How to Remove a Mechanic’s Lien – Part 2

Last month we started talking about how to remove a mechanic’s lien if it fell into either the category of a valid lien or an invalid/fraudulent lien. This month I would like to cover a third category of liens which are liens that were once considered to be valid but are now past the Texas Property Code’s foreclosure time-frame.

Generally, this situation occurs when an Owner, builder or General Contractor had financial problems and multiple subcontractors have filed liens on the property. Most of these situations involve an Owner / General Contractor or Builder being substantially the same person, i.e. they are owned by the same person or entity but might have different corporate names. In situations where the financial conditions were so dire that multiple liens were placed on property, the property often is foreclosed on by the financial lender. At the foreclosure sale, the Lender will attempt to auction the property and generally opens the bidding at the current value of the existing loan on the property plus interest, penalties and attorney’s fees. At the foreclosure sale, the purchaser takes the property subject to any liens which are not considered “inferior” to the Lender (which by the way is the subject of heated debate). The second alternative is that no one successfully bids at the Foreclosure Sale, the Lender purchases its own loan and then the Lender later sells the property to a subsequent purchaser.

If you purchase the property at a foreclosure sale, you will definitely end up having to figure out how to obtain “clear title” to the property. If you purchase it from the Lender directly and not through a foreclosure sale, you could possibly have trouble obtaining a loan to purchase the property thus requiring you or the lender to obtain “clear title” to the property.

These situation can be messy and not for the faint of heart. The best way I have seen to clean all these up is to notify all of the lien holders that the home was purchased at the foreclosure sale by the Lender or a new owner. The bank / owner would want to demand that the lien holder release its lien. If the bank / owner has some cash and some room to play with it is always good to offer some sort of settlement (for instance .10-.25 cents on the dollar) for a sworn affidavit releasing the lien. The bank / owner would need to threaten the lien holder that failure to come to an agreement or remove the lien would necessitate the filing of a lawsuit against them for improper cloud of title. The only way this would truly work would be if the statute of limitations had run and the lien holder was truly not able to foreclose their lien out. This can get complicated because industrious attorneys can always try to find ways to say that their lien was not truly “inferior.” If it was another lien holder that foreclosed the lien instead of the bank, the question of whether or not the other lien holders’ liens were “inferior” to the foreclosing lien holder can get even more complicated.

Generally, you should know that the limitations are as follows:

• Non-Residential – 2 years after last day claimant could have filed lien affidavit or 1 year after completion / abandonment / termination of original contract, whichever comes last.

• Residential – 1 year after last day claimant could have filed lien affidavit or 1 year after completion / abandonment / termination of original contract, whichever comes last.

• Bond on Lien – 1 year from notice of the bond filed.

In conclusion, buying foreclosed properties, whether they be lender or other lien holder foreclosures, can be a messy and complicated process. There are generally methods of trying to obtain clear title. However, they can only be successful if your purchase truly wiped out their lien pursuant to the Texas Property Code and subsequent case law. Additionally, these methods can be time consuming and costly. If there are liens on the property you purchased, you are probably going to have a hard time getting a title policy on the property without having the liens removed or released. The only way to do this would be to (1) come to an agreement for the release by the lien holder; or (2) obtain an order from a Court declaring the liens to be invalid and entering an order removing them from the county deed records. For instance, if there are 25 mechanic’s liens, you might be able to find 15 of them and convince them to release their liens. However, that still leaves the other 10 lien claimants that you will eventually have to sue to try and obtain an Order removing them from the property.

Remember, it is best not to go into these transactions blind. Have a title report pulled prior to purchasing the property and consult with your banking, title and legal advisors to make sure that you would be able to obtain clear title on the property if you in fact purchased it.

How to Remove a Mechanic’s Lien – Part 1

I noticed that my website has been getting more traffic with questions on what steps need to be taken to remove a lien, so I want to write a series of posts meant to explain the process one needs to go through to remove a lien.  We’ll start with a few categories the liens may fall under.  The first category we will discuss are valid liens where the money is owed and not disputed; the second category would be invalid or disputed liens; and the third category would be liens which were once valid but a foreclosure proceeding had not been brought within the statute of limitations.  I’ll cover the first two categories in this article.

