In each state, statutes govern the right to a construction lien. It is almost inevitable that someone, someday, will not meet a required step. The lien is lost, and with it, whatever leverage or payment security it represented.
There is still a balance to collect—unless the creditor has improvidently signed something that also waives the right to payment of the claim. This could be a Pay-If-Paid clause in the contract, or some quirk in local law extinguishes the debt as in a recent Georgia Court of Appeals decision. ALA Construction Services v Controlled Access, Inc. (Ga Ct App, 5th Div 9-18-2019).
The first thing to do is gather the facts and assess what collection rights are available. In almost all cases there is still a basic contract claim against the other contract party. That might be the project owner. It might be a contractor or subcontractor. The contract law principle of privity says that you have a contract claim against your contract counterpart. You do not have a right against a third party except in unusual circumstances. If you sold construction widgets to a contractor, but the contractor has no money, it is unlikely you have an enforceable claim against the project owner (or the shareholders of the contractor). Although, never say never. There are some equitable claims which might apply to reach a third party with the right set of facts. If you think one of these unusual situations apply you should discuss this promptly with your lawyer.
If you are going to have to take collection action against your contract counterpart where are you going to do that? This is the concept of “venue.” If you had the construction lien you would (by statute) have to bring your action in the place/venue where the property was regardless of where your counterpart is located. The project might be in Minnesota, but your counterpart is in Milwaukee, Wisconsin. Your contract might specifically say that your counterpart has agreed to be subject to court jurisdiction in your home state of Minnesota. In that case the venue is probably in a Minnesota court. Without that language, however, the most likely venue for the action would be in Milwaukee, Wisconsin.
Next, take a good look at your file. Do you have the documents which form the contract? Do you have all the invoices and were they sent to the right address of your counterpart? Do the invoices actually add up to the balance on your books after allowing any payments or appropriate credits? Has your counterpart disputed the charges? Did you clearly document your response to the dispute? If any of this is missing, now would be the time to find it rather than a scramble later when your lawyer asks for it.
Did you get a personal guaranty from someone? Is it too old and likely “stale?” Has the guarantor been notified that there is a claim on the guaranty and has there been a written demand for payment? Courts are often solicitous of guarantors where the guaranty is old or the fact circumstances look “unfair” in some way. If your guarantor is the owner of the construction company which has no money, then in many cases the owner will have put his or her money into the company to keep it going and may also have no money. This is just a cautionary note to avoid unrealistic expectations. It may also serve as a prompt to revisit the guaranty agreements you thought you had.
If you must sue to collect your money the objective is a money judgment. Each state then has its own collection procedures like garnishments, judgment liens and levies of execution which enable a sheriff to seize money or property. These remedies almost always need a lawyer’s help to navigate successfully because states also have laws which declare some kinds of property exempt from judgment creditors. A person’s homestead is almost always at least partially exempt.
Finally, if it happens that your judgment is against the Minnesota homeowner that hired you directly to do work on their home you might still end up with a “lien” even though your Minnesota mechanic’s lien was lost. This is the result of a clause in the Minnesota State Constitution which says that the homestead exemption would not apply in this instance. The result is that your judgment can become an enforceable lien against that homestead property.
All these additional considerations for collection are second choice where a lien could have been filed. The process of collecting your construction industry receivables starts when you first hear of the job and not when the horse has left the barn at the end. Hopefully, this series of posts has readers thinking about how they can protect their ability to collect and, at the same time, how the project owner can understand the perspective of the lower tiers of contractors and suppliers to better manage the flow of funds on the project to everyone’s benefit.