Utah Bar Journal

The question posed in the title is important to lien claimants (who may be exposed to substantial liability under the Wrongful Lien Statute), property owners (who may not be aware of this powerful tool for quickly dispensing with wrongful liens), and attorneys (who may not be aware of recent developments that may have a significant impact on lien claims).

Introduction
In Utah, liens are exclusively creatures of statute, most of which are found in title 38 of the Utah Code. See id. § 38-9-1(6)(a) (prohibiting all liens not “expressly authorized by this chapter or another state or federal statute”). One of the most common types of lien is a “mechanics’ lien,” which is available to “all persons performing any services…in the construction, alteration, or improvement of any building or structure or improvement to any premises…for the value of the service rendered.” Id. § 38-1-3.

A mechanics’ lien, like all liens recorded against real property, constitutes a cloud on title and must be cleared if the owner wishes to sell or refinance the property. Getting rid of a lien can be particularly time-sensitive, for example, in a new construction situation where the owner wishes to convert a construction loan into permanent financing. Unfortunately, there are only two ways an owner can expeditiously remove a cloud on title caused by a lien (other than paying off the lien claimant).

First, the owner can litigate the enforceability of the lien and, during the pendency of the litigation, have the lien released by posting alternate security (a surety bond or cash deposit) pursuant to section 38-1-28. This option can be expensive (the bond amount varies between 150% and 200% of the lien amount) as well as odious to a property owner who believes the lien is frivolous or otherwise improper. It may also be unavailable to a property owner whose financial condition may not enable him to qualify for a bond.

The second option is to file a petition and request an expedited hearing to have the lien declared wrongful pursuant to the Wrongful Lien Statute. A sufficient petition will trigger a hearing “within ten days to determine whether the document is a wrongful lien.” Id. § 38-9-7(3)(b). No other matter may be heard at this summary proceeding, as its sole purpose is “to determine whether or not a document is a wrongful lien.” Id. § 38-9-7(4).

A successful petition under the Wrongful Lien Statute will not only result in the release of the lien, but also an award of damages, attorney fees and costs. The statute contemplates two possible penalties. The lesser penalty applies to a lien claimant who receives written notice from the property owner that the lien is wrongful and refuses to remove or correct it within ten days. See Utah Code Ann. § 38-9-4(2). The penalty under this provision is $3000 or treble actual damages, whichever is greater, as well as reasonable attorney fees and costs. See id.

The other, more severe penalty applies to a lien claimant who records a lien while knowing or having reason to know that the lien is wrongful, groundless or contains a material misstatement or false claim. See id § 38-9-4(3).1 The penalty under this provision is $10,000 or treble actual damages, whichever is greater, as well as reasonable attorney fees and costs. See id § 38-9-4(3).

Some attorneys and district courts in Utah are under the impression that the Wrongful Lien Statute does not apply to mechanics’ liens. This note explores this question and concludes that a recent Utah Court of Appeals case, Foothill Park, LC v. Judston, Inc., 2008 UT App 113, 182 P.3d 924, holds that the Wrongful Lien Statute can and does apply to mechanics’ liens if a petitioner, in a summary proceeding, can show that the lien claimant was not entitled to a mechanics’ lien at the time the lien was recorded.

Historical Overview of the Wrongful Lien Statute2
Utah’s Wrongful Lien Statute became law in 1985 and was later amended in 1997 and 1999.

In 1985, Senator Matheson of the Utah State Senate brought the wrongful lien bill in response to liens that were being filed by members of certain fundamentalist groups in southern Utah against local city and county officials who attempted to enforce Utah law against these fundamentalist groups.

Senator Matheson stated that approximately $12 million in liens had been filed against these public officials, and that these liens were generally referred to as “common law liens” and had no basis or support in the law. At that time, Senator Carling raised his concern that the language of the bill as proposed would also apply to statutory liens such as mechanics’ liens. He further indicated that this bill should not apply to those liens. The original language of the bill defined a wrongful lien as a lien that was without basis in the law, or that was “otherwise invalid.” The senators agreed that this language was too broad inasmuch as it could be read to include any statutory lien such as a mechanics’ lien. In order to protect statutory liens, Senator Matheson agreed that the phrase “or is otherwise invalid” be stricken from the bill.