The first one is, of course, the easiest.  How does an owner, etc. remove a lien which is technically considered valid (meaning, the lien was filed timely and properly perfected in accordance with the Texas Constitution and the Texas Property Code and is a valid assertion of non-payment) and which is not disputed.  The typical way to handle these liens is to work out a settlement with the lien holder for full or partial payment in return for a sworn affidavit releasing the lien which is then filed with the county in which the property is located.

The second one is a bit tougher.  There are many reasons why a lien can be disputed or considered invalid.  One being that a lien can be invalid because the proper procedures/language/timeframes weren’t followed per the Texas Constitution and the Texas Property Code (Texas sometimes can be as picky as Virginia: read here at Construction Law Musings).  Another reason for which a lien can be invalid is due to reasons of fraud (such as a contractor falsely/fraudulently placing a mechanic’s lien on a property) or because the lien amount is disputed.

Regardless of why you dispute the lien or believe it is invalid, you follow the same general steps.  Typically, I would start with a demand letter explaining why the lien is invalid or disputed and demanding that the lien be removed.  Usually, it involves threats to file a trespass to try title, fraud, breach of contract, or similar suit to remove the lien.  I have been successful with just a demand letter in many cases.  The success of a demand letter depends many times on whether the Claimant has an attorney that knows and understands the quagmire of Texas’ Mechanic’s Lien statutes and is really willing to look at the facts and give their client the opinion that ‘yes this deadline/notice, etc. was missed so the lien is invalid’ or ‘you failed to include the mandatory language in your notice letter or lien,  you should remove the lien or be possibly subject to substantial damages and attorney’s fees in a lawsuit.’  Sometimes the Claimant is just misinformed, got bad advice, and is just dead set on not removing the lien.

If they still aren’t willing to remove the invalid or disputed lien the last recourse is to file a suit to remove the lien.  You could also possibly bond around the lien, which is rarely done, should be done with caution, and is probably the subject of another blog post.  Both of these options require that you follow through with your threat as contained within your demand letter.  If you file a lawsuit, it could vary in timeframe and costs depending on the facts of the case.  If it was obvious the lien holder didn’t follow the deadlines, didn’t have the right statutory language in the notice or the lien, or did not fit the definition of a service which qualifies for a lien (see blog post Does your work fit the requirements for a mechanic’s lien), etc., the process is relatively simple but can sometimes be a lengthy time before you actually get your case heard by a Judge.  If the situation involving the dispute is a disagreement with the GC or contractor due to costs, it may be a very fact intensive case based on the events that lead up to non-payment.  However, on the other hand, you might get lucky and have a case where you file the lawsuit and actually get a default judgment removing the lien because the Defendant never responds.  If you prevail you will be able to file the judgment with the county to remove the lien.

So as you can tell, depending on the facts, the fight to remove the lien may not always be an easy one.  Next time I’ll go over what you would need to do to clear the title of old liens that are past the statute of limitations timeframe.

August 15th – Texas Mechanic’s Lien Deadlines

1st Tier Commercial Claimants:

  • 1st notice letter to the GC is timely for work done any time after June 1, 2010.
  • 2nd notice letter to the GC & Owner is timely for work done any time after May 1, 2010.
  • Your mechanic’s lien is timely for work done any time after April 1, 2010.

Residential – 2nd Tier Commercial – Specially Fabricated Claimants:

  • Notice letter to the GC & Owner is timely for work done any time after June 1, 2010.
  • Your mechanic’s lien is timely for work done any time after May 1, 2010.

Why You File Mechanics Liens

I know contractors aren’t happy that they have to pay an Attorney collect money they are owed.  And I don’t really blame them, in a perfect world that money should go straight to their bottom line.  But since it isn’t a perfect world, I try to explain to my clients why this remedy is beneficial to them.  A good article on the subject has been written recently by Scott Wolf Jr., “what happens when you file a mechanic’s lien“.  In the article he goes over some of the reasons it’s good to have a Mechanic’s Lien on your side.

