under the “No Lien Clauses” tag.

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Texas Court Says A Claimant May File A Mechanics Lien After Previously Releasing A Lien

The Texas appeals court in Lyda Swinerton Builders addresses this “second lien” issue, and it’s the first time I’ve ever seen a court address this catch-22 situation. What’s really interesting about the facts here is that Texas is one of the many “relation-back” states, and in fact, just had a lien priority battle in another case that spun on the relation-back doctrine.

In short, the relation-back doctrine is a lien priority rule, which considers all lien filings to be effective from the very start of the construction project and not the moment of filing. Accordingly, in the Lyda Swinerton Builders situation, the first lien was effective from the project start date, and then even though that lien was released and a new one was later filed, that new lien was still effective from the same project start date. If you’re a mechanics lien law dork, or a law dork, you can likely see the convoluted issue before the court here.

The Builder Cannot Lien Or Collect The Amounts Owed Prior To The First Mechanics Lien Release

In evaluating this situation the Texas appeals court went straight to the language of the lien release filed to release the first mechanics lien. This immediate reference to the release language underscores the importance of the release language in these types of questions. The release in this case provided as follows:

FOR AND IN CONSIDERATION of $1,500,000.00 and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the [builder] does hereby release and discharge the property from this lien.

It is important to note that the original lien claim was for $3.2 million, and accordingly, the release was filed in exchange for less than half that amount ($1.5m).  Certainly, the parties likely negotiated to make a $1.5m payment now, continue work, and then to get future payments for the remaining debt. The lien claimant made a huge error when they agreed to release their lien for less than the full amount of the claim.  The court states such:

The builder argues that notwithstanding the release, it could “re-file” a lien for the unpaid portion of the same debt against the same parcel of land. We disagree because allowing the builder to do so would render the release meaningless. Thus, the release extinguished the builder’s initial lien and prevented it from reasserting the same lien against Parcel A for the unpaid portion of the pre-release debt.

This is the exact situation that cost Zachry Construction millions last year in another Texas case about lien waivers (as distinguished from actual mechanics lien cancellations or releases). Don’t ever sign or authorize a waiver or release of your claims unless you’re actually paid in full for those claims. When a claim is released, cancelled, or waived, it’s gone forever notwithstanding any back-room deals.  Period.

The builder actually got pretty lucky here because the court ruled it could still seek through a breach of contract claim the remaining $1.7 million unpaid in response to the first mechanics lien. This is because the “release does not say” that the “unpaid portion of the initial debt [was forgiven].” While this makes literal sense, the court went a little out of their way to preserve this claim for the builder as a great argument exists that they actually waived this claim.

A Second Mechanics Lien Is Allowed For Debt That Arose After The First Lien Was Released

Now to one of the more interesting parts of the decision: whether the claimant could file a followup mechanics lien for post-release expenses and charges that would not only be effective, but would “relate back” to the start of the project. The court’s summary does a great job of explaining:

Neither the release itself nor any summary judgment evidence suggests that the builder agreed to refrain from filing new liens if it incurred additional expenses. By its terms, the release affected only the builder’s pre-release lien. It said nothing about the builder’s ability to file future liens for post-release expenses…

[The release] refers only to the lien already filed and the indebtedness already incurred. We therefore do not construe the release as barring liens for post-release expenses.

Further, I applaud the Texas appeals court for tying the decision together and rejecting the bank’s claims by citing the purposes of the mechanics lien statutes:

Cases interpreting the mechanic’s lien statutes also counsel against invalidating a lien on a purely technical basis. For example, “[i]t is well settled that HN13Go to the description of this Headnote.the mechanic’s and materialman’s lien statutes are to be liberally construed for the purpose of protecting laborers and materialmen.” And courts have been more willing to excuse a mistake or omission in cases where no party is prejudiced by the defect. Indeed, “[t]he Legislature did not intend that the materialman should lose his lien through the technicalities of a warning, where the owner was not misled to his prejudice.”