Furthermore, Senator Moll indicated that the purpose of the bill was to keep fringe groups from filing common law liens and that the bill should have no application whatsoever to mechanics’ or materialmen’s liens. See Senate Floor Debates, afternoon session, February 21, 1985, [10] 4:05 – 4:39 / [1] 01-64.

District Court Interpretations of the Wrongful Lien Statute
As noted previously, some confusion exists among attorneys and at the district court level as to whether the Wrongful Lien Statute applies to mechanics’ liens (or other statutory liens). One district court judge, noting the legislative history of the statute, concluded: “It is clear from the plain language of the wrongful lien statute, as well as the legislative intent that the wrongful lien statute is not to apply to mechanic’s liens or any other liens filed by lien claimants who are authorized by statute or law.” See infra, note 2.

Another source of confusion is undoubtedly Utah Code section 38-9-2(3), which states: “This chapter does not apply to a person entitled to a lien under Section 38-1-3 who files a lien pursuant to Title 38, Chapter 1, Mechanics’ Liens.” One district court judge recited this provision and then concluded that “the Wrongful Lien Act is expressly inapplicable to mechanic’s liens,” and that “the penalty provisions of the Wrongful Lien Act were not intended to apply to mechanic’s liens.” See Ruling and Order issued by Judge Bruce C. Lubeck in the Third Judicial District, Summit County, on June 19, 2007 (Strata Dev., LLC v. Weaver, Case No. 070500246). As will be seen below, these categorical statements are, to some extent, incorrect.

Appellate Court Interpretations of the Wrongful Lien Statute
Two recent decisions by the Utah Court of Appeals have clarified the applicability of the Wrongful Lien Statute to mechanics’ liens (these cases clarify the application of the statute to other types of liens as well):

Packer v. Cline
In Packer v. Cline, 2004 UT App 311 (mem.), the Utah Court of Appeals affirmed the trial court’s invalidation of a mechanics’ lien pursuant to the Wrongful Lien Statute. The defendant, Mr. Cline, recorded a purported mechanics’ lien for $70,000.00 against the plaintiffs’ residence for the value of a mural painted in the residence by a third party.

The trial court found, and the appellate court affirmed, that Cline’s lien was not a mechanics’ lien because it did not substantially comply with several requisite provisions within the mechanics’ lien statute, including (A) what work, if any, he performed on the mural; (B) the value of that purported service; (C) how he derived a value for his service; (D) when the work was allegedly performed; and (E) notice of the steps the Packers could take to have the lien removed. See id.

The appellate court further affirmed the trial court’s finding that because Cline’s lien did not comply with the mechanics’ lien statute, “Cline’s purported mechanics’ lien was a wrongful lien under section 38-9-1(6) because it was not authorized by statute, by order or judgment of a court of competent jurisdiction, or by the Packers.” Id. (emphasis added) (citation omitted).

This is a sensible conclusion. Mechanics’ liens, and indeed all liens in Utah, are creatures of statute. See AAA Fencing Co. v. Raintree Dev. & Energy Co., 714 P.2d 289, 291 (Utah 1986); Utah Code Ann. § 38-9-1(6)(a). As such, a document that purports to be a mechanics’ lien, but does not substantially comply with the mechanics’ lien statute, is, by definition, not a mechanics’ lien and is instead a “wrongful lien” actionable under the Wrongful Lien Statute. However, Packer was not a published decision, and the facts of the case left the question of the applicability of the Wrongful Lien Statute unclear.

Foothill Park, LC v. Judston, Inc.
The Utah Court of Appeals definitively addressed whether the Wrongful Lien Statute applies in Foothill Park, LC v. Judston, Inc., 2008 UT App 113, 182 P.3d 924, in which the trial court had found that the defendant’s mechanics’ lien was void when it was not enforced within 180 days of the first notice as required by statute. See id. at 927-28.

The court of appeals analyzed the trial court’s finding that the void lien was a “wrongful lien” under the Wrongful Lien Statute. The defendant argued that “mechanics’ liens are outside of the scope of [the Wrongful Lien Statute].” Id. at 930. The court of appeals qualifiedly agreed, noting that while the statute “is inapplicable under the unique facts of this case,” it is not so broad “as to exempt any filing that purports to arise under the mechanics’ lien statute” but instead “only excludes persons ‘entitled’ to a mechanics’ lien.” Id. (emphases added) (internal citation omitted). That is, the provision that seemingly excludes mechanics’ liens from the Wrongful Lien Statute (Utah Code section 38-9-2(3)) in fact only excludes mechanics liens filed by “a person entitled to a lien under Section 38-1-3.” Id. (quoting Utah Code Ann. § 38-9-2(3)). Liens that are filed by persons not entitled by statute, including those styled as mechanics’ liens, are therefore subject to the Wrongful Lien Statute.

