Wrongful Liens in Community Associations: Lessons Learned and New Considerations. John D. Richards Richards Law Robert S. Rosing Wrona DuBois, PLLC

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1 Wrongful Liens in Community Associations: Lessons Learned and New Considerations John D. Richards Richards Law Robert S. Rosing Wrona DuBois, PLLC

2 A Wrongful Lien Story How It Begins The Ranches at Eagle Mountain - A Sad Tale. Developer s excitement with a new concept. Lots of Investors Tens of Millions in Land. First large scale master planned community in Utah (1998 earlier). Visits other out-of-state HOAs. Envisions thousands of homes (units/lots).

3 City Planning Contacts City Council (township at the time). Prepares and signs development agreement. Master Association would do A, B, C Unique in this case: the Master HOA owned no common area had a maintenance agreement with the town of Eagle Mountain for the HOA to fulfill. The plan was in place and the plats were recorded. The Master Developer was ready to sell off lots/parcels.

4 Selling Lots/Parcels Hundreds of parcels were sold. It was represented to the Builder/Buyers that there was a Master HOA Concept. A drafted and unrecorded copy of the CC&Rs was circulated. Knowledge of Master HOA was common to the parcel buyers (and ultimate home buyers). The Master Developer had promised the city certain improvements such as park areas. So, what does the Master Developer need?

5 Help MONEY!

6 Notices Recorded The Master Developer recorded Notice of Existence of HOA after it had sold properties. There was a notice that reminded buyers of assessment obligations. Remember these buyers are still builder/buyers. What is missing? What has gone wrong at this point?

7 Master Plan Commences Sub-HOAs were created. They, to builders, are paying assessments. The Master HOA/Board organized and operated. Lots start to sell to homebuyers. Community starts to grow

8 CC&Rs 2004 CC&Rs for Master HOA were recorded. At the time of recording, the Master Developer owned no property. HOA Board President signed. Recorded on advice of counsel. Problem? What? John to explain actual history.

9 Fast Forward Over 10 Years Later A homeowner in a sub-association questions the 2004 CC&Rs. The 2004 CC&Rs had been amended over time via a delegate system. 3 or 4 other Notices of Obligation or Notices of HOA had been recorded on all properties by this time. Question: What problem was exposed? How grave of a sin? It was argued that the CC&Rs that were recorded were done so to give effect to purchaser s expectations (when homeowners purchased, CC&Rs had been recorded). Had they been recorded with proper authority?

10 A Second Wrongful Lien Story Represent Association. Association has unpaid Assessments. You file a lien and send a demand letter. The Association s HOA Registration is not up to date. You receive a demand under the Wrongful Lien Act.

11 Association Liens All condominiums and homeowners have associations by statute. 57-8a-302 HOAs Both of these statutes now stated, Except as provided in Also may have a contractual lien by virtue of the CC&Rs but no one signs the CC&Rs.

12 57-8a-105. Registration with Department of Commerce. a) During any period of noncompliance with the registration requirement described in Subsection (2) or the requirement for an updated registration described in Subsection (4): (i) a lien may not arise under Section 57-8a-301; and (ii) an association may not enforce an existing lien that arose under Section 57-8a

13 Repairing Non-Compliance Except as described in Subsection (5)(f), beginning on the date an association ends a period of noncompliance: (i) a lien may arise under Section 57-8a-301 for any event that: (A) occurred during the period of noncompliance; and (B) would have given rise to a lien under Section 57-8a-301 had the association been in compliance with the registration requirements described in this section; and (ii) an association may enforce a lien described in Subsection (5)(e) or a lien that existed before the period of noncompliance. What about liens filed during period of Non-Compliance?

14 Civil Liability for Wrongful Liens If the person in violation of Subsection (1) refuses to release or correct the wrongful lien within 10 days from the date of written request from a record interest holder of the real property delivered personally or mailed to the last-known address of the lien claimant, the person is liable to that record interest holder for $3,000 or for treble actual damages, whichever is greater, and for reasonable attorney fees and costs.

15 Potential Liability Even if Released A person is liable to the record owner of real property for $10,000 or for treble actual damages, whichever is greater, and for reasonable attorney fees and costs, who records or causes to be recorded a wrongful lien in the office of the county recorder against the real property, knowing or having reason to know that the document: (a) is a wrongful lien; (b) is groundless; or (c) contains a material misstatement or false claim.

16 HOA Registry and Wrongful Liens Statute says lien may not arise. Association should be aware of its own registration. Fix-It provision has gap for lien filed during period of noncompliance. Is Lien wrongful when filed?

17 Hutter v. Dig It, Inc., 2009 UT 69 Dig-It filed a mechanic s lien against Hutter, which was found to be unenforceable because Dig-It did not file a preliminary notice. Utah Code 38-9a-101: The question was whether an unenforceable mechanic s lien is a wrongful lien under the Utah Wrongful Lien Injunction Act. The phrase not expressly authorized by statute in the Wrongful Lien Act does not include statutorily created liens that ultimately prove unenforceable.

18 Bay Harbor Farm v. Sumsion, 2014 UT App 133 Attorney s Lien. Attorney hired for multiple matters, including defense of worker s comp claim for injuries sustained on the farm. Attorney wasn t paid liened the farm. Bay Harbor said work wasn t related to the farm, so lien was wrongful. Attorney shall have lien on property that is the subject of or connected with work performed for the client (2).

19 Bay Harbor Farm v. Sumsion, 2014 UT App 133 The attorney s lien, which is expressly authorized by statute and therefore not wrongful. This is true even if it ultimately proves unenforceable. However, Court states that you cannot simply state that the lien was authorized by statute. Court may consider whether lien claimant has a good-faith basis for claiming a statutory lien. Must have a plausible basis.

20 Total Restoration, Inc. v. Merritt, 2014 UT App 258 Following a flood in their home, the Merritts hired Total Restoration to remove water damaged items and dry the premises. Total Restoration later filed a mechanic s lien against the Merritt property after the Merritt s failed to pay their bill. Utah Code Ann states that a property is lienable if the mechanic did work to improve, repair, or increase the value of the property. Total Restoration did not perform extensive repairs to the home. They only removed water-damage material, but did not repair the flood damage.

21 Total Restoration, Inc. v. Merritt, 2014 UT App 258 The court held that a lien claimant cannot escape the reach of the Wrongful Lien Act simply by claiming that their lien is expressly authorized by statute. They instead need to prove that they have a good-faith basis for claiming a statutory lien.

22 Practical Advice Legal construction may be as important as physical construction New emphasis when telling Developers to not rush through Some errors may not be fixable