Colorado owners, lenders, purchasers, contractors and subcontractors who file corporate surety bonds as a means of discharging properties from mechanics' liens should note that a decision last year by the Colorado Court of Appeals, Weize Company, LLC v. Colorado Regional Construction, Inc., throws into doubt the use of surety bonds alone as an effective tool to discharge a property from the Lis Pendens in a mechanics' lien lawsuit. In this case of first impression in the State of Colorado, the Court of Appeals held that a general contractor's filing of a surety bond did not relieve a subcontractor from the obligation to file and record a Notice of Commencement of Action or "Lis Pendens." It further held that the General Mechanics' Lien law requires a lien claimant to record a Lis Pendens even though a bond has been substituted for the lien.
Colorado's General Mechanics' Lien law, C.R.S. §§38-22-101 et seq., provides that an owner (or a general contractor) may, at any time, file a corporate surety bond or other undertaking equal to 150 percent of the amount of a mechanics' lien and thereby discharge the property from the lien. This process is very useful for an owner who seeks to refinance a property and is required by the lender to clear the property from all mechanics' liens. It is also helpful in selling a property that is subject to mechanics' lien litigation.
The General Mechanics' Lien law also provides that, upon the approval of the bond or undertaking, the Clerk of the District Court shall issue a certificate of release thereby discharging and releasing the property in full from the lien and "from any action brought to foreclose the lien ..." C.R.S. §38-22-132. In order to foreclose a mechanics' lien, the claimant must file a foreclosure action together with a Notice of Commencement of Action, commonly referred to as a "Lis Pendens", as a condition to any foreclosure of the mechanics' lien.
In Weize, the Court reasoned that a surety bond is not the equivalent of a payment or performance bond. In the event that the surety became insolvent, the subcontractor would still need to have a Lis Pendens recorded against the property because the lien claimant would be entitled to enforce the lien in the same manner as if no bond had been filed. The trial court had ruled that the subcontractor did not have a valid lien because it failed to record a Lis Pendens. The subcontractor argued that it was not obligated to record a Lis Pendens because the mechanics' lien had been bonded over by the general contractor. The Court also reasoned that the absence of a Lis Pendens could mislead a potential purchaser or lender into believing that there was no potential that a lien could be imposed against the property.
This decision appears to contravene conventional wisdom regarding the use of surety bonds, and would require a Lis Pendens to be recorded against the property even if a surety bond was posted by the owner or general contractor. Doing so, however, would create an anomalous title situation. In a typical case, the title to the property would show: (i) a recorded mechanics' lien; (ii) a Notice of Commencement of Action or Lis Pendens; and (iii) a release of the mechanics' lien (ordered as a result of posting a surety bond). Under Weize, the Lis Pendens would remain of record and not be released, thereby complicating the financing or sale of the property and negating one of the primary reasons a surety bond was used in the first place.
Accordingly, owners, lenders, purchasers, contractors and subcontractors should be aware that, even if there is a surety bond, the Lis Pendens needs to remain of record and there is a potential the property could be subjected to the mechanics' lien if the surety becomes insolvent.