Risky and Unconventional: Trying to Apply the Provisions Of Ors 205.450-470 To Challenge A Construction Lien

Curtis A. Welch

503.972.2529

    Consider the following scenario.

    A subcontractor provides labor, materials and equipment for a large multi-use project in Oregon. After the subcontractor has worked on the project for several months, the general contractor falls behind substantially in progress payments owing to the subcontractor. Following a discussion of the amounts that are owed, the general contractor terminates the subcontractor.

    The subcontractor exchanges correspondence with the general contractor over the next several weeks in an effort to get paid. The general contractor ultimately expresses the opinion that the subcontractor performed defective work on the project and that damages allegedly caused by the subcontractor substantially outweigh any monies owed by the general contractor to the subcontractor. The subcontractor mentions to the general contractor that there was little to no indication from either the owner or general contractor during the project that any of subcontractor's work was defective, but the general contractor does not change its stance.

    The subcontractor hires a lien service to record a construction lien against the project. The lien service properly records the lien under ORS 87.035 and properly provides notice of the lien under ORS 87.039.

    Subsequently, the owner serves on the subcontractor an order to appear and show cause why the construction lien should not be stricken under ORS 205.460, as "an invalid claim of encumbrance." The order, obtained ex parte under ORS 205.460 (1), sets a hearing date two weeks from the date of the order. The owner's stated basis for its petition filed with the order to show cause is the allegation that the lien service recorded the lien more than seventy-five days after the subcontractor's last day of work on the project.

    The subcontractor hires counsel to represent it in the proceeding. At the outset of the proceeding, the subcontractor's counsel argues to the judge assigned to hear the matter that the provisions of ORS 205.450 to .470 do not apply to construction liens. The subcontractor points out that the provisions of ORS 205.450 et seq. were enacted in response to claims of encumbrance being recorded against the property of federal, state, or local government employees arising out of the performance or non-performance of their duties. ORS 205.455 in fact provides that no person shall accept for filing any such claim of encumbrance against such government officials or employees. Further, ORS 205.465 provides that a claim of encumbrance against the property of such government officials or employees arising out of the performance or non-performance of their duties is invalid unless an order from a court authorizing the filing accompanies the filing of the claim.

    In addition, the subcontractor argues that its construction lien cannot be an invalid claim of encumbrance and points to the definition in ORS 205.450 (8) stating that a valid claim of encumbrance includes "an encumbrance authorized by statute." The subcontractor emphasizes that its construction lien is authorized by statute, namely ORS 87.010.

    Assume for purposes of this scenario that the court determines that because the definition of "encumbrance" under ORS 205.450 (1), by its literal terms includes a "lien", the provisions of ORS 205.450 to .470 may apply to a construction lien. Assume also in this scenario that the court rules that should it be shown that the lien service did not record the lien within the 75-day limit, the lien may be an encumbrance that is not authorized by statute.

    The owner's attorney proceeds to call four witnesses to testify, each employed by the general contractor, and each claiming (despite job records and other evidence showing the subcontractor's last day of work was the day that the subcontractor had contended) that the subcontractor's last day of work on the project was an earlier date, a date more than 75 days before the date of recording of the lien.

    The general contractor's witnesses however admit on cross-examination that they have limited knowledge of the subcontractor's last day of work. Also, a degree of bias of the general contractor's witnesses in favor of the owner is shown, as it is established that the general contractor and the project owner are owned and controlled by the same individual.

    The subcontractor, in addition to having filed declarations of witnesses, calls four witnesses to testify in court, including two individuals who testified that they, along with their co-workers, were on site working on the day the subcontractor claims was its last day of work. They testify regarding the amount of work they did on the project site on that last day. One of the other witnesses testifies that he travelled to the project site on that last day and observed the workers and observed their equipment on site. The fourth witness testifies regarding the billing records and job records showing the work on that last day.

    After closing arguments on the second day of the proceedings in court, the court rules that the subcontractor's lien was timely filed, thereby rejecting the project owner's attempt to have the lien declared invalid. The court also rules that the subcontractor is to be awarded its reasonable attorney fees under ORS 205.460 (6), to be paid by the project owner. The court enters an order stating that the lien was timely filed, thereby precluding any challenge by the owner on that issue in the subsequent lien foreclosure action. The court also enters a judgment in favor of the subcontractor for its attorney fees and costs.

Discussion

    A project owner's first obstacle in trying to use ORS 205.450 et seq. towards a construction lien is of course trying to convince the court that those statutes apply. The type of encumbrance that those statutes are designed to prevent—an encumbrance filed against a public official's property and arising out of the performance or non-performance of official duties—is not an encumbrance authorized by any statute. In contrast, ORS 87.010 authorizes a construction lien to be filed by those persons who fit within one of the six subsections of that statute.

    The legislature long ago recognized the right of a lien claimant to be paid and to record a lien to secure that right. In contrast, the legislature has never granted any right to someone who is allegedly upset with an action or inaction of a public official to record a lien against that official's property.

    There is one reported appellate court case construing ORS 205.450 et seq.—Vukanovich v. Kine, 251 Or. App. 87, 285 P.3d 733 (2012) rev. den. 353 Or. 203 (2013). At issue in the Vukanovich case was a lis pendens recorded in connection with the plaintiff's suit against an individual named Kine. Plaintiff alleged that Kine had breached an agreement providing that plaintiff and Kine were to invest in a limited liability company to purchase certain real property, a residential subdivision, from Umpqua Bank with each contributing 50% of the funds to purchase the property. The agreement also provided that the parties were to split equally the profits derived from the property.

