NO MECHANICS LIEN RIGHTS? TRY A CONSTITUTIONAL LIEN
Most people in the construction industry are familiar with mechanics liens. Under Minnesota law, if a contractor or material supplier is not paid for its services, it may file a lien against the real estate involved to secure payment. There are many rules to follow in perfecting a mechanics lien, but if filed properly a mechanics lien is a very effective tool for obtaining payment.
But what if a contractor does not possess any lien rights, or I did something to lose its lien rights? Too often contractors believe all is lost if they do not possess valid lien rights. However, this may not be the case, and a constitutional lien might still be an available remedy for collecting payment.
In addition to the protection state law provides through the mechanics lien statutes, the constitutions of some states also provide for a constitutional lien which might give additional protection to an unpaid contractor or supplier. In general, the Minnesota State Constitution provides that a debtors home is exempt from seizure or sale to pay a debt. This is commonly referred to as the homestead exemption. Under the state homestead exemption laws, a creditor may not attach or foreclose upon a debtors homestead to satisfy a debt. Obviously, the mechanics lien laws create an exception to this homestead exemption, and a contractor or supplier may clearly foreclose its mechanics lien against a homestead property.
If a contractor loses or otherwise does not protect its mechanics lien rights, in many cases collection against the homestead (and often the owner) is lost. However, the Minnesota State Constitution provides for another exception to the homestead exemption that is often overlooked. Under Article 1, § 12 of the State Constitution, the homestead is exempt from collection efforts. However, this rule does not apply if the judgment was obtained for work done or materials furnished in the construction, repair or improvement of the homestead property. This provision may create a safety net for contractors or suppliers who do not protect their mechanics lien rights. However, this exception should never be relied upon as the primary source for lien rights, and the mechanics statute should always be followed.
The constitutional lien is much narrower in scope and application than the mechanics lien. One difference is that a constitutional lien requires an agreement directly with the owner. Therefore, a subcontractor who did not have an agreement directly with the property owner may not enforce a constitutional lien. Further, a constitutional lien only arises where homestead property is involved. (However, you may obtain a judgment and foreclose it against the debtors other non-homestead real estate.) In further contrast to a mechanics lien, a constitutional lien must first be reduced to a court judgment. This means that the contractor must first sue the owner and obtain a judgment before a lien may be claimed and filed against the property. Thereafter, the contractors attorney may enforce the judgment by foreclosing on the owners homestead.
A judgment foreclosure may in some cases be cheaper and quicker than a mechanics lien foreclosure action. Further, a judgment is valid for ten years and may be renewed, whereas a mechanics lien is enforceable for only one year from the last date of work, and may not be renewed. In addition, whereas a mechanics lien foreclosure must be commenced in district court by an attorney and might take over a year before a trial is held, a judgment for an amount under $7,500.00 may be obtained more quickly in conciliation court. A conciliation court hearing usually occurs within six weeks after the case is filed, and may be conducted by the contractor or supplier without an attorney. The ability to conduct the hearing without an attorney usually saves the creditor a large amount of legal fees and costs. After a conciliation court judgment is obtained, it may be entered in district court, and the creditors attorney may then start a judgment foreclosure action against the debtors homestead.
A constitutional lien will not be available every case, and does have its drawbacks. Claims for amounts greater than $7,500.00 may not be brought in conciliation court, and must be commenced in district court. For this reason, if a contractor possesses a valid mechanics lien for over $7,500.00, it would likely commence a mechanics lien foreclosure because any claim in excess of $7,500.00 must proceed in district court anyway. Also, unlike a mechanics lien, a judgment (which forms the basis for a constitutional lien) may be discharged in bankruptcy, but a valid mechanics lien creates a secured claim that is usually enforceable despite a bankruptcy.
Further, a constitutional lien may only be relied upon if the contractor had an agreement directly with the property owner regarding homestead property. If there is no agreement with the property owner, the contractors only remedy against the property owner is generally the mechanics lien. Therefore, the rules for perfecting a mechanics lien should always be followed, and every job treated as if a constitutional lien will not be available. Also note that a judgment lien will be junior in priority to a mortgage or a valid mechanics lien. As such, if numerous other liens are filed against the homestead property, a mechanics lien foreclosure will generally secure a higher position against the property.
The mechanics lien rules should always be followed when working on any property, and especially when working on homestead residential land. Additional requirements exist for residential properties that do not exist for commercial jobs, including the often-botched pre-lien notice to the owner. However, if for some reason a mechanics lien cannot be enforced, or the dollar amount in question does not warrant a district court mechanics lien foreclosure action, a constitutional lien may be an effective back up plan for collecting money from an owner. It is also very important to remember that, regardless of lien rights, you may always sue the entity that hired you to obtain a judgment. Therefore, even if a subcontractor does not have lien rights against the owner, it should always pursue a judgment against the general contractor.
If you currently hold any judgments against property owners for work performed at their homes, an experienced construction and collections attorney should be contacted to discuss enforcement and a potential foreclosure. You may have more rights than you think.