Stonewood Design v. Infinity Homes: Court Places Substance Over Form Re: Lien Release Bonds

Published by the Section on Construction Law of the Oregon State Bar

    The Washington Court of Appeals recently decided the case of Stonewood Design, Inc. v. Heritage Homes of Wa dba Infinity Homes, et al, 164 Wn. App. 1034 (2011) (published on January 17, 2012). The court's decision (referenced herein as Stonewood v. Infinity) provides clarity to Washington's statute governing release of lien bonds, and clarifies the Court of Appeal's holding in an earlier case. This article discusses Stonewood v. Infinity, and discusses the language of Oregon's release of lien bond statute in comparison to Washington's release of lien bond statute.

    In Stonewood v. Infinity, the general contractor Infinity contracted with Stonewood for Stonewood to install tile in a home. Stonewood performed the work and billed Infinity in an amount slightly over $30,000. Infinity withheld approximately $9,000 from Stonewood, claiming that some of the tiles were chipped and needed to be replaced.

    The parties' attempts to resolve the dispute were unsuccessful. Stonewood filed a construction lien for the contract balance and then sued to foreclose the lien. Stonewood's lawsuit included a claim against Infinity for breach of contract and a claim against Stonewood's contractor's registration bond.

    The defendant homeowners posted a release of lien bond under RCW 60.04.161 and obtained release of the Stonewood lien.

    In the lawsuit, Infinity contested Stonewood's claim for foreclosure on the release of lien bond, and asserted a counterclaim against Stonewood for Infinity's alleged costs to repair the tile work.

    At trial, the jury awarded damages to Stonewood for the approximate $9,000 sum withheld by Infinity, and rejected Infinity's claim for offset.

    In post-trial proceedings, Infinity argued that Stonewood's lien was invalid. The court rejected that argument and held that Stonewood had "proved the facts necessary to execute upon the release of lien bond." The court entered judgment in favor of Stonewood for the amount of the jury verdict.

    The court's judgment provided in part that Stonewood was "entitled to execute" on the release of lien bond, as well as on Infinity's contractor's registration bond because Stonewood "prevailed in its breach of contract action against Infinity."

    Infinity's primary argument on appeal was that Stonewood had not obtained a "judgment upon the lien" under the language of RCW 60.04.161 and therefore the trial court had erred in allowing Stonewood to execute on the release of lien bond.

    The relevant language of RCW 60.04.161 provides that "[T]he condition of the bond shall be to guarantee payment of any judgment upon the lien in favor of the lien claimant entered in any action to recover the amount claimed in a claim of lien, or on the claim asserted in the claim of lien." (Emphasis added).

    On appeal, Infinity placed much reliance on the Court of Appeals' decision in DBM Consulting Engineers, Inc. v. United States Fidelity & Guaranty Co., 142 Wn. App. 35 (2007), in which the court held that a release of lien bond guaranteed payment only where there is a "judgment upon the lien" not merely a judgment on the underlying claim.

    The court found that the DBM case was distinguishable. In DBM, the lien claimant had obtained a judgment against the owner for breach of contract, but had not pursued its claim for foreclosure of the construction lien that it had asserted. Instead, the lien claimant filed a second lawsuit naming the bonding company and seeking payment from the release of lien bond that had been posted. The parties had not litigated the validity of the construction lien.

    Infinity argued on appeal that since the trial court's order did not specifically state that Stonewood's construction lien was foreclosed, the order did not obligate the surety to pay the lien under the release of lien bond. The court held that Infinity's argument "elevates form over substance", and stated further that "DBM does not impose vocabulary requirements for judgments." The court noted that what is required under the DBM case is that the construction lien must be litigated before execution on a release of lien bond is appropriate. The court reasoned that litigating the validity of the underlying lien preserves the link between the lien and the release of lien bond.

    In affirming the trial court, the Court of Appeals held that because Stonewood had established the validity and enforceability of its lien, the trial court was correct in authorizing execution on the release of lien bond.

    Oregon's statute regarding release of lien bonds, ORS 87.076 (1), requires that a release of bond shall provide for payment of the claim and all costs and attorney fees that are awarded against the land and improvement "on account of the lien." Although there are no reported appellate cases in Oregon construing this language, it is reasonable to conclude that such language requires, as does Washington's statute, that the validity and enforceability of the construction lien be established in order for there to be execution on the release of lien bond.

    It is also reasonable to conclude that an Oregon appellate court would look to the substance of the trial court's decision in a construction lien case where other claims have been adjudicated, and as with the Stonewood v. Infinity court, not "impose vocabulary requirements for judgments." However, in light of the lack of appellate court precedent in Oregon on this issue, an Oregon lien claimant should include language in the judgment and decree of foreclosure that specifies in substance that the lien was found to be valid and enforceable, and that the judgment and decree is on account of the lien.

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