    Plaintiff alleged that approximately six months after the parties' agreement, Kine formed a limited liability company, Stonecrest Properties LLC ("Stonecrest"), with two others, and that Stonecrest had agreed to purchase from Umpqua Bank the same property that plaintiff and Kine had agreed to purchase through their limited liability company. One of plaintiff's claims in his suit was for specific performance to compel Kine and Stonecrest to convey to plaintiff a 50% interest in Stonecrest, as by the time of suit Stonecrest had acquired the subject real property from Umpqua Bank. Id. at 738.

    Stonecrest petitioned for an order to show cause under ORS 205.450 et seq. to strike the lis pendens, contending that plaintiff only had a speculative claim for a future interest in the property rather than a present interest in the property which was needed to support the basis for the filing of a lis pendens. The trial court agreed with Stonecrest and entered a judgment striking the lis pendens, and the Court of Appeals affirmed. Id. at 739.

    The Vukanovich court noted that because plaintiff lacked an actual interest in the real property, plaintiff could not come within the terms of the lis pendens statute, ORS 93.740, which requires that the subject of the suit be an actual interest in real property. Vukanovich, 251 Or. App. at 738-39.

    The holding of Vukanovich cannot not be extended to the case of a construction lien claimant whose lien arises under ORS 87.010. If a lien claimant fits within one of the six categories under ORS 87.010, the lien is authorized. The lien claimant's interest in the liened property is an actual interest in real property, not a speculative future interest as in the Vukanovich case.

    Further, the Vukanovich court's holding focused on the substantive requirements of the underlying statute, and did not address the issue of whether the alleged failure to meet procedural requirements of the underlying statute meant that the encumbrance was not authorized by statute. Thus, the Vukanovich decision, aside from being irrelevant to a construction lien case because the underlying statute, ORS 87.010, authorizes the lien, would not be relevant to a case where procedure was at issue, where for example, the owner claimed a construction lien claimant did not timely file the lien.

Other issues

    1. Burden of persuasion and production

    If a court were to ever permit ORS 205.450 et seq to be applied to a construction lien, one of the practical, and important, issues would be the issue of which party has the burden of persuasion and production. There is no reference in ORS 205.460 as to whether the property owner must establish that the encumbrance is invalid, or whether the holder of encumbrance must establish that the encumbrance is valid. ORS 40.105 (Evidence Rule 305) provides some guidance. That rule provides: "[A] party has the burden of persuasion as to each fact the existence or nonexistence of which the law declares essential to the claim for relief or defense the party is asserting." (As to the burden of production, see ORS 40.115 (2) which places the initial burden of production on the party that has the burden of persuasion).

    In relation to a proceeding under ORS 205.450 et seq. the issue is the alleged invalidity of the encumbrance. The owner is the proponent of the proposition that the encumbrance is invalid. In fact, one of the averments that is required in the owner's affidavit required under ORS 205.460 is the averment that "[T]he encumbrance is not authorized by statute."

    Thus, in a proceeding under ORS 205.460 et seq., a court would in all likelihood place the burden of persuasion and production on the property owner.

    As to the standard of persuasion and proof, there is no indication in ORS 205.450 et. seq that the standard is anything other than a preponderance of evidence standard.

    2. Live testimony or affidavits.

    The statutory form of order prescribed by ORS 205.460, if granted, requires the holder of the encumbrance to appear. However, the statute is silent as to whether testimony of those other than the holder of the encumbrance may be through affidavit. As a practical matter, if the judge is going to allow live testimony and the property owner is going to present live testimony, it is advisable for the holder of the lien or encumbrance to also present live testimony. Depending on the witness of course, live testimony is typically more persuasive than testimony through affidavit.

    In the scenario set forth at the outset of this article, the subcontractor both filed declarations of witnesses and called witnesses to testify in court.

    3. Issue Preclusion

    Another concern for the property owner is the preclusive effect in a lien foreclosure action of rulings made by the judge in the ORS 205.460 proceeding. In the above scenario, the owner would be precluded from litigating the lien timeliness issue in the foreclosure action since that issue had been litigated. Broader issues may be decided in the ORS 205.460 proceeding, and be given preclusive effect in the lien foreclosure action.

    If the judge takes the position that a question of fact exists as to an issue of the validity of the lien or the applicability of the statute, the judge would not grant the owner the relief requested, and there would not be a determination of an issue with preclusive effect. However, under the language of ORS 205.460 (6), the judge is to actually determine if the encumbrance is valid or if it is invalid. Accordingly, if the proceeding has made it that far in the process without the judge dismissing the owner's petition, there will in all likelihood be a determination made that will have preclusive effect.

Conclusion

    There are substantial risks to an owner in trying to apply ORS 205.450 et. seq to a construction lien, with an uncertain outcome. The most uncertain outcomes pertain to whether a judge will apply the provisions of ORS 205.450 et. seq to a construction lien, and the outcome of an owner's argument that a lien created and authorized by ORS 87.010 is not authorized by statute. Further, if the property owner fails in his or her attempt, they will be assessed attorney fees and there will be a determination made in the proceeding that will have a preclusive effect in the lien foreclosure action.

    The property owner who believes they have a basis to contest a lien is better served to utilize ORS 87.076 for bonding around a lien.

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