Utah Bar Journal

A year or so later, I took on a case in which the lien claimant had failed to file a “Preliminary Notice” with the State Construction Registry, thus depriving him of his lien rights. If I had overlooked this error, my client could have ended up paying thousands in legal fees defending against the lien. As it was, I simply wrote a letter, the claimant released the lien, and my client came away from the experience thrilled at having avoided a lawsuit and its attendant expenses.

In Utah, laws pertaining to mechanics’ liens have become increasingly difficult to navigate. The experiences described above prompted me to develop a fairly systematic approach to lien claims, some of the highlights of which are set forth below. While no article can address all possible permutations of Utah’s lien laws, this note includes some basic issues that practitioners might otherwise overlook when evaluating lien claims.

Is the Lien Claimant Entitled to File a Lien?
Utah Code section 38-1-3 identifies those parties entitled to file a lien (in essence, anyone who provides labor, materials, or services to improve real property). See Utah Code Ann. § 38-1-3 (2005). In Packer v. Cline, 2004 UT App 311 (mem.), the Utah Court of Appeals affirmed the trial court’s invalidation of a mechanics’ lien filed by an individual who did not meet these requirements. See id. In Packer, the defendant recorded a purported mechanics’ lien for $70,000 against the plaintiffs’ (his former in-laws) residence for the value of a mural painted
in the residence by defendant’s former spouse. See id. para. 2. Because defendant had not provided labor, materials, or services to improve real property, he was not entitled to file a lien. See id. para. 4. Further, defendant was found liable for statutory damages and fees under section 38-9-4(3) of the Wrongful Lien Statute. See id. para. 6.

Was the Lien Timely Recorded?
In order for a lien claimant to preserve lien rights against a residential property, the claimant must record the lien against the property no later than ninety days after the filing of a Notice
of Completion or, where no Notice of Completion is filed, 180 days after final completion of the original contract. See Utah Code Ann. § 38-1-7(1)(a)(i)(A)-(B) (Supp. 2008). A lien that is not timely recorded is invalid and unenforceable. See In re Williamson, 43 Bankr. 813, 825 (Bankr. D. Utah 1984).

Was a Suit to Foreclose on the Lien Timely Filed?
A mechanics’ lien becomes void, and the district court loses jurisdiction if the lien claimant fails to file an action to enforce the lien within 180 days from the day on which the claimant recorded
the lien. See Utah Code Ann. § 38-1-11(2)-(4).

Did the Lien Claimant Contract with the Property Owner or with a General Contractor?
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.” Id. § 38-1-27(2)(c). Primary filing and access to the SCR, as well as notification to interested persons, are all done electronically.

The SCR’s filing requirements can have a significant impact on lien claims. When the property owner has properly filed a Notice of Commencement in the SCR, all subcontractors must thereafter timely file a Preliminary Notice (often referred to as a pre-lien) with the SCR. See id. § 38-1-32(1)(a)(i).

This pre-lien requirement only applies to “subcontractors” as defined by statute (in contrast to a “general” or “original” contractor).

Essentially, anyone who contracts directly with the property owner is deemed a “contractor,” while anyone who does not contract directly with the owner is deemed a “subcontractor.” See id. § 38-1-2(1); For-Shor Co. v. Early, 828 P.2d 1080, 1082 (Utah Ct. App. 1992) (“[A] lien claimant will be characterized an ‘original contractor,’ regardless of the function he performed in the particular construction project, so long as his contract was with the property owner.”).

This is important because a subcontractor risks losing its lien rights if the subcontractor does not comply with the SCR, whereas general or original contractors can disregard the SCR filing requirements altogether. See id. 38-1-32(1)(a)(i). Consequently, property owners can minimize their exposure to lien claims by having subcontractors contract with the general contractor (rather than with the property owner). Conversely, lien claimants can avoid the added hassle of complying with the SCR, as well as the risk of losing lien rights through noncompliance with the SCR by contracting directly with the property owner.

Did the Property Owner Timely File a Notice of Commencement on the State Construction Registry?
The SCR potentially benefits property owners by reducing the number of potential lien claimants to only those who comply with the SCR. Property owners who wish to avail themselves of the SCR should therefore file a Notice of Commencement either no later than fifteen days after the issuance of the building permit, see Utah Code Ann. § 38-1-31(1)(a)(i) (Supp. 2008), or no later than fifteen days after commencement of physical construction work at the project site, see id. § 38-1-31(1)(b). Importantly, an untimely notice (or failure to file a notice) relieves subcontractors from complying with the SCR requirements altogether. See id. §
38-1-31(3)(a).

