The purpose of the mechanic’s lien statute is to benefit and protect persons who supplied labor, materials, or services in order to enhance the value or the condition of another’s property. This area of law is very complex and it is recommended that legal counsel should be sought. The time frame in which to file a mechanic’s lien is important. A lien statement for labor and work by the day or piece, but without furnishing laborers or materials, must be filed for record after the last labor for which the lien claimed has been performed and at any time before the expiration of two months next after the completion of the building, structure, or other improvement. Except where the time for filing a lien statement has been extended as allowed by provisions of the Colorado Revised Statutes. All other lien statements must be filed for record at any time before the expiration of four months after the day on which the last labor is performed or the last laborers or materials are furnished by the lien claimant. The idea of such lien statements and lien filings is to preclude unjust enrichment. Labor and materials have gone into the property of another and made it more valuable, so that, when the owner is called upon to protect his property from a lien by paying for the labor or material, he is but paying for something that he has received. Value has been created by labor performed upon and material incorporated into the property or consumed directly in its improvement, and he who has furnished such labor or material has added to the value and is given a lien to the extent of the addition he has made. 164 A blanket lien may not be enforced against fewer than all of the properties in the absence of some showing of proper apportionment. The right to a mechanic’s lien is wholly a creature of statute A claimant may choose to file a lien against, and to recover the entire debt from, a single property, even though multiple properties are benefited under the same contract, if the value of the work cannot be apportioned among the properties, so long as the debtor holds the sole interest in all of the properties benefited under the contract. 167 Such single-property lien is not a “blanket” lien. 168 The statute cannot be extended or restricted by the acts of contracting parties. 169 Although all 50 states recognize some form of mechanic’s lien, the statutes have significant differences. Thus, in interpreting the Colorado mechanic’s lien law, cases from other jurisdictions should be approached with caution.
The mechanic’s lien statute is to be liberally construed as to its remedial portion, but must be strictly construed in determining the question whether the right to a lien exists. Thus, where the inquiry is whether a person asserting a lien has complied or is entitled to such a remedy, the compliance by the person seeking the lien is strictly construed. The idea is that the person seeking the advantage of such a remedy must have strictly and for the most part exactly complied with it.
OVERVIEW: Mechanic’s lien laws in Colorado are controlled by the provisions of the General Mechanic’s Lien law provisions starting with section 38-22-101 et seq. The right to a mechanic’s lien is wholly a creature of statute. The purpose of the mechanic’s lien statute is to benefit and protect persons who supplied labor, materials, or services that enhanced the value or the condition of another’s property. All 50 states recognize some form of mechanic’s lien; the statutes from each state have significant differences. This area of law is very complex and it is recommended that legal counsel should be sought for further explanation. This section contained in this summary is very brief and not exhaustive of all the nuisances of the statutes that control lien law.
THE TIME FRAMES: The time frame in which to file a mechanics lien is important. If you miss it, your rights may have lapsed. For example as to those that provide labor-A lien statement for labor and work by the day or piece, but without furnishing laborers or materials must be filed for record after the last labor for which the lien claimed has been performed at any time before the expiration of two months after the completion of the building, structure, or other improvement. In all lien-filing time frames, before you can file the lien statement you must serve on the party that you are seeking the lien and the general contractor if one exists a notice of intent to file a lien. The service of the intent to lien must be served at least 10 days before filing the lien statement with the county clerk and recorder. Once again you need to review the statutes to make sure that you comply. Some provisions allow for an extension where the time for filing a lien statement has been extended as allowed by provisions of the Colorado Revised Statutes. All other lien statements must be filed with the appropriate clerk and recorder at any time no later than four months after the day on which the last labor is performed or the lien claimant furnishes the last laborers or materials. As mentioned at the beginning of this short summary, the idea of granting these types of lien rights is the concept of precluding unjust enrichment to the benefited party. An interesting factor to these types of disputes is that often the landowner may not even know about the lien claimant and has no direct contract relationship with the party that is attempting to file the lien against the property. A key attribute of the mechanics lien provisions is that there does not need to be a contract relationship, the whole concept being that so long as someone added value to the real estate that the claimant can maintain that he is entitled to filing such a lien. Labor and materials have gone into the property of another and made it more valuable, so that, when the owner is called upon to protect his property from a lien by paying for the labor or material, he is but paying for something that he has received. The consumer issue starts with the troubling problem that the landowner, household owner has already paid the contractor and now is sent a lien statement and is facing the possibility of a lien being filed against the landowner’s property. Value has been created by labor performed upon and material incorporated into the property or consumed directly in its improvement, and he who has furnished such labor or material has added to the value and is given a lien to the extent of the addition he has made. Many defenses are available to a property owner, but in all cases the exact nature of the lien claimant’s rights turn on the facts of each case. Colorado’s legislature provided important protections to residential units by providing that where payment to the contractor has been made that the lien rights of the subcontractor and material suppliers may have been defeated. Once again each case may have a different result as to how this provision may apply.