The court went on to reverse the trial court’s finding of liability under the Wrongful Lien Statute because the case was one of first impression, and thus whether or not the defendant was entitled to file its lien was “unresolved…at the time of [the lien’s] filing.” Id. However, the court also noted: “With this decision, however, any uncertainty about whether a laborer in [the defendant’s] position is entitled to file a mechanics’ lien has been eliminated.” Id. at 930 n.11. In other words, Judston created a precedent that lien claimants should heed.

GUIDELINES FOR APPLYING THE WRONGFUL LIEN STATUTE
Judston establishes the basic principle that the Wrongful Lien Statute applies to all wrongful liens, including those styled as mechanics’ liens. Some additional considerations are in order.

First, the Wrongful Lien Statute “only applies to liens and encumbrances which are wrongful from inception, and not to documents which are justifiably recorded.” Jack B. Parson Cos. v. Nield, 751 P.2d 1131, 1134 n.1 (Utah 1988); see also Judston, 182 P.3d at 930; Eldridge v. Farnsworth, 2007 UT App 243, ¶50, 166 P.3d 639, (citation omitted) (noting that the statute “requires a court to determine whether a lien is wrongful by evaluating it ‘at the time it is recorded or filed’”). Consequently, scrutiny of a lien’s validity must be restricted to the point in time in which the lien was recorded.

Second, an attorney challenging a lien under the Wrongful Lien Statute need not restrict the challenge to the face of the lien. Rather, the practitioner may present any evidence of the lien’s objective wrongfulness at the time the lien was recorded (several of which are outlined below).

Third, the Wrongful Lien Statute contemplates invalidating a lien in a summary proceeding. Consequently, district courts generally will be reluctant to invalidate a lien under this statute unless the petitioner can unequivocally show at the summary proceeding that the lien claimant was not entitled to maintain a lien at the time the lien was recorded. Following are a few illustrations as to when such an unequivocal showing is possible:

Lien Claimant Has Not Made Improvements to Real Property:
A lien is susceptible to attack under the Wrongful Lien Statute if the lien claimant has not made improvements to the encumbered real property. See Utah Code Ann. § 38-9-3. The lien in Packer was invalidated under the Wrongful Lien Statute because the lien claimant had not made improvements to the property. The so-called “common law liens” noted in the legislative history would also be susceptible to summary invalidation under the Wrongful Lien Statute because Utah Code section 38-9-1(6)(a) only allows liens that are “expressly authorized by this chapter or another state or federal statute.” Id. 38-9-1 (6)(a).

Lack of Licensure: A person who makes improvements that require licensure as per Utah Code section 58-55-604 but is not properly licensed “may… not commence or maintain any action in any court of the state for collection of compensation for performing any act for which a license is required.” Utah Code Ann. § 58-55-604. Because an individual’s licensure status is a matter of public record, this can be an effective challenge to a lien under the Wrongful Lien Statute. However, the individual circumstances of each case must be taken into account.

For example, a lien claimant might be able to proceed with a mechanic’s lien despite lacking the requisite licensure if (A) the property owner is not a member of that class of individuals the statute requiring licensure was designed to protect; (B) the property owner receives by other means the benefit of the protection contemplated in the statute; or (C) the property owner did not rely on the contractor’s licensure status to infer the contractor’s competence. See Lignell v. Berg, 593 P.2d 800, 805 (Utah 1979). The trial court has substantial discretion on this point, because “‘the general rule’ (of nonenforceability [of a contract due to lack of licensure]) is not to be applied mechanically but in a manner ‘permitting the court to consider the merits of the particular case and to avoid unreasonable penalties and forfeitures.’” Id. at 805 n.7 (quoting Corbin on Contracts, Vol. 6A, § 1512).

Challenging a mechanics’ lien under the Wrongful Lien Statute based on the lien claimant’s lack of licensure is obviously fact-sensitive and must be evaluated on a case-by-case basis.

Untimely Notice of Lien: A party wishing to encumber property with a lien must record a “written notice” of the lien with the county recorder’s office. Utah Code Ann. § 38-1-7(1)(a)(i). The deadline for filing such a notice is, depending on the circumstances, either 180 days after “final completion of the original contract” or 90 days after a “notice of completion” is filed. Id. § 38-1-7(1)(a)(i)(A) and -(B).

