Lien vs Bond

When you hear someone say:

“I’ll just bond around your lien”

What exactly does that mean?

Both instruments have their pros and cons when it comes to advancing your claim for collecting your job related unpaid balance.

Once you have properly prepared and served a preliminary notice, and you have filed your mechanics lien, and the job has come to an end. What happens to your large unpaid balance? It’s time to take action. Sure you can try to collect from your customer. But chances are they are in the same position. Waiting to get paid. You can only hope they also protected themselves by filing their own preliminary notice. 

Caution: you cannot piggyback on your customers preliminary notice. You must each file your own preliminary notice

If it has been 90 days or less since the job was completed, it’s time to move forward with your mechanics lien. If your mechanics lien has been accurately prepared, recorded and served, you must now decide you’re next coarse of action:

  • Have your attorney begin a foreclosure law suit
  • Release the lien
  • Try to negotiate an extension of the lien

Of course you are hoping that the owner makes arrangements to pay your customer so he in turn can pay you. But what happens when the General Contractor says: “We are going to bond around your lien”. What does that mean? Am I out a bunch of money? What do I do now?

Don’t panic. Bonding around the lien is not necessarily a bad thing. Let’s understand exactly what this bonding around the lien means.

#1 Your mechanics lien gives you a basis to open a foreclosure suit. Of course this will be immediately challenged. However, unless the owner can prove that you have already been paid or that you did not complete the work or provide the materials you claim in your mechanics lien. Then you are more than likely going to receive a judgement in the amount of the mechanics lien. And in many cases also be awarded the cost you paid to bring this action forward.

Now the key to you recovering the money awarded in the judgement is:

“There must be enough equity, in the foreclosed property, to satisfy your judgement”

If the property is over encumbered by a mortgage , unpaid construction loans, tax liens, or other instruments which take priority over your mechanics lien, you will only receive the full amount claimed in your mechanics lien, if there is enough equity left to satisfy your judgement. If not, you may receive the amount left in the equity  and be forced to open a breach of contract lawsuit against your customer, In order to collect the balance.

So what about this bonding around the lien? How may it be more beneficial than trying to perfect my mechanics lien? 

First of all. Both instruments are intended to secure the amount owed to you. The lien is supported by the equity in the property. But the bond is supported by the face value of the bond. It cannot be compromised. When you are forced to redirect and claim a lien on the bond, not only will you be able to collect the full amount you claimed. But in many cases the bond may have an additional 25% as a precaution to cover additional fees which may be awarded. So while the improved property is a strong asset, as long as it has equity. The bond however, is quite similar to an insurance policy. If you are prevented from pursuing a foreclosure suit against the property. Your mechanics lien may be used as a basis to begin a suit against the bond. This may provide a better assurance of recovering your money, than a mechanics lien. 

Bonding Companies play a similar role as an Insurance company. Therefore, the money is guaranteed and going after the bond is similar to filing a claim against an insurance policy. The face value of your mechanics lien will not be jeopardized by the possible lack of equity in the property. However, unlike winning a foreclosure suit and hoping there is adequate equity to satisfy your mechanics lien. 

You can now go after the bond. There are a few more hoops to jump through to collect on the bond, but a successful claim against the bond will result in payment in full. The difference between perfecting a mechanics lien and perfecting a claim against the bond is that your argument must be justified by a few more people. The general contractor, bonding company and the owner’s representative will all participate in defending against your claim. This makes it a bit harder for your attorney. But as long as he has solid evidence to support your claim, you should be successful collecting the full amount claimed.

So worrying about someone bonding around your mechanics lien is not necessarily a bad thing. The bond claim may actually be a safer vehicle. The bond claim can not be compromised like the equity in the property.

There is one caution to be aware of should the general contractor choose to bond around the lien. The general contractor will usually agree to post a bond, in order to continue with his contract. He will most likely have reason to believe he will be successful in proving your claim of lien to be invalid. Only you would know if he has the evidence when making this decision. Do not file a claim based upon emotions. Make sure your claim has a solid basis. Something you can support with service orders, invoices, payments received and proof that you were involuntarily removed from the job, or that you are not making a claim for anything other than what you can support with physical documentation

So the bottom line is that both the mechanics lien and claim against the bond are valid securities which allow you a means to recover your open balances. If by some reason you fail in trying to perfect either claim, you still have the right to pursue your client with a breach of contract suit against your customer. However, this may only be a worthy action as long as your customer has the means to pay the judgement.

A good practice in all of these situations is to have your preliminary notice or mechanics lien or a claim against the bond, prepared by someone who knows what they are doing. Choosing a company like CRM who have been preparing and serving these notices for 33 years, will allow you to have the peace of mind that you need when choosing a partner who is  licensed, Insured, and experienced. Furthermore, they are specialist with preparing and serving these documents. Don’t trust this process to the amateurs. Should you decide to do this yourself, make sure you have someone who is up to date on the current statutes. The opposing counsel who defends their client against someone like you who brings a lien against them, will look for any defects in your preliminary notice or mechanics lien. Just one small oversight and the opposing counsel will have your lien thrown out of court.

This is not a job for amateurs or those who want to give it try. Rely on a professional and make CRM Lien Service your document processing partner.