This blog ‘Overzealous and Improper Liens in TN,’ is part six in our ten-part series on Tennessee lien laws where we will give the basics of what the lien law structure looks like in Tennessee, understand it a little bit, understand some of the pitfalls, and some of the things that you need to be aware of.
Part 1: Lien Law Basics – Who, What, and How Much?
Part 2: Preserving a Lien – Timing and Filing Requirements in TN
Part 3: Preserving a Remote Contractor’s Lien in TN – The Notice of Nonpayment Requirement
Part 4: Filing Suit to Perfect the Lien in TN
Part 5: Bonding a Lien in TN
Part 6: Overzealous and Improper Liens in TN
Part 7: Licensing Considerations – No License, No Lien in TN
Part 8: Can You Lien for Tenant Work in TN?
Part 9: What about Priority? - The Visible Commencement Standard in TN
Part 10: Other Rights – The TN Prompt Payment Act – Reasonable Assurances and Stopping Work
Part 11: Other Rights – The TN Prompt Payment Act – Notice and Remedies
Recap: Tennessee Lien Law Basics
Now we will start with some Tennessee lien law basics.
a. Who has lien rights?
Prime contractors and remote contractors have lien rights in Tennessee.
b. For what work are lien rights valid?
Lien rights are on work for actual improvements made on real estate.
c. For how much are lien rights valid?
Lien rights secure the contract price which can include extras.
d. Steps for prime contractors and remote contractors to follow
Prime contractors have different requirements than remote contractors in Tennessee, but that is our two buckets. Prime contractors have 90 days after improvement for priority. They have one year to perfect, or one year after the completion or the abandonment if you are dealing with priority.
Remote contractors have the extra step to file a Notice of Nonpayment. It is a rolling requirement that gets a little tricky along the way. Their requirements are a little bit different depending on timing.
Common Situations of Improper Liens
Now moving forward, the question is that when you are liening a property, what are you concerned about in terms of liability for an improper lien. Below are some situations of improper liens.
a. Common Examples
Here are three common examples:
i. Liening without Notice of Nonpayment (or limited Notice of Nonpayment)
This is a very common situation with remote contractor liens. This is a situation where either the remote contractor did not provide a Notice of Nonpayment or provided a Notice of Nonpayment for a small portion of their lien but goes ahead and liens the property for the full amount of their claim.
There is some case law in Tennessee that says the Notice of Nonpayment is fatal, which makes it an improper lien in that situation.
ii. Liening multiple lots/properties
There is also a situation with multiple lots. This gets a little confusing and is usually seen on residential development projects. It is also seen on projects where there are nearby, but not adjacent projects that are being constructed together.
iii. Liening without improvement or delivery
The other one that is seen is situations, material, and suppliers that have not actually delivered material or held them in a warehouse or held them in some laydown yard but going ahead and liening a property or a situation where you have designers who are wanting to lien for their design services when a project does not actually get constructed.
The issues that you are going to see here are in the form of a checklist:
i. Notice to Remove Lien
In Tennessee there is sort of a 30-day cure period but if you do not cute within 30 days. You can be responsible for an improper lien and with respect to improper lien.
ii. Exaggerated liens
There is an exaggerated lien statute which says that if you intentionally exaggerate, you are going to be on the hook.
iii. Slandering title
There is also slander of title.
iv. Motion of dismiss
The fourth one is not direct but it is a motion to dismiss, so if you actually go to the process of recording your mechanic's lien, filing suit to perfect. If your lawsuit gets dismissed, you can also be responsible for attorney's fees and improper lien claims.
Multiple Lots and Apportionment
This is a situation where you have multiple lots, and it is a two-part text. What this does is say that you are allowed.
As you can see in point (a), when you have two lots that are adjacent or continuous and you are doing one project, this is a typical situation where someone buys multiple parcels of property and puts a big project on multiple parcels rather than consolidating the parcels. What the lien law says is that you can put one lien down that covers all of those parcels.
Now, there is a second situation which is when it is an improvement or it is multiple improvements that are not to be used as a single improvement, or in a case where the lots do not meet the contingent or adjacent parcels test. And what the lien law says is “shall, in claiming a lien, apportion,” which means the lienor shall apportion the lien. There is not a lot on this; there are a couple of older cases under some of the outdated lien law, and one under some of the newer lien law.
The one under the newer lien law goes so far as to say that in a situation where you have town homes, the lien ore was required to state exactly how much their lien was for each town home or the smallest division of property. So, if you have a million dollar lien and you know you put it on ten townhomes, you have to have some way to apportion it.
This means you cannot go in and put a million dollar lien on one of the townhomes or you cannot go in and put a million dollar lien in all ten of the town homes. Instead, you have to divide that million dollars up and say that $80,000 is here and that $120,000 is in another place, or that $100,000 is on all of them. You have to take some reasonable approach to that apportionment. That is an issue that trips people up and gets them an improper and exaggerated lien.
The other issue that is commonly seen in the same improper lien situation is one in which material has not actually been delivered. This is from the material supplier’s side and there is only one exception to when you can lien without having delivered the materials, and that is the text in (4)(A)(iii)
That is for specifically fabricated materials and even that has some limitation in the sense of at some point if you have not delivered, there are arguments to be made that you have repossessed the material and thus do not have any lien rights. So if you have not delivered, be weary of that.
