Carney Badley Spellman, P.S. is a Pacific Northwest law firm located in Seattle, Washington. Our clients will tell you we are known for providing exceptional value in legal services by recognizing case objectives early and obtaining cost-effective results. The Carney firm provides legal services in business, litigation, construction, government affairs and insurance to individuals and to privately-held and publicly-traded companies.
When the Owner Bonds Around Your Mechanics' Lien, You Still Have to Litigate the Lien's Validity
by Jason M. Kettrick September 2008
On October 29, 2007 Washington's Division I Court of Appeals filed its opinion in DBM Consulting Engineers, Inc. v. United States Fidelity and Guaranty Company, 142 Wn.App. 35, 170 P.3d 592 (2007); reconsideration denied, Dec. 19, 2007. The case provides yet another example of the myriad traps hidden within our mechanics' lien statute. In the opinion authored by Judge H. Joseph Coleman (retired), Division I tackled an issue of first impression and determined unanimously that when a bond in lieu of claim is recorded under RCW 60.04.161, the lien claimant must still adjudicate the validity of its lien in order to obligate the surety to pay on the bond.
The lawsuit arose from an engineering services contract between DBM Consulting Engineers, Inc. and Soos Creek Vista, for a project owned by Soos Creek and located in King County. At some point a dispute arose between the parties over claims of unauthorized services and overcharges, and DBM recorded a mechanics' lien against the project for $62,836.89 allegedly owed on the contract. A few weeks later, DBM sued Soos Creek in King County Superior Court for breach of contract, unjust enrichment and foreclosure of the mechanics' lien.
Soos Creek's plan for the project, like that of so many other developers at the time, was to subdivide the property and sell individual parcels. And presumably due to the chilling effect of mechanics' liens on financing availability and lot sales, Soos Creek quickly availed itself of RCW 60.04.161, the bond lien statute, and bonded around DBM's liens shortly after the foreclosure lawsuit was started. With bonds in place clearing the way for parcel sales, the lawsuit went to a jury trial where a $38,070.22 judgment was entered for DBM on its breach of contract claim, but the validity of DBM's mechanics' lien was never litigated.
In the mean time the original bond surety, USF&G, was purchased by St. Paul/Travelers Insurance Company and when Soos Creek failed to pay the judgment, DBM demanded payment from Travelers. Travelers declined DBM's demand, contending it was not obligated to pay on the bond because DBM did not litigate the validity of its lien before the trial court. Travelers' position was understandably not well received by DBM, which started a second lawsuit, this time against USF&G and Travelers for payment on the bond. In the second lawsuit King County Superior Court Judge Andrea A. Darvas entered summary judgment against Travelers in the amount of the bond, plus $27,882 in prejudgment interest and $16,175 in attorneys' fees. Travelers appealed.
The appeal turned on the interpretation of the lien bond statute, RCW 60.04.161, and an issue of first impression in Washington. According to Travelers, even though DBM requested foreclosure of the lien in its complaint, DBM never litigated or obtained a judgment on the liens' validity, with the result that Travelers was not obligated to pay on the bond. DBM, on the other hand, argued that the bond recorded by Soos Creek released the property from the lien – so there was no lien to foreclose. DBM further argued that RCW 60.04.161 establishes bond liability where judgment is entered on the claim asserted in the claim of lien, even though no judgment is entered on the lien itself.
RCW 60.04.161 reads:
Any owner of real property subject to a recorded claim of lien under this chapter … who disputes the correctness or validity of the claim of lien may record, either before or after the commencement of an action to enforce the lien … a bond issued by a surety company authorized to issue surety bonds in the state…. The condition of the bond shall be to guarantee payment of any judgment upon the lien in favor of the lien claimant entered in any action to recover the amount claimed in a claim of lien, or on the claim asserted in the claim of lien. The effect of recording a bond shall be to release the real property described in the notice of claim of lien from the lien and any action brought to recover the amount claimed…. If an action is timely commenced, then on payment of any judgment entered in the action or on payment of the full amount of the bond to the holder of the judgment, whichever is less, the surety shall be discharged from liability under the bond.
The Court, after recognizing the statute is no model of clarity, concluded Travelers' interpretation was consistent with the grammatical construction of the statute and therefore correct. The italicized sentence in the above-quoted statute lists two types of actions – actions where judgment is entered for the amount claimed in the claim of lien, and actions where judgment is entered on the claim asserted in the claim of lien. Why the legislature felt this distinction was necessary is anyone's guess. Nevertheless, according to the Court and now Washington law, in all actions judgment upon the lien is a prerequisite to the obligation of sureties to pay on the lien bond.
The Court's holding is yet another application of the familiar canon that the mechanics' lien statute is strictly construed to determine whether the lien attaches. The recording of a lien bond does not remove the underlying dispute from the mechanics' lien statute, and is not a concession by the bond principal that the lien is valid and correct. The recording of a lien bond merely substitutes the bond as security for the lien so that the property can be sold before completion of the lien foreclosure action. As a result, and as is now clear from the Court's decision, claimants must always go through the steps of adjudicating the validity of their mechanics' liens in order to preserve their right to demand the surety pay on the bond.