The General Contractor Wants To “Bond Off” My Mechanic’s Lien. What Does That Mean, And Should I Agree To the Substitution of a Bond for My Lien?

By: Paul R. Fitzgerald, Esq.

 

Mechanic’s liens force property owners to deal with subcontractor claims.  Liens create serious problems for owners: a lender will not advance funds on a construction project until the lender is satisfied that all subcontractors and suppliers have been paid, and liened property cannot be sold until all liens have been satisfied or discharged.  Since liens create so many headaches for property owners, many owners include language in their construction agreements requiring the general contractor to immediately “bond off” any lien that is filed by a subcontractor.

This article discusses the Connecticut statute that governs the release of a mechanic’s lien by the substitution of a payment bond.  The article also addresses some of the concerns that subcontractors typically have regarding the bonding process, as well as issues to consider when bonding off a lien.

Why does the law allow property owners and general contractors to substitute a payment bond for a mechanic’s lien, and how does the process work?

Liens can have a detrimental impact on private construction projects.  Accordingly, Connecticut has enacted a statute that attempts to balance the property rights of owners with the payment rights of lienors.  Connecticut General Statutes §49-37 permits the owner of liened property, or any person interested in the property (which typically includes the general contractor), to file an application with the Superior Court to dissolve the lien “upon substitution of a bond with surety.”  So long as the court is satisfied that the applicant “in good faith intends to contest the lien,” and so long as the applicant “offers a bond, with sufficient surety, conditioned to pay to the lienor such amount as a court may adjudge to have been secured by the lien, with interests and costs,” the judge shall order the lien to be dissolved and a bond substituted for the lien.  The statute is therefore mandatory: if an applicant can meet these statutory requirements, then the court has no discretion to deny the application to bond off the lien.

Should I fight to keep my lien on the property?

Many subcontractors are intuitively opposed to releasing their lien in exchange for a payment bond.  These subs are concerned that if their lien is removed, they will lose valuable leverage against the general contractor and owner.  While this concern is understandable, it is generally misplaced.

As a preliminary matter, it is important to note that a subcontractor may be able to assert a claim directly against a property owner even when the sub has not filed a lien or has agreed to the substitution of a bond for a lien.  Connecticut has adopted a statute, Conn. Gen. Stat. §42-158j, that allows subs to sue owners directly in certain situations. For a more detailed discussion of this statute, refer to our prior newsletter.  

When considering whether or not it is worth fighting an application to bond off a lien, it is important to remember what a lien actually is: a source of security.  A lien ensures that a valid claim will be paid with the proceeds of the sale of the liened property (assuming that there is sufficient equity in the property). In this regard, a bond is just as advantageous as a lien: both provide the subcontractor with security for his or her claim.  A lien is secured by the property itself, whereas a bond is secured by the surety issuing the bond.

A payment bond may actually be preferable to a mechanic’s lien in many situations.  Lien foreclosure actions can be costly and involve the claims of many competing encumbrancers.  Moreover, the liened property may not have sufficient equity to satisfy all claimants. By contrast, an action on a bond is typically simpler and less expensive, and there should be no risk that a bond will be inadequate to satisfy a subcontractor’s claim.    

For these reasons, it rarely makes sense for a lienor to contest an owner’s or general contractor’s application to bond off a lien.  In fact, it usually is unnecessary to involve the court at all. The parties (through their counsel) can and should reach an agreement regarding the form and amount of a bond and avoid the cost and inconvenience of filing an application with the court.  

How should I determine the amount of the bond?

As noted above, it is almost never worth fighting over an application to substitute a bond for a mechanic’s lien.  There are really only two circumstances when a subcontractor should resist an application to bond off the sub’s lien:

(1) when the proposed bond is not issued by a valid surety, and

(2) when the proposed bond is not in a sufficient amount.  

It is easy enough to determine whether a payment bond has been issued by a valid bonding company.  The Connecticut Insurance Department maintains a list of all of the surety companies licensed to do business in the State.  (Read our prior newsletter regarding the perils of doing business with a surety company that is not licensed in the State).  A lienor should never agree to substitute its lien for a bond issued by a surety company that is not licensed to do business in the State.

Determining whether the proposed bond is in a sufficient amount is a more difficult question.  Pursuant to Connecticut General Statutes §52-249a, a lienor is entitled to his or her attorney’s fees in an action on a bond which has been substituted for a lien.  However, at least one Connecticut Superior Court judge has stated that a lienor is not entitled to include attorney’s fees in the amount of a bond substituted for a lien, since Conn. Gen. Stat. §49-37 does not explicitly permit the inclusion of attorney’s fees.  See Pulte Homes of New England, LLC v. MD Drilling and Blasting, Inc., No. CV064004974, 2006 WL 1229924 (Conn. Super. April 11, 2006).  Regardless, it is customary to add at least 10% of the amount of the lien to the amount of the bond.  

Conclusion

When a general contractor or owner is unable or unwilling to make payment to a subcontractor, it is imperative that the sub secure its claim.  While a mechanic’s lien serves as an excellent source of security, a payment bond- issued by a valid surety and in a sufficient amount– is usually just as effective at securing a sub’s claim.  If you have questions regarding mechanic’s liens, or would like to discuss the substitution of a bond for a lien, please call MKRB at 860-522-1243.

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At Michelson, Kane, Royster & Barger P.C., our goal is to provide our clients with the advice and representation they need in order to meet their legal and practical objectives. Our team is experienced, collaborative, knowledgeable, and friendly. Several of our award-winning attorneys play key roles in construction organizations, and even help to shape the laws that affect the construction industry in Connecticut. Let us put our experience to work for you.