Did you know that your lien may be voided if it is filed in bad faith or you refuse to execute a release of lien? It’s true. And, if a court finds that you did act in bad faith, it may award attorney fees to the owner. That would be a bad turn of events.
As some of you may know, section 52.157 of the Nebraska Construction Lien Act addresses bad faith claims. It provides:
If in bad faith a claimant records a lien, overstates the amount for which he or she is entitled to a lien, or refuses to execute a release of a lien, the court may:
(a) Declare his or her lien void; and
(b) Award damages to the owner or any other person injured thereby.
Under this section, a court could invalidate a lien and award damages suffered by the owner, which may include attorney fees. While damages might be difficult to prove, I could see an owner claiming that financing was delayed or denied because of the lien and those damages could be significant.
To prove bad faith, one must show that the entity filing the lien knew the lien was baseless or overstated, or filed with reckless disregard to the facts. This is a tough standard for an owner to meet, but not insurmountable. The cases I’ve reviewed discuss whether the lien holder had any basis for the amount of its lien or when the lien holder knew that the lien should have been reduced. Of course, any claim of bad faith could be easily defeated if the lien holder can document the amount of its claim or explain its refusal to reduce the lien.
Ultimately, the best way to protect yourself against claims of bad faith is to have solid evidence for the amount of your lien and work with the owner and/or general contractor should either request a partial lien release in exchange for partial payment.
If you have any questions about your lien policies and procedures, please give me a call.