As case law evolves, so do best practices. A recent lien foreclosure opinion published by Division II, Court of Appeals of the State of Washington, Shelcon Const. Grp., LLC v. Haymond, 2015 WL 3419603 (2015), may cause construction lenders to examine their practice of wholly relying upon recorded lien releases and, moving forward, to seek further assurances from the releasing party that it has been paid in full. Shelcon not only breaks new ground on whether lenders can reasonably rely on recorded lien releases, it also clarifies Washington law on when a mechanic’s lien attaches to property. In securing priority ahead of a lender’s deed of trust, the contractor in Shelcon was successful in arguing that: (1) its lien rights attached “several hours” ahead of a lender’s deed of trust, as the contractor had begun marking boundaries before the deed of trust was recorded; (2) even though it had already executed a lien release required by the lender, the contractor could later file a second lien to recapture those earlier, released amounts; (3) the lender was not entitled to rely solely on a lien release executed by the contractor and instead should have obtained further assurances from the contractor that it had been paid; and (4) the contractor was entitled to an award of legal fees and costs against the lender.
In hindsight, the lender may have avoided a lien priority dispute by using lien release forms containing explicit lien release language, ensuring that the contractor executed a subordination agreement, and securing written representations from the contractor confirming receipt of payment in full. Developers and owners may also learn from this ruling and consider reviewing their lien release forms in order to avoid “resurrected” liens on their projects.
I. FACTUAL BACKGROUND
While the Court of Appeals describes this case as having a “long and complicated history,” certain unique facts are prominent in the Court’s findings. In early 2006, a developer, Scott Haymond (“Haymond”), through his business entities began contract negotiations for clearing, grading, demolition and excavation with an earthworks contractor, Shelcon Construction, LLC (“Shelcon”). A scope and fixed price were eventually established, and Shelcon began measuring the property’s boundary lines at 8:35 a.m. on July 5, 2006. Shelcon identified boundaries using fluorescent ribbon, a practice it followed on all its projects. That same day, but several hours later at 2:14 p.m., Washington First International Bank (“Washington First”) recorded a deed of trust against the property in the amount of $1,540,000. The sequence of when Shelcon began marking boundaries and when the deed of trust was recorded would later dictate the result of this case.
Approximately two years later on June 20, 2008, Shelcon recorded a mechanic’s lien in the amount of $303,291.29. By then Haymond was behind on payments and in need of additional financing. He had begun negotiations with Anchor Bank, but when the Shelcon lien clouded title, Anchor Bank required that the lien be released as a condition of financing. On July 16, 2008, a fully-executed lien release was recorded, stating in part that “THE UNDERSIGNED LIEN CLAIMANT hereby releases the lien on the property owned or reputedly owned by....” The release, however, contained “no language addressing whether Haymond had paid Shelcon or whether the lien release was limited or conditional in any way.”
After the release had been recorded, Haymond advised Anchor Bank that the lien was a misunderstanding and falsely claimed that the amount owed was for an unrelated project. Anchor accepted this explanation without securing any confirmation from Shelcon. Shelcon, meanwhile, was unaware of Haymond’s misrepresentation.
Haymond then submitted several invoices to Anchor Bank, which were approved by Anchor Bank after it had inspected the project. But, Anchor Bank never communicated with Shelcon during this due diligence period – not even to secure a priority agreement. Ultimately, Anchor Bank relied primarily upon the lien release in approving and processing a loan to Haymond. Anchor Bank recorded its deed of trust on August 22, 2008.
In the fall of 2008, Haymond and Shelcon agreed to modify their agreement. A written contract was circulated, which included new payment provisions changing the contract to a cost-plus-fee arrangement, a standard merger clause, and a provision for 18 percent interest on all unpaid amounts.
Neither party signed the contract. Nonetheless, Shelcon began billing on a cost-plus-fee basis and Haymond paid the invoiced amount. Shelcon continued to work on the project until February 2009 and two months later recorded a second lien. Notably, the second lien included amounts owed under the first lien, which has been purportedly released.1
II. LEGAL ANALYSIS
A. The Lien Release Did Not Constitute a Complete Waiver of Lien Rights, Even Though the Release Was Never Conditioned on Payment.
The trial Court found that Shelcon’s first lien release “did not affect the amount for which Shelcon could subsequently lien after it had finished its work ...” Anchor Bank on appeal essentially conceded that Shelcon never executed a subordination agreement, a waiver or any document (other than the lien release) purporting to limit Shelcon’s lien rights. Anchor Bank mainly focused its efforts on arguing that, as a matter of law, the first release Shelcon signed precluded Shelcon from later liening for the (purportedly) already-released amounts.
The Court of Appeals, however, disagreed. Noting that there was no case law directly on point, the Court drew analogies to other cases discussing lien releases – cases some might find highly distinguishable. Ultimately, the Court’s decision hinged on a “liberal” reading of the mechanic’s lien statute and the fact the contractor had never been paid for the amounts intended to be released. This finding may cause lenders and owners to raise an eyebrow, because the lien itself never stated that the release was conditioned on payment. Title companies and others in the industry have relied upon lien releases of similar ilk in the past when removing clouds on title. Moving forward they may not.
B. The Lender Was Not Entitled to Rely Solely Upon the Lien Release.
As a secondary argument employed to defeat the contractor’s lien priority, the bank claimed that Shelcon should be prevented from recapturing the earlier, released amounts under the legal doctrine of equitable estoppel. For purposes of argument, the Court assumed Anchor Bank could meet all the requisite elements of the doctrine, except reasonable reliance. To invoke the doctrine, the Court held that Anchor Bank was required to prove that it had acted reasonably in relying on the release. The Court, however, found quite the opposite: that Anchor Bank’s reliance was not reasonable. This conclusion rested on the finding that “Anchor Bank had the means to discover the true facts [that Shelcon had not been paid to date], but it failed to do so.” The Court expressly adopted Shelcon’s argument that “Anchor Bank’s reliance was unreasonable in part because it failed to inquire of Shelcon.” While not discussed in the opinion, perhaps the bank felt it didn’t need to consult with Shelcon because it had already secured a lien release. It would now seem that releases alone are insufficient, depending on their wording.
C. A Contractor's Lien Attaches the Day it Begins Marking Boundary Lines.
Those in the industry know that a contractor’s lien generally (there are exceptions) attaches the first day labor, materials, equipment or professional services are first furnished to the site. In order for the lien to attach, however, the furnished items must be done for the “improvement of real property.” As a consequence, disputes have arisen over what type of work triggers attachment of a lien. For instance, drilling test pits has been found to be insufficient to allow a lien to attach because such tests do not constitute an “improvement” of the land.
From this murky legal precedent, the Court determined that marking boundaries fits the definition of professional services, as it is preparatory work in advance of “construction work.” In further support of this finding, the Court noted that the Shelcon’s boundary marking occurred just days before the construction work began. Because Shelcon’s first day of work occurred before both deeds of trust were recorded, Shelcon’s lien had seniority.
The Court awarded legal fees and costs in favor of the contractor. This award was not only against the owner under an attorney-fee clause in the contract, but also against the bank under the mechanic’s lien statute.2
The upshot of Shelcon is owners and lenders should consider updating their lien release forms, requiring priority agreements from contractors (most do already), and securing written representations from contractors confirming receipt of payment in full satisfaction of work performed (while careful to not make representations tothe contractor). Whatever mechanisms are used, seeking further assurances that a contractor has been paid and that its lien rights have been waived seems prudent before relying upon a recorded lien release, in light of this unique case.