The difference between fair and fraudulent mechanics liens
Tuesday, March 07, 2017
Mechanics liens are extremely powerful tools for protection against nonpayment in the construction industry. Just like any powerful tool, however, mechanics liens can be abused.
Unscrupulous parties who want to get more than their proper share, who just want to cause problems for a particular project, or are just looking to make a fraudulent grab for cash sometimes file liens for these underhanded purposes. Filing an incorrect and improper mechanics lien for a knowingly fraudulent purpose is problematic in several ways.
Mechanics liens were created to promote fairness by protecting less powerful parties on a construction project against the threat of nonpayment by parties with more leverage and resources. Subverting this tool of fairness into a means to unfairly leverage undue payment is not only wrong, it creates a climate of distrust in which even more draconian timing and notice requirements may be deemed necessary to protect innocent property owners.
This shift would come at the expense of proper lien claimants. Further, this type of improper lien filing can have serious and far-reaching consequences. Just like Uncle Ben Parker told Spider-Man, "With great power comes great responsibility."
What Is a Fraudulent Lien?
The range of fraudulent or otherwise improper liens is immense, but there are clear situations where a lien’s fraudulent nature is indisputable.
Filing a lien against a property at which the lien claimant performed no work, or filing a lien after the lien claimant was fully paid are clearly fraudulent. While the claimant clearly has some (incorrect) reason for filing such a fraudulent lien, none of the possible reasons make the filing justifiable.
Common reasons for this type of lien are: that the claimant is owed money on another job for the same GC or property owner, but didn’t file a lien on that project before time expired, personal reasons generally related to the identity of the property owner, or just general fraud/shakedown. Unfortunately, the power associated with mechanics liens makes them a ripe target for fraudulent "contractors" attempting to take advantage of vulnerable property owners.
Unfortunately, it’s vulnerable property owners who often bear the brunt of fraudulent lien claims. Disasters lead to a lot of construction jobs, and with them come the possibility of shady contractors looking to take advantage for a quick buck. It’s unfortunate, but the scenario plays out with disappointing frequency.
In fact, construction resulting from the recent flooding in Louisiana has already given rise to some substantial contractor fraud. While the actions of a very few people shine a poor light on the vast majority of contractors, such actions have led to stronger restrictions on mechanics liens in the past.
But, as well as just being the wrong thing to do, filing an improper mechanics lien can have serious negative consequences.
What Could Happen If an Improper Lien Is Filed?
The short answer here is: a lot. For the fraudulent lien claimant, basically none of it is good. Some mechanics lien statutes clearly set forth specific consequences for filing and/or failing to release a fraudulent or improper lien.
In other circumstances, the remedy may be found in alternate parts of a state’s law. Sometimes, the consequences can even be criminal in nature.
New York provides examples of each of these potential outcomes. If a lien is "exaggerated" under the definition in Lien Law § 39, the lien will be declared void, and "damages may be awarded to the owner or contractor that can include (i) the costs of any bond; (ii) attorney fees; and (iii) an amount equal to the difference by which the amount claimed to be due or to become due as stated in the notice of lien exceed the amount actually due or to become due thereon."
If this is not bad enough, filing a fraudulent mechanics lien can also open the claimant to potential criminal prosecution. In U.S. ex. rel Roberts v. Ternullo, falsely filing a mechanics lien — in this example, many mechanics liens — led to criminal charges and even jail time.
In that case, the owner/operator of a retail fence business "would frequently fail to deliver fencing contracted for by customers or deliver less than called for in the contract, and when full payment was not forthcoming, would file mechanics liens with the County Clerk …" As a result, the owner/operator was charged with multiple counts of forgery and the making of a sworn false statement, amongst other charges. Ultimately, the defendant was sentenced to prison time.
Mechanics liens are powerful tools, but like many powerful tools, they can be used for properly or improperly — with the consequences of either being substantial. While the law provides protection against, and consequences for, improper lien filings, the best solution is for contractors to follow the golden rule, and to only use mechanics liens when they are necessary and allowed.
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