A Lawyer Discusses What You Need to Know About Troubled Projects
When the economy caused the “pause button” to be placed on financing for certain projects, it created a domino effect leading to the filing of many mechanic’s liens, judgments and other problems on those projects. Here are a few things you need to know.
C. JAYE BERGER
While the laws on mechanic’s liens vary from state to state, having a mechanic’s lien on a property usually only becomes problematic if the owner is trying to “do” something with the property, such as refinance, sell or satisfy a construction lender. If the lienor has not started a lawsuit to foreclose on the mechanic’s lien, it can just sit there and in some instances, will expire after the statutory time period of time has passed, unless it has been extended or an action to foreclose has been commenced. In New York, for example, they last for one year and can be extended for another year. Commencing an action to foreclose on the mechanic’s lien extends it.
When a closing needs to occur, that is when frantic phone calls are often made trying to “settle” mechanic’s liens in order to clear title. The end goal is to obtain a satisfaction of the mechanic’s lien, which can be recorded. Since mechanic’s liens do not last long, the information in them tends to be fairly “current.” In other words, you can usually locate the parties involved and talk to them about a resolution.
If the lien is not too large, it can be bonded. This takes the lien off of the title to the property. If the lien cannot be bonded and a closing needs to occur, money to cover the amount of the lien, plus some additional money to cover contingencies, may have to be placed in escrow with the Court, a bonding company or a title company. The additional amount will be dictated to you by whoever is holding the money and is not negotiable. Even when a lien is bonded, there may still be litigation over the subject of the lien on theories such as breach of contract.
Sometimes there are too many liens to bond all of them or the amounts are too large to make them bondable. This possibility has created another interesting business opportunity that I have seen spring up in the recent economy. The contractor may find an investor to team up with to buy or take over the troubled project. Most, if not all of the “consideration” is the assumption of the debts, obligations and litigation of the seller. The contractor has the “ins” with the trades to promote deals and settlements with the subcontractors on mechanic’s liens and to eliminate problems on the project which are keeping it from moving forward. The buyer may buy “subject to” various mechanic’s liens and pending litigation because the risks are “known” and the rewards can be great.
Clearing up a judgment, on the other hand, can be much harder. Judgments can last for twenty years in some states. If there is an old judgment on a title search, it may be very difficult to locate the parties needed in order to resolve it. The property owner may even have default judgments against his company. This can occur when corporations move their offices and fail to have legal counsel update their corporate records. If a lawsuit is started, the Secretary of State only has to “serve” the corporation at whatever address has been given to them for that corporation. If the corporation’s forwarding order has expired, the notice of the lawsuit may never actually reach the owner, but it is still good service by the Plaintiff, because the Secretary of State was served. Working with a knowledgeable attorney can alleviate many of these issues.