Mechanics Lien Rights: Use ‘Em or Lose ‘Em
An important new case regarding New Hampshire Mechanics Lien Law has application for contractors in all states and reminds the industry of how painful uncollectible debts can be. In Moultonborough Hotel Group decided on July 18, a hotel developer was building the Hampton Inn and Suites in Tilton, New Hampshire. ROK Builders, LLC, the general contractor, was owed approximately $2.5 million at the conclusion of the project.
The developer had received some mid-project financing after cash flow issues and the new finance company received a final lien waiver from ROK, indicating that it was waiving its mechanics lien claim through the payment date even though it had not been fully paid when the waiver was submitted. ROK also was not aware that the financing entity had stopped making payments to the developer. The hotel opened in June of 2008 and financial problems resumed quickly. Moultonborough ultimately filed for bankruptcy restructuring in 2009 in New Hampshire Federal Court.
ROK asserted in the bankruptcy court that it was entitled to be paid before the construction lender because work began ROK had started work prior to the recording of the mortgage. The First Circuit Court held that because the lender had no knowledge of any claims that ROK had at the time the mortgage was recorded, and the lender had advanced funds to the developer to pay contractors on the project, the lender had priority over the after-asserted mechanics lien by ROK. The court also noted that ROK had signed a final lien waiver indicating that it had been paid and that it had waived any mechanics lien rights, distinguishing this case from New Hampshire precedent.
This harsh result leaves ROK as an unsecured creditor. Unsecured creditors in bankruptcies typically get paid pennies on the dollar on their claims, if at all.
This case presents two important lessons for contractors in all states including ME and New Hampshire:
- Lien waivers must be accurate when signed. One shouldn’t say they have no claim and have been paid, when they have a claim and have not been paid.
- Bankruptcy is the ultimate payment risk for a contractor. Contractors should not wait to assert their mechanics lien rights. Continuing to do work and not fully asserting one’s mechanics lien rights can be the difference between being paid fully under a mechanics lien, or not being paid at all.