Idaho Supreme Court Provides Guidance on Mechanic’s Lien Release Bonds
Okay, I said it… we here at that Idaho Land Law blog love mechanic’s liens. Properly perfected, they are great tools to insure payment to contractors, subcontractors, and material suppliers. The Idaho Supreme Court recently provided us guidance on Idaho’s mechanic’s lien release bond statute and how the priority of a mechanic’s lien may impact your right to recover against a lien release bond. (American Bank v. Wadsworth)
The story line of the case is typical of developments that were occurring prior to the great downturn of 2008. BNR Development, Inc. planned to develop a high-end residential golf course community and secured funding of $15M from American Bank. BNR hired Wadsworth Golf Construction Company to construct the golf course and everyone was happy. Sound familiar?
During the course of the project, Wadsworth received monthly progress payments from BNR and provided conditional lien releases in exchange for payment. At some point during the project, BRN defaulted on its loan from American Bank and failed to pay Wadsworth for a portion of the work. Wadsworth recorded a mechanic’s lien of $2.3M on the property, which included retainage not included in previous progress payments. American Bank then initiated a foreclosure action naming Wadsworth as a defendant in order to establish the priority of its mortgage. Wadsworth counterclaimed stating its mechanic’s lien had priority over American Bank’s mortgage.
In order to proceed with the foreclosure sale, American Bank purchased a release of lien bond and, upon its motion, the District Court released Wadsworth’s mechanic’s lien.
Both parties then moved for partial summary judgment with American Bank arguing its priority prevented Wadsworth from recovering against the mechanic’s lien release bond. The District Court denied American Bank’s motion and held that the issue of priority was irrelevant concerning Wadsworth’s right to proceed against the mechanic’s lien release bond.
The District Court directed the property be sold at a foreclosure sale. American Bank was the highest bidder (by credit bid), and the sale left no surplus proceeds. Thereafter, the District Court conducted a two-day trial and found that Wadsworth’s lien was valid and awarded principal, interest, costs and fees to Wadsworth in the amount of $2.4M. It also held that in executing the conditional lien releases Wadsworth agreed to subordinate its lien priority date to other third party liens for the express benefit of other lienholders, including the Bank.
American Bank appealed, and the Idaho Supreme Court reversed – holding:
· The District Court erred in finding that the priority of the parties’ interests became irrelevant upon the posting of the lien release bond. It held that “the lien release bond is merely meant to act as substitute security and does not otherwise affect the rights of interested parties.” Because Wadsworth did not challenge the District Court’s determination that it expressly subordinated its lien to that of American Bank, there can be no recovery by Wadsworth against the bond.
What does this mean for mechanic’s lien claimants pursuing recovery against a mechanic’s lien release bond? In short, priority matters! Contactors, subcontractors, and material suppliers should carefully review any lien releases they execute and make sure that such do not waive lien rights related to retainage or priority. Arguably, in this case if Wadsworth had not waived its right to retainage on previous progress payments, then its lien rights may have extended to the first day it provided work on the project. This may have been sufficient for it to establish priority over American Bank’s mortgage and allowed it to recover against the lien release bond.