On those occasions when a contractor must record a mechanic’s lien, the response from the property owner often involves an immediate claim that the lien is invalid or even slanderous. It is important, then, for contractors to have an understanding of the contours of the counterclaims owners rely upon, not only to understand what the owner is communicating when it makes the claim, but also to understand the line between a valid lien and one that exposes the contractor to liability. To provide that understanding, this article summarizes the law in the four most populous states. That summary shows that owners have several claims at their disposal but the acts that expose a contractor to liability tend to be extreme.

Are the statements made within the lien protected by a legal privilege?

A threshold question is whether statements within a lien can expose a contractor to liability at all for common law claims such as slander of title. This question arises because each of these states applies the litigation privilege to one extent or another. The litigation privilege is intended to allow individuals and entities to be frank in making the allegations in their pleadings by protecting them from reprisal if their claims are false or even defamatory.

Florida courts review the application of the privilege on a case-by-case basis. There is a legal presumption that the statements in litigation or in anticipation of litigation such as mechanic’s liens, even if they turn out to be false, are protected unless they are made maliciously.1 While malicious conduct will create an exception to the application of the privilege, the protection is still robust because proof of malicious conduct sets a high hurdle for owners to clear. Texas is like Florida in its application of the litigation privilege through a case-by-case analysis of malice.2

In California, the statements within a mechanic’s lien are almost completely protected by the litigation privilege.3 Only one exception has been recognized. A court in California may not apply the privilege if it determines that the lien claimant failed to contemplate a lawsuit in good faith and with serious consideration when recording the mechanic’s lien.4

New York’s courts may begin to apply the privilege without exception. In 2019, a trial court determined that statements within a mechanic’s lien were unconditionally protected by the litigation privilege.5 Just six years earlier a different court had indicated that an owner had many common law claims that it could assert.6 If and how the New York courts apply the 2019 decision will be critical.

Thus, for common law claims, the litigation privilege’s application varies from perhaps providing complete protection, to providing protection unless litigation was not truly contemplated, to providing protection unless the facts demonstrate malice or fraud. Because the protection of the privilege is not absolute, acts giving rise to liability will be addressed later in this article.

Are there statutory claims to which the privilege does not apply?

Unfortunately for contractors, the answer to this question is yes. A New York statute gives owners a remedy if they can prove that the contractor willfully inflated the lien amount.7 In Florida, owners can recover if they prove that the lien amount was willfully exaggerated, was willfully inclusive of costs for work not performed or materials not furnished, or was calculated in such a grossly negligent fashion that the conduct amounts to willful exaggeration and fraud.8 A statute in Texas provides owners with relief if they can prove that the lien was fraudulent.9 In California, a statute gives owners a remedy if the lien was knowingly false or recorded to harass.10

What constitutes actionable conduct under the statutory claims?

In New York, it is the property owner’s burden to establish deliberate and willful exaggeration of the amount due.11 As a result, the sort of acts that will lead to trouble arise from a mindset where there is a specific intent to exaggerate. In one case, the contractor knowingly included inflated mark-ups in his claim and stated that he was “entitled to mark it up to whatever number I want.”12

Under the Texas statute, in order to demonstrate that a lien is fraudulent, the owner must show that the contractor knew the document was fraudulent, intended that the document would be perceived as legitimate, intended to cause financial, physical or mental damage, and intended to defraud the owner.13 Examples of actionable conduct in Texas include a lien from an engineer who did not have a right to record one and a lien from a contractor who did not credit partial payments received before recording the lien.14

In Florida, an owner’s claim failed because the appellate court determined that the contractor’s conduct was neither malicious nor willful. There, the owner prevailed on counterclaims for breach of contract, which in turn demonstrated that the contractor’s lien had no value. The court viewed the dispute over defective and incomplete tiling work as one that was characterized by good faith.15 In a different case, a Florida court determined that a lien was fraudulent because the individual who recorded it, an individual who provided construction consulting services, was not entitled to a lien in the first place.16

In California, the statute adding the claim was modified in 2016. A case addressing knowingly false or harassing mechanic’s lien has not arisen, though it appears that owners are asserting the claim in response to mechanic’s liens at the trial court level.17

What constitutes actionable conduct under the common law claims?

It is typically the case that a showing of malice is required to overcome the application of the litigation privilege. Thus, actionable conduct tends to be extreme. In fact, there are few cases that deal with malice and mechanic’s liens, so it is helpful to look to other types of liens.

For example, in Texas, an ex-wife placed a judgment lien on her ex-husband's home in an amount owed her from the divorce settlement. After she received payment in full, she refused to remove the lien, causing the ex-husband's sale of the home to fall through. The court found that the ex-wife's behavior was malicious.18 In the mechanic's lien context, the lesson is that contractors should promptly release a lien that has been satisfied.

One Florida case involved a lien placed by a condo owners association on a particular unit for unpaid special assessment charges. Other tension in the relationship ancillary to the lien (e.g. disputes about parking spaces) did not convince the court that the condo association acted with malice, so the slander of title claim failed.19 In the mechanic’s lien context, this shows that the minor squabbles that can arise during a project may not lead to a finding of malice.

California is unique in that the litigation privilege applies absolutely so long as the mechanic’s lien, or its public-project equivalent the stop notice, were not processed with serious contemplation of litigation. In one case, the court determined that the privilege did not apply because the threat of pursuing legal remedies in a demand letter sent around the time of the provision of the stop notices did not clearly show an intention to litigate.20

Conclusion

Looking at the common law and statutory decisions collectively it can be seen good faith disputes that minor disputes during the project probably will not lead to liability while the addition of arbitrary and excessive mark-ups, the recording of a lien by a party with no right to do so, the failure to release a lien that has been satisfied, and the failure to apply all payments when calculating the amount due will likely lead to problems.

The analysis also shows that knowledge of state law is critical. Construction professionals should consult with legal counsel to confirm that they have a right to record a lien. They should also carefully verify and compile documentary support for information that is stated in the lien, whether it is the first date or work, the last date of work, the amount of the lien or some other required element. Knowledge is power, and in these situations, knowledge of the applicable law give a construction executive the ability to avoid risk when recording a mechanic's lien.