Here are three of the reasons he gives in his article:

– “Without a mechanics lien, you can only sue the party you contracted with. With a lien, you can sue the property owner, those up the contracting chain from you, and the surety bonding the project.

– A mechanics lien can prevent a property from being sold, transferred or refinanced.

– Without a mechanics lien, you have no security when you file suit on your breach of contract claim. With a lien, your claim has the property as security.”

I would probably add that a Mechanic’s Lien can survive Bankruptcy in some circumstances.  Since it’s tied to the property, not the person, unlike a lawsuit or judgment.

Didn’t foreclose on your Mechanic’s Lien? What should you do now?

Last time we talked about the step one takes to foreclose on their Mechanic’s Lien and the foreclosure deadlines.  This month I wanted talk about what happens if you fail to foreclose on your mechanic’s lien within the time provided by law.   As luck would have it, I was in the process of finishing up this post, when I get a call about one of my clients two+ year old Mechanic’s Lien.  Now hopefully they will be receiving  full payment for the money they are owed.

In order to answer this question and how it was able to work out for my client, you have to know something about the recording process in Texas.  All deeds, liens, releases, and property records are filed in the records department of the county in which your property is located.  Most counties try to cross reference all document recordings through a Grantor, Grantee, and Property index.  What this means is that the document has a filer (which is the Grantor), a person to whom the record is being filed against (which is the Grantee), and attaches to a particular property through legal description and/or address.  In the mechanic’s lien context, the person filing the lien is the Grantor and the person or company to whom the lien attaches (who owns the property) is the Grantee.

Next, it is important to know how documents that have been filed are removed.  First of all, they are never really “removed.”  You can always see what was filed throughout the history of the property.  However, there are various instruments that can be filed to “release” a lien, “waive” rights to a claim, “cancel” a deed of trust, or “order” a lien to be invalid.  So, the question remains “What happens when you file a lien on a property which is not resolved through payment or release and which was never foreclosed upon?”

Throughout time, many people have given their legal opinion on this.  Legally, you have a deadline to file for foreclosure of your lien.  If you fail to foreclose, your lien is oftentimes considered “invalid.”  But is it truly “invalid?”  What happens if a first lien holder forecloses before you?  The law says that your lien is “foreclosed” out.  But does the lien go away?

The answer is that the only way to clear the title and “remove” the lien is to file a document removing such lien.  If you fail to timely foreclose on your lien, your lien document is still on file and is still attached to that property.  If a bank forecloses its’ superior lien, your lien technically is supposed to be foreclosed out, yet it is still on file in the county records and attached to that property.

So, as you can see, this is very complicated in practice.  What the law says is not necessarily what happens in reality.  The county clerk’s office does not have someone pulling liens that are no longer considered valid or that have been foreclosed out.

So, where does this leave you?  Many times, it leaves you with some bargaining power down the line.  Often times, I will have a title company contact me asking for a payoff amount for a lien I filed years before.  In this situation, there is rarely an argument as to whether the lien is still valid just how much my client will accept to release its lien.  This was the situation for the client I mentioned earlier in the post.

Other times, a bank will call us.  They foreclosed on their lien but there is still a cloud on the title which they need to remove (i.e. my client’s lien).  At that point, we enter into negotiations on how much it will take for my client to release the lien.

There are also those times where a demand is made upon you to remove your lien because you have failed to foreclose and the statute of limitations have passed.  In those situations, the lien claimant often times removes their lien without being paid.

Every situation is different.  There are some wins and some losses.  However, by understanding the filing process it helps mechanic’s lien holders understand that there are options past foreclosure.

June 15th – Texas Mechanic’s Lien Deadlines

1st Tier Commercial Claimants:

  • 1st notice letter to the GC is timely for work done any time after April 1, 2010.
  • 2nd notice letter to the GC & Owner is timely for work done any time after March 1, 2010.
  • Your mechanic’s lien is timely for work done any time after February 1, 2010.

Residential – 2nd Tier Commercial – Specially Fabricated Claimants:

  • Notice letter to the GC & Owner is timely for work done any time after April 1, 2010.
  • Your mechanic’s lien is timely for work done any time after March 1, 2010.