An untimely written notice will invalidate the lien claim. For example, in Interiors Contracting v. Smith, Halander & Smith Assocs.,, 881 P.2d 929 (Utah Ct. App. 1994), the court of appeals affirmed the trial court’s invalidation of a mechanics’ lien “since it was not timely filed within the requirements of [Utah Code] § 38-1-7.” However, attempting to invalidate a lien based on an untimely written notice does not always lend itself to disposition in a summary proceeding because the actual deadline is somewhat malleable and often disputed by the parties.

Failure to File Preliminary Notice: In 2005, the Utah legislature amended Title 38 of the Utah Code to include provisions pertaining to the “State Construction Registry” (the SCR). The SCR is designed to “provide a central repository for notices of commencement, preliminary notices, and notices of completion filed in connection with all privately-owned construction projects as well as all state and local government-owned construction projects throughout Utah.” Utah Code Ann. § 38-1-27(2)(c). Primary filing and access to the SCR, as well as notification to interested persons, are all done electronically.

To claim the benefit of the SCR’s preliminary notice requirements on a project to which they apply, a property owner must file a “Notice of Commencement” within fifteen days of building permit issuance by the local authority issuing the permit. See Id. § 38-1-31(1)(a)(i)(A)(II).

A subcontractor who wishes to maintain a lien must comply with the SCR by filing a “Preliminary Notice” within the later of either “20 days after commencement of its own work or the commencement of furnishing labor, service, equipment, and material to a construction project” or “20 days after the filing of a notice of commencement.” Id. § 38-1-32(1)(a)(i)(A) and - (B). This provision only applies to subcontractors who do not contract directly with the property owner or laborers compensated with wages. See id. § 38-1-32(1)(a)(i).

If a subcontractor fails to file a Preliminary Notice, it is statutorily barred from holding a lien on the Property. See id. at § 38-1-32(d)(1)(A). Consequently, a lien that is expressly prohibited by statute (such as by Utah Code § 38-1-32(d)(1)(A)) is, by definition, not “expressly authorized by statute,” see id. § 38-9-1(6)(a)), and is therefore a wrongful lien subject to dismissal under the Wrongful Lien Statute.

In additional to mechanics’ liens, other types of encumbrances are also potentially actionable under the Wrongful Lien Statute. For example, in Winters v. Schulman, 1999 UT App 119, 977 P.2d 1218, the Utah Court of Appeals found a “Notice of Lis Pendens” to be invalid and actionable under the Wrongful Lien Statute.3 In Centennial Investment Company, LLC v. Nuttall, 2007 UT App 321, 171 P.3d 458, the court of appeals also found an improperly-filed “Notice of Interest” to be actionable under the Wrongful Lien Statute.

CONCLUSION
Judston corrected the notion that the Wrongful Lien Statute is per se inapplicable to liens recorded under color of law. Rather, the Statute can be used to invalidate a lien where the lien claimant was not entitled to a lien at the time the lien was recorded. Foothill Park LC v. Judston, 2008 UT App 113, ¶¶18-21, 182 P.3d 924. Careful scrutiny of the documents and underlying facts of each case is nevertheless required to ensure that challenging a lien under the Wrongful Lien Statute will succeed.

1. A lien is “groundless” if it is not (A) expressly authorized by this chapter or another state or federal statute; (B) authorized by or contained in an order or judgment of a court of competent jurisdiction in the state; or (C) signed by or authorized pursuant to a document signed by the owner of the real property. Utah Code § 38-9-1(6).

2. Most of the material in this section is found in an order issued by Judge W. Brent West in the Second Judicial District, Ogden Department, on May 10, 2004 (Case No. 040900301).

3. The Wrongful Lien Statute expressly provides that “[t]he provisions of this chapter shall not prevent a person from filing a lis pendens…” Utah Code § 38-9-2(2) Eldridge v. Farnsworth, 2007 UT App 243, ¶48, 166 P.3d 639 (citing Utah Code Ann. § 38-9-2(2)(2005)). However, the court in Eldridge also cited, without commentary, Winters for the proposition that a lis pendens may be evaluated “[for] compliance with statutory requirements,” which includes compliance with the Wrongful Lien Statute. Id. ¶49.