As reported in an earlier Sherman & Howard Client Advisory dated February 2, 2011, the Colorado Court of Appeals' ruling in Weize Company, LLC v. Colorado Regional Construction, Inc., held that a general contractor's filing of a surety bond to replace a mechanic's lien did not relieve a subcontractor from the obligation to file and record a lis pendens against the real property in order for the subcontractor's lien to be valid. As we reported in that Client Advisory, the decision created an anomalous title situation and raised several problems for owners, contractors and subcontractors.
The Colorado Legislature has agreed. In Senate Bill 11-264 - recently signed into law by Governor Hickenlooper and effective as of July 1, 2011 - it clarified Colorado's General Mechanics' Lien law, C.R.S. §§38-22-101 et seq., such that once a court approves a surety bond as a replacement for a mechanic's lien, there is no longer any requirement to have a lis pendens recorded. Indeed, the amendment to C.R.S. §38-22-132 requires that any recorded lis pendens be released of record and unambiguously states that the real property is released from the lis pendens, any notice of commencement of an action relating to the lien, or any action for enforcement or foreclosure of the lien.
While the legislation is a welcome addition to the existing mechanics' lien laws, the amendment to C.R.S. §38-22-132 will require contractors and subcontractors to exercise increased vigilance in analyzing the financial solvency of any surety company providing a surety bond. The rationale of Weize Company, LLC v. Colorado Regional Construction, Inc., was based upon the potential insolvency of the surety company and gave a contractor or subcontractor that had filed a notice of lis pendens the right to proceed against the real property in the event of such an insolvency. With the new amendment, there will be no opportunity to seek recovery against the underlying real property in the event of insolvency or any other failure of the surety company to pay under the bond.
Contractors and subcontractors may find themselves in the business of evaluating the financial stability of surety companies and opposing the posting of surety bonds by companies that may be deemed to be insufficiently capitalized or that may present a risk of nonpayment under the bond. Accordingly, it will become exceedingly important for contractors, subcontractors and their counsel to obtain ratings and analysis information on surety companies from outside sources.
Finally, the new legislation leaves a gap in the applicable law, insofar as the effective date of the legislation is July 1, 2011, and it applies only to actions commenced on or after July 1, 2011. Accordingly, with respect to litigation that was commenced before July 1, 2011, the holding of Weize Company, LLC v. Colorado Regional Construction, Inc., still applies, and contractors and subcontractors act at their own risk if they release a lis pendens or allow a lis pendens to be released upon the posting of a lien replacement surety bond.