The SCR requires the local government entity issuing the building permit to transmit the building permit information to the SCR. See id. § 38-1-31(1)(a)(i)(A)(I). This usually results in a Notice of Commencement being generated and recorded on the SCR without any effort by the property owner or general contractor. However, I have observed several instances where the local government entity did not timely file a Notice of Commencement, thus allowing subcontractors to disregard the SCR filing requirements. Property owners or general contractors are therefore well advised to take steps to ensure that the Notice of Commencement is timely filed. Conversely, potential lien claimants (particularly subcontractors who have failed to timely file a Preliminary Notice) should also investigate the timeliness
of the Notice of Commencement, as an untimely notice relieves them of their obligation to comply with the SCR.

If the Lien Claimant is Required to File a “Preliminary Notice” on the State Construction Registry, Did He Timely File the Notice?
When the SCR filing requirements are in play, a subcontractor must “pre-lien” the project by filing a Preliminary Notice on the SCR by the later of (A) 20 days after commencement of work or of furnishing labor, services, material, etc., or (B) 20 days after the filing of a notice of commencement if the subcontractor’s work commences before the filing of the first notice of commencement. See id. § 38-1-32(1)(a)(i)(A)-(B).1

A lien claimant (that is, a subcontractor) who is obligated to file a Preliminary Notice but fails to do so “may not hold a valid lien under” the lien statute. Id.§ 38-1-32(1)(d)(i)(A). Lien claimants should therefore either contract directly with the owner (thus obviating the SCR filing requirements) or implement procedures to regularly pre-lien projects by timely filing Preliminary Notices. Conversely, property owners should always evaluate a lien claimant’s compliance
with the SCR before expending effort in disputing the lien.

Was the Lien Claimant Properly Licensed?
Utah Code section 58-55-604 states that a contractor may not commence or maintain any type of lawsuit (including a suit to foreclose a mechanics’ lien) if the suit is filed to collect compensation “for performing any act for which a license is required ...without alleging and proving that the licensed contractor…was appropriately licensed when the contract sued upon was entered into, and when the alleged cause of action arose.” Utah Code Ann. § 58-55-604 (Supp. 2008). Consequently, a contractor’s failure to comply with the licensing requirements
of this statute precludes it from maintaining a lien. See A.K. & R. Whipple Plumbing & Heating v. Aspen Const., 977 P.2d 518, 522 (Utah Ct. App. 1999).

However, the licensure statute includes several statutory exceptions. See Utah Code Ann. § 58-55-305. Several common law exceptions to this statute have also softened its potential impact. See A.K. & R. Whipple Plumbing & Heating v. Aspen, 1999 UT App 87, ¶ 14 (internal quotation marks omitted) (noting that the statutory bar “does not preclude the application of the previous common law exceptions to the general rule of non-recovery”).

For example, in Fillmore Products, Inc. v. Western States Paving, Inc., 561 P.2d 687 (Utah 1977), the Utah Supreme Court held that the general rule of denying relief to unlicensed persons
should not be applied “inflexibly or too broadly” because the statute “might become ‘an unwarranted shield for the avoidance of a just obligation.’” Id. at 689-90 (citation omitted). Thus,

a court addressing the issue of whether an unlicensed contractor may maintain an action for quantum meruit must: (1) determine whether the contractor is properly licensed or whether its status as an unlicensed contractor places it within the purview of section 58-55-604; and (2) determine whether the contractor is entitled to relief under common law principles despite its non-licensure and support that conclusion with appropriate findings of fact. In other words, if the court concludes the claim falls within the purview of section 58-55-604, but the common law exceptions apply, then the statutory bar will not preclude suit. However, if the court determines section 58-55-604 applies but the common law exceptions are inapplicable, then section 58-55-604 absolutely bars the action.

Yet another common law exception arises out of Lignell v. Berg, 593 P.2d 800 (Utah 1979), which states that “the party from whom the contractor seeks to recover is…not a member
of [the class the licensure statute is intended to protect] if the required protection (i.e., against inept and financially irresponsible builders) is in fact afforded by another means.” Id. at 805.
Utah’s licensure statute is intended to protect the public from incompetent contractors. See A.K. & R. Whipple Plumbing & Heating, 1999 UT App 87, ¶ 13. However, “‘the general rule’
(of nonenforceability) 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.’” Lignell, 593 P.2d at 805 (citation omitted).