The other part of that is for designers, architects, and engineers, who may have lien rights. The common example you see here is where you get a lien or a threat of a lien from a designer when a project runs out of funding and goes south before it is actually constructed.
For those lienors being engineers or architects, they can only lien to the extent that the improvement is actually made.
So this is another section where you commonly see the improper and exaggerated liens.
Forfeited, Expired, Satisfied,.. Liens
So what is the liability if you record an improper or exaggerated lien? First, we are going to talk in a couple steps here and take you back a little bit. In Tennessee lien law, there are a couple of steps.
The first step is that you have to record the notice in the public registrar’s office. Then you have to record an attachment and then a lawsuit to perfect that attachment. Each of those steps requires certification on the amount. So, when you are looking at these first examples each step is going to potentially put you in a situation where you may have liability if you are a lienor someone who is pursuing an improper lien.
The first of which is a section of the statute directly in the lien law. This text is below:
We have ‘forfeiting,’ ‘expired,’ or ‘satisfied,’ liens. There are some very easy examples of these. There are arguments as to whether for instance, about the Notice of Nonpayment. Arguably if the lienor has not satisfied the Notice of Nonpayment requirements along the way. They have forfeited their lien rights so this section of the statute may be applicable to them.
There is also the situation where you have things like ‘deemed abandoned,’ which requires the liens to be filed within 90 days of the deemed abandonment. If that does not happen, you have an expired lead.
Those two can be interpreted pretty wide to give it some real teeth. The satisfied portion is pretty obvious in the sense that if someone pays you, you need to release your lien. The other part of it is if you go ahead and proceed with a lawsuit and ultimately fail, you need to release your lien.
So, how does this work and what is your liability? The answer is this: the statute is sort of friendly in the sense that it gives the lien claimant 30 days to release their lien without liability. It is the situation when someone decides not to do that that the lienor – if they have not forfeited, expired, satisfied or adjudged lien – is now exposed to all damages from the party sending the notice. And that also includes attorney’s fees.
Notice that this is not something that says ‘one with a disputed amount.’ this is from the standpoint that these are more your procedural problems with liens and not necessarily the amount of the lien. That is what this statute deals with.
The next statute deals with the amount itself.
The liability in this section is essentially the same as it was for the procedural statute that was discussed above. This is not like improperly liening for $120,000 when the lien upon recounting should have been $105,000. This is for someone who goes in knowing willfully and grossly exaggerating the amount. So, this is a situation where someone liens for a change order that has no real legitimate basis. That type of issue really exposes someone to this exaggerated lien.
That said, from a lienor standpoint, be wary that for someone to recover under this there has to be some really bad conduct that the court is not going to like, that they are going to agree is willful and grossly exaggerated. In general, that is a very high standard for a court to look at.
Slander/Libel of Title
The other side of this is outside of the statute, you have to worry about some old common law which would be the slander or libel of title.
Above is one of the seminal cases on what you have to do to prove before you can recover against a lienor and you will see that it is pretty similar to what is now statutory in the lien sections above. You are going to need malicious conduct, reckless disregard of the property owner’s rights, or reckless disregard as to whether statements are false. The statements would be the recorded lien in the chain of title or the attachment to the property.
The law there is pretty similar. You will also see a section above from one of the same cases that says, “A good faith but erroneous, claim of title does not constitute a cause of action for libel of title."
Remember the situation above where you file a $120,000 lien but it should have been $105,000 upon recount. That is not going to expose you or should not expose you to a slander or libel of title absent other facts. So there is some room for someone who is going to record a lien to do so as long as they are doing it in good faith.
But there is really a line that can be crossed, first, if you do not comply with the procedural requirements of the statute, and two, if you get too aggressive and behave in a way that could be considered malicious or reckless disregard. For a court this is kind of that line that you cross to get you in trouble as a lien claimant.
Motion to Dismiss
Now the other side of that, that will be touched upon is the motion to dismiss. This is in Tennessee, and it does not exist in a lot of other states, but this is a situation in which once someone has filed a lawsuit, the lawsuit has to be a verified complaint in order to perfect the lien and the attachment of the property to the case.
What Tennessee statute allows is after filing a complaint, a defendant, and in this case likely an owner, can file what is called a motion to dismiss the complaint. Motions to dismiss are hard to obtain but in the lien context, they are more prevalent because of the verified nature of the lien claim and the statutory requirements being strict.
So in cases where you can get a motion to dismiss granted, the court shall award attorney’s fees to the defendant. There is some leeway in there and there are some exceptions in other parts of the statute, but you have to be aware of that if you decide to move forward filing suit with a lien that has a questionable basis.
Number one is you have the statute and there are two sections of the statute which protect you, you have the section on your gross exaggeration, and you have this motion to dismiss, all of which can expose you to significant attorney’s fees.
Now there are cases out there dismissing lien claims on a motion to dismiss even for the simple fact of not providing a Notice of Nonpayment for a remote contractor.
So that is where we are with improper and exaggerated liens. There is some latitude there to file a lien, and there is typically time to correct it or release it if you have a procedural flawed lien. But if you are going to go ahead and proceed with exaggerated liens or liens that are in a grey area, you may expose yourself to liability including all of the attorney’s fees of the owner.