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Protecting Contractor’s Lien Rights: A Multi-Disciplinary Approach

A client subcontractor called us about a project that they sensed was in trouble. They hadn’t been paid in a few draws and the general contractor, who was affiliated with the developer, was asking it to continue working while “financing was put in order.” We advised the client to be extremely wary. We recognized that the lien protection that the contractors had was their best (but not a perfect) weapon. We advised the client to condition continued work on a payment of certain invoices. We further warned the client against using the standard lien waiver forms made available by title companies. We recognized that those forms often waived lien rights that the contractors don’t realize they are waiving. This specifically involves waiving lien rights to retainage amounts. The client contractor conditioned continued work upon the use of the correct lien waiver form, which waived rights only to amounts for which the contractor had been paid.

We specifically referenced a draconian Wisconsin Statute in the lien waiver in order to insure we were not waiving rights we shouldn’t. Our client was paid and continued working.

Not surprisingly, the job ultimately shut down and was left half-completed for several years. The contractor developer began a state court receivership (a quasi-bankruptcy procedure) and embarked upon a no holds barred discovery fight with the lender. We recognized that the costs of this fight would severely compromise the client. Working with the client, we arranged for a joint representation agreement among several similarly-situated subcontractors. This helped each of the subs decrease their legal costs. We negotiated conflict waivers because all contractors were in slightly different positions based on the condition of the lien waivers they signed.

While state and national banks and savings and loans have a super priority under Wisconsin Statutes to place them ahead of contractor’s liens in priority, we noticed that the lender here was non-traditional. Working with our Financial Services Industry Team, we were able to develop an argument that the lender was not entitled to that priority. While other less reliable and more discovery-heavy theories were championed by others, we opted out of that activity. The circuit court adopted our rationale, placing the subs in first position. We then agreed to a special master proceeding to determine lien waiver and perfection issues. The clients in our subcontractor group had varying success based upon the strength of their lien waivers. The client who first came to us and obtained our advice on the lien waiver at the front end received the best recovery because they had properly perfected and not waived their lien rights. Others received less and some subcontractors received nothing.

The multi-disciplinary approach allowed us to obtain a six-figure recovery for a subcontractor in a situation where it otherwise would have received nothing. The attorneys’ fees were managed, minimized and a fraction of the amount recovered.