In other words, “the party from whom the contractor seeks to recover is…not a member of [the class the licensure statute is intended to protect] if the required protection (i.e., against inept and financially irresponsible builders) is in fact afforded by another means.” Id. And if a litigant is not within this class, “the [licensure] rule will not be applied,” so “the pivotal issue
…is whether defendant occupied a protected status.” George v. Oren, Ltd., 672 P.2d 732, 735 (Utah 1983) (citations omitted); see also Am. Rural Cellular, Inc. v. Sys. Commc’n Corp., 890
P.2d 1035, 1040 (Utah Ct. App. 1995) (“[W]hen the contracting party possesses knowledge and expertise in the field, it is not within the class of persons in need of the protection that the
licensing statute was intended to provide”).

Is the Lien Barred by the Residence Lien Recovery Fund?
The Utah Residence Lien Recovery Fund “is an alternate payment source for contractors, laborers or suppliers whose liens are voided because a homeowner qualifies for protection under the Residence Lien Restriction and Lien Recovery Fund Act.” Utah Department of Occupational and Professional Licensing, http://www.dopl.utah.gov/programs/rlrf/ (last visited Aug. 2, 2009). These protections are available to property owners who (A) have a written contract, (B) with a properly licensed contractor, and (C) have paid the contractor in full pursuant to the terms and conditions of the contract. See Utah Code Ann. § 38-11-107(1)(a) (Supp. 2008); id. § 38-11-204(4)(a)-(b).

“[P]ayment disputes are very common on construction projects such that compliance with the third requirement is sometimes virtually impossible until the end of litigation. Thus, it is often unclear whether an owner is entitled to the protection afforded by the Act.” Randy B. Birch, Residence Lien Recovery Fund – The Homeowner’s Responsibilities, http://www.northeasternutahlitigationattorney. com/2009/02/residence-lien-recovery-fund-homeowners.html (last visited Aug. 2, 2009). However, a property owner who has paid a general contractor in full but still ends up facing liens from unpaid subcontractors may be able to avoid such liens by applying for protection under the Act.

Do Any of the Provisions of the Wrongful Lien Statute or Abuse of Lien Statute Apply?
The Wrongful Lien Statute provides penalties for liens that are “wrongful,” which are defined as “a lien, notice of interest, or encumbrance” that is not “expressly authorized by this chapter
or another state or federal statute;…authorized by or contained in an order or judgment of a court of competent jurisdiction in the state; or…signed by or authorized pursuant to a document
signed by the owner of the real property.” Utah Code Ann. § 38- 9-1(6). A lien claimant who fails to release such a lien within ten days from the date of the owner’s written request is liable for “$3,000 or for treble actual damages, whichever is greater, and for reasonable attorney fees and costs.” Id. § 38-9-4(2). This statute provides even harsher penalties against lien claimants
who record a lien while knowing or having reason to know that the lien is “a wrongful lien,” is “groundless,” or “contains a material misstatement or false claim.” Id. § 38-9-4(3). The
penalty is “$10,000 or for treble actual damages, whichever is greater, and for reasonable attorney fees and costs.” Id.

The more narrowly tailored Abuse of Lien Statute penalizes lien claimants who record a lien “containing a greater demand than the sum due” and does so “with the intent to cloud the
title;…to exact from the owner or person liable by means of the excessive claim of lien more than is due; or…to procure any unjustified advantage or benefit.” Id. § 38-1-25(1). The penalty
is “twice the amount by which the abusive lien exceeds the amount actually due; or . . . the actual damages incurred by the owner of the property.” Id. § 38-1-25(2).

A property owner who disputes the propriety of a lien or the lien amount should ask their attorney to evaluate these statutes. Conversely, a lien claimant should take precautions to ensure that the claimant does not run afoul of these statutes.

Conclusion
These suggestions are by no means exhaustive, nor are they applicable to every lien claim. But systematic analysis of lien claims has the potential to save all involved parties a lot of time and effort by weeding out flawed claims early on in the litigation process.

1. A subcontractor who fails to file a Preliminary Notice prior to commencing work on a
project may be able to resurrect at least a portion of his lien rights. “If a person files
a preliminary notice after the period prescribed by Subsection (1)(a), the preliminary
notice becomes effective five days after the day on which the preliminary notice
is filed.” Utah Code Ann. § 38-1-32(1)(b). Consequently, a subcontractor can file a
belated Preliminary Notice, then reduce or eliminate his work on the project for the
next five days. The subcontractor has then preserved his lien rights as to the remaining
work completed after those five days. See id.

Spencer Macdonald is a partner at the Provo firm of Sumsion Macdonald, LLC, where he practices in the areas of commercial litigation, LLC disputes, contract actions, mechanics' liens, boundary line disputes, landlord/tenant issues, and commercial leases.