The mechanic’s lien statute is to be liberally construed as to its remedial portion, but must be strictly construed in determining the question whether the right to a lien exists. Thus, where the inquiry is whether a person asserting a lien has complied or is entitled to such a remedy, the compliance by the person seeking the lien is strictly construed and the deviation from the statutory requirements may very well defeat the rights to such a lien being filed. The idea is that the person seeking the advantage of such a remedy must have strictly and for the most part exactly complied with the statutory provisions.
TRUST FUND STATUTE: Most general contractors have never heard of the Contractor Trust Fund Statute (“CTFS”) at CRS 38-22-127 It is extremely dangerous. The statute creates the rule that a construction contract creates an express trust relationship.
Subcontractors can prevent discharge if the statute was violated. They don’t need to prove fraud by deceit; just that money which should have gone to them was disbursed in violation of the statute. Such a violation is regarded as a breach of fiduciary duty, and at least constructive fraud, and can usually be pleaded also as fraud by deceit. A subcontractor who has received money to be paid to a sub-subcontractor or materials supplier has the same duties as a contractor.
A debt incurred for breach of fiduciary duty in violation of an express or technical trust is not dischargeable. See 11 USC 523(a)(4); The trust created by the CTFS is such a trust. It is not a “constructive trust,” although a violation of the statute could result in a court imposing a constructive trust to recover funds. Technically speaking, a constructive trust is not a cause of action, but an equitable remedy to correct inequities resulting from various situations, such as tortious conduct, or defective formation of contracts, etc. Constructive trusts can be imposed as a remedy for constructive fraud, which often arises from breach of fiduciary duty, including misappropriation of funds.
As if non-dischargeability weren’t sufficient punishment, the CTFS goes on to say that a violation of the CTFS constitutes criminal theft. Obviously if the contractor’s actions do constitute theft, then the crime will normally be a felony, rather than a misdemeanor, due to the amounts involved. If the contractor has multiple contracts underwater, the contractor (including any individual who knowingly authorized illegal disbursements) might get charged with multiple felonies. Prosecutors now prosecute such cases more often than in decades past. .
Also, breach of trust and conversion are torts, for which claimants can assert claims for emotional distress and punitive damages. And, as if THIS were not enough, the “Rights in Stolen Property” statute, CRS § 18-4-405 provides for recovery of treble damages.
Also, the owner, as well as the subcontractors and materials suppliers, can sue a contractor for treble damages under the CTFS and the Rights in Stolen Property statute.
Steve Berken’s October 21, 2009 ListServ message with the subject line: “Re: Trust Fund Statute Question” transmitted a copy of the Treehouse court opinion. That opinion implies that the contractor is never, ever, entitled to disburse a dime to itself until all subs are paid everything they are owed. This is to say that 100% of all funds given to a contractor are held in trust for subcontractors, and cannot be spent — even on the contractor’s legitimate overhead and profit — until after the entire contract is completed, and all the subcontractor bills are received and paid. This is crazy-making, scary stuff, inconsistent with standard practice in the industry. If taken seriously, it would prevent contractors from conducting business in a normal fashion.
I would not lightly accept the idea that your contractor violated the statute. As Churchill said, “Never, never give up!” In any sentence containing the word “violated,” I would also say “ALLEGEDLY,” because here we are discussing not only potentially catastrophic non-dischargeable liability, but also the possible commission of one or more felonies. A first-time offender will usually get probation, but this is not guaranteed. Assuming the contractor gets probation, a conviction may still interfere with your client’s ability to maintain a license, bear firearms, vote, and find a job with another contractor when the dust settles. I prosecuted for four years and have done some criminal defense, but when a significant CTFS case comes into the office, I still prefer that my client also consult with a criminal defense specialist. Civil practitioners tend to be cavalier about the Fifth Amendment privilege, and a criminal defense attorney will open your clients’ eyes to the importance of paying attention.
I think CTFS cases should raise the hair on the back of your neck. They deserve a serious budget for attorney fees and realism about the fact that filing for bankruptcy may be futile. I think sometimes the best thing the attorney can do for the client is to help the client plan for life after the holocaust.
There are defenses to a CTFS claim, although they seem few and far between when you represent the contractor.
First, if a contractor can show that the only money it retained was specifically designated in the draw request and related documents as money disbursed for the contractor, then I think you have reasonable statutory arguments. Under 127(1) the unpaid subcontractor is not an entity “for which such disbursement was made,” since the disbursement was made for the contractor. But the Legislature failed to make it clear: when the statute says “for which the disbursement was made,” does this refer to the project for which the disbursement was made, or to the labor and materials, or to the claim for which a potential lien exists? The outcome will be different under each of the three possible answers. The courts do not even seem to consider this issue.
Also, the statute says: “if the owner of the property has executed a written release to the contractor or subcontractor, he need not furnish any such bond or hold such payments or disbursements as trust funds.” See 127(3). If the owner signed a draw request, releasing funds to the contractor, then is this a “release” referred to by the statute, which makes the disbursed funds non-trust funds? I would argue that it is. I have not seen a court opinion discussing this.
Also, if the draw request authorizes payment of money to the contractor, then isn’t the contractor itself one of those “laborer or material suppliers, or laborers who have furnished laborers, materials, services, or labor, who have a lien, or may have a lien, against the property for whom the money is held in trust? I know, I know, perhaps technically speaking you can’t really hold money “in trust” for yourself, but if we’re divining the intent of a legislature composed of . . . well, shall we say . . . people who are not wordsmiths . . . then isn’t it reasonable to assume, generously, that they at least intended a rational outcome, permitting the contractor to pay itself a normal overhead and profit draw when the contract is on budget? Again, I am not aware of a court opinion discussing this issue.
There is at least one court opinion that seems to support a logical and practical approach. It implies that the contractor defeats a theft and treble damages claim if he can prove that “all moneys which he received from the owner were disbursed to laborers, subcontractors, or materialmen who worked on the owner’s project, OR [emphasis mine] that the funds were otherwise accounted for and were applied to satisfy the owner’s obligations relative to the project.” People v. Erickson, 695 P.2d 804, 805-806 (Colo. App. 1984). This text is pretty vague on the question of what constitutes “otherwise accounted for.” It seems open to the interpretation that payment of overhead and profit is allowable at least at a time when there is no reason to believe that subs will go unpaid, especially if the owner explicitly authorized the draw.
Also, under Section 127(2), money given to the contractor is not money held in trust if the contractor has a “good faith belief that such lien or claim is not valid or if such contractor or subcontractor, in good faith, claims a setoff, to the extent of such setoff.” The contractor is likely to have a more expansive view of his own good faith belief than the subcontractor.
Equitable defenses are available to a CTFS claim. See In Re Regan, 151 P.3d 1281, at 1285 (Colo. 2007). So look hard for estoppel, laches, unclean hands, waiver, etc.
Also, of course the CTFS has no application at all in certain circumstances, such as a project involving a payment or performance bond. It may not apply if the remedy is unavailable at the outset, such as on a project where the owner posted a notice of non-liability on the premises. (The subcontractor can invoke the CTFS even if it lost its lien rights, but to be protected by the CTFS, the subcontractor must at some time have had at least the potential for claiming a lien in order for the CTFS to apply.) The CTFS would not apply if the subcontractor’s contract with the contractor expressly waived the subcontractor’s rights under the CTFS (or perhaps also if the subcontractor waives the right to claim a mechanic’s lien at the outset). See Village Homes of Colorado v. Guaranty Bank, 405 B.R. 479 (May 2009, ABC). The CTFS would not apply if the claimant were for some other reason not eligible to assert a claim for a mechanic’s lien — e.g. if the project is a public one where the Miller Act or Mini-Miller Act replaces the mechanic’s lien remedy.