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October 14, 2010

Nevada Supreme Court Offers Guidance on Motion to Expunge or Reduce Mechanics’ Liens

Mechanics’ liens are NOT an interest in property. They are instead “a ‘taking’ in that the property owner is deprived of a significant property interest, which entitles the property owner to federal and state due process.” That due process is satisfied by the District Court deciding “factual issues on the basis of affidavits and supporting documents,” so long as the “interested parties are given an ‘opportunity to be heard at a meaningful time and in a meaningful manner’” – still, live testimony at “an evidentiary hearing is not mandatory in these situations because of the low rise of an erroneous deprivation” of the lien claimant’s interest in ensuring that there are adequate assets available to collect on any judgment ultimately obtained. The District Court shall weigh the evidence and make a determination of whether a mechanics lien is excessive in amount on a “preponderance of the evidence” basis, and shall NOT apply a summary judgment to the proceeding. So saith the Nevada Supreme Court, in the recent case of J.D. Construction, Inc. v. IBEX Int’l Grp, LLC, 126 Nev.Adv.Op. 36 (Oct. 2010).

In the historical view of Nevada construction practitioners, petitions to reduce or expunge mechanics lien claims under NRS 108.2275 were to be viewed from a summary judgment posture. Though there was little legal support for this concept, the idea that a District Court would weigh evidence on a petition to expunge was not largely accepted; even if the purpose of the petition would ultimately be defeated by that criteria. How can a petition to expunge be used if the Court cannot weigh evidence? The statute becomes superfluous – in order to adjudicate if the lien is excessive, the District Court must evaluate facts. If the District Court can only evaluate facts at trial, this statute seems to allow a trial before the trial, but how can that be? Yet, the refrain from lien claimants facing motions to expunge or reduce – especially to reduce – has been just that: the requirement to try the case before discovery is complete denies the lien claimant due process by denying him the right to full discovery of all issues. In addition, the standard of summary judgment – no genuine issue of material fact in dispute – as a level of proof necessary to reduce a lien was a significant burden. When combined with the mandatory nature of an award of attorneys fees to the victor under NRS 108.2275(6)(c), the use of a petition to expunge or reduce a mechanics lien required serious consideration for an owner to undertake. This conclusion has been wiped clear.

In JD Construction, the mechanics lien claimant was to be paid based on a percentage of completion, but stopped working over a dispute on the percentage completed. The construction project had retained a third party estimator to provide estimated completion percentages. The lien claimant recorded a mechanics lien for the amount it believed it was owed. In response, the project owner filed a lawsuit against the lien claimant seeking, among other things, that the lien be expunged, based in part on revised completion percentages from the estimator. Thereafter, the project owner filed a motion to expunge or reduce the lien under NRS 108.2275, contending that the lien claimant had actually been overpaid based on the percentage of completion, and therefore the lien claim was excessive or frivolous. The lien claim responded by submitting affidavits and other documents to support its lien amount.

At the hearing on the motion, the District Court ordered discovery on the limited issue of the percentage of completion, and directed the parties to depose the estimator’s person most knowledgeable of the issue. The lien claimant, however, chose only to depose the estimator’s field inspector, and based on that testimony submitted an expert report estimating the project to have had a higher percentage of completion than that determined by the estimator. Based on that evidence, the District Court granted the motion to expunge, holding that the lien was not frivolous but was, in fact, excessive. The lien claimant appealed.

The Nevada Supreme Court agreed with the District Court that the lien was excessive. Initially, the Court determined that because the determination of whether a lien is frivolous or excessive requires the determination of material facts, the District Court should make appropriate factual findings at a NRS 108.2275 hearing. Further, in making its ruling that the lien is excessive, the District Court should use a preponderance of the evidence standard. A determination that a lien is frivolous would require a finding that there was no reasonable cause to record the lien. In either case, the district court may take live testimony if necessary to do so. However, the taking of live testimony was not necessary as the provision of affidavits, depositions and other evidence, where both parties are provided a sufficient opportunity to present their cases, was sufficient to meet the due process rights of those parties. At no time, however, did the lien claimant request that live testimony be taken. Whether a District Court’s refusal to have live testimony at a hearing upon the request of the parties was a denial of due process was a question for another case.

Turning to the actual facts of the case, the Court determined that since the lien claimant had the burden of proof to show the adequacy of its lien claim, it failed to meet that burden when it failed to depose and present evidence from the estimator’s person most knowledgeable regarding the level of project completion. Moreover, at the hearing the lien claimant failed to address its subcontractor’s claims and whether its lien included money for the subcontractors as well. As such, the lien claimant did not meet its burden to produce substantial evidence supporting the lien claim amount, and the District Court was correct to find the lien to be excessive by a preponderance of the evidence.

The Court’s holding here destroys the idea of hiding behind a “no genuine issue of material fact” standard to uphold a mechanics lien in the face of a NRS 108.2275 motion. The Court, however, found that there was no clear mandate to make findings of fact based on a reasonable cause standard as part of the finding that a lien is excessive. The without reasonable cause standard was only found in the portions of the statute allowing for a lien to be found as frivolous. No such language attached to the finding that a lien was excessive. In that instance, the Court noted that the statute was ambiguous and nothing in the legislative history supported any particular standard. As a result, the Court was required to look to “reason and public policy” to determine what the evidentiary standard should be for finding a lien to be excessive, and doing so the Court found that it should be by a preponderance of the evidence.

This case should not be seen as raising the bar for any potential lien claimant to keep its mechanics liens viable. If a lien claimant records a mechanics lien it should be prepared to demonstrate that the lien amount it claims is factually correct. A lien claim may always be increased through amendment, if discovery discloses a basis for additional compensation. Of key significance, however, is the Court’s recognition that an owners’ interest in having its property remain free of encumbrances is a significant interest, which is given equal footing with the interest of the lien claimant and the state in securing the contractor’s right to payment through the mechanics lien process. The Court balances these interests in the context of a NRS 108.2275 motion by noting that the findings of the district court that a lien is excessive or frivolous carries little risk of any erroneous deprivation of those contractor and state rights. Since NRS 108.2275(7) reserves to the parties all other rights and remedies, the District Court’s expunging, reducing or upholding a lien has no “law of the case or preclusion effect” on any other court proceeding.

This case seems to recognize a balancing of the mechanics lien law between the lien claimant and the liened owner. Whether this case merely lays out a road map for District Courts in handling NRS 108.2275 petitions, or signals a shift in the Court’s attitude toward project owners remains to