February 2, 2017

Just who do you have to sue to get paid when foreclosing against a lien release bond?

Guthrie

Division III of the Washington Court of Appeals recently clarified a significant gray area in the construction lien statute in Inland Empire Dry Wall Supply Co. v. Western Surety Co. Specifically, the court weighed in on who a lien claimant must sue in a foreclosure action against a surety who provided a lien release bond.

In Inland Empire Dry Wall Supply, Inland entered into a contract with Eastern Washington Drywall & Paint to supply certain drywall materials for a construction project. Eastern was a subcontractor to Fowler General Construction.

Inland supplied $124,653 in drywall materials to Eastern. Fowler paid Eastern in full for these materials, but Eastern failed to pass the funds downstream to Inland. As a result, Inland filed a lien against the project. To free up the underlying property from Inland's lien, Fowler obtained a release of lien bond from Western Surety Co.

Inland subsequently filed a lien foreclosure lawsuit in Spokane County Superior Court.

Inland only named Western Surety Co. as a defendant in the lawsuit.

Western filed a summary judgment motion seeking dismissal of Inland's lawsuit claiming Inland failed to name a necessary and indispensable party in the lawsuit — Fowler, the bond principal. As a result of this failure, Western argued that Inland had failed to perfect its right to foreclose the lien against the lien release bond within the eight-month period allotted by the construction lien statute.

The trial court granted Western's motion and dismissed Inland's lien claim. Inland appealed the trial court's decision to Division III of the Washington Court of Appeals.

On appeal, the court wrestled with the issue of who a lien claimant must sue in a foreclosure action against a surety that issued a lien release bond. Acknowledging that the statutory procedure for obtaining relief against a lien release bond is unclear and a source of considerable confusion in Washington, the court pointed to Division II of the Washington Court of Appeals' decision in CalPortland Co. v. LevelOne Concrete LLC (2014) as an important judicial attempt to provide guidance to lien claimants on these issues.

The court examined the reasoning of the CalPortland decision and ultimately agreed with the CalPortland court that a lien claimant does not need to sue the owner of the real property in a foreclosure action against a lien release bond. However, the court emphasized that the CalPortland decision did not address the narrow issue presented by Inland's appeal — whether Inland was required to name both the surety (Western) and the bond principal (Fowler).

To resolve this narrow legal issue, the court scrutinized the plain language of the construction lien statute in an effort to understand the intent of the legislature. Ultimately, the court emphasized that “the omission of any reference to the bond principal is significant and indicates the legislature's intent that a bond principal need not be included.”

The court stressed that this interpretation makes sense because it is consistent with black-letter surety law which does not require a claimant to sue both the surety and bond principal to recover on a bond claim.

Thus, based on the plain language of the construction lien statute and basic principles of surety law, the court ruled that lien claimants are not required to name the property owner or the bond principal in a lien foreclosure lawsuit when a release of lien bond has been furnished. The only necessary party is the surety that issued the lien release bond.

Notably, the Inland decision was not unanimous. Judge Fearing dissented for a number of reasons, but his primary criticism of the majority opinion in Inland was that it disregards the connection between the lien release bond and the original construction lien and violates the principle that courts are to find the meaning of a statute by making sure any interpretation of it makes sense when read together with related statutes.

Conceding that the “statutes are not models of clarity,” Judge Fearing argued that the court cannot look at the lien release bond section of the statute in isolation. Rather, the dissent reasoned that the other sections of the statute that lay out the procedures for foreclosure of a construction lien against the underlying real property must still apply in the bond context.

Employing this holistic approach to interpreting the statute, the dissent connected the statutory dots and concluded that since the owner of the real property must be sued in a traditional lien foreclosure action, the “owner” of the bond must be sued in a foreclosure action against a lien release bond.

Unfortunately, the “owner” of the lien release bond is not defined in the construction lien statute.

To determine the identity of the “owner” of the lien release bond, the dissent pointed to the CalPortland decision and several New York and Virginia decisions. Judge Fearing highlighted key portions of the CalPortland and the other states' decisions that arguably stand for the proposition that the bond principal (real property owner, general contractor or other party that purchased the lien release bond) is the “owner” of the lien release bond because the bond principal paid for and has an interest in the bond.

Thus, the dissent concluded that the proper interpretation of the construction lien statute requires a lien claimant to sue both the surety and the bond principal in a foreclosure action against a lien release bond.

While the dissent's analysis is somewhat complicated and definitely subject to debate, the end result makes some practical sense. As Judge Fearing pointed out, including the bond principal in the foreclosure suit is more efficient and avoids potentially duplicitous litigation because the bond principal is often in the best position to defend against the underlying breach of contract claim and validity of the lien.

As a practical matter, while the Inland decision provides important guidance to lien claimants seeking to foreclose against a lien release bond, prudent contractors should recognize that neither the Inland nor the CalPortland decisions are binding law in all Washington counties.

Further, Judge Fearing's lengthy and well-reasoned dissenting opinion foreshadows how reasonable legal minds may continue to disagree on how to interpret and apply the lien release bond provisions in the construction lien statue.

Absent a decision by the Washington Supreme Court or legislative action, significant uncertainty will remain regarding the procedures for foreclosure against a surety issuing a lien release bond. In light of this lingering uncertainty and the significant adverse consequences for failing to comply with the lien statute, contractors should consult with an experienced construction lawyer when pursuing a lien foreclosure lawsuit whether or not a lien release bond has been filed.

Brian Guthrie is a lawyer in Ashbaugh Beal's Construction Law Group in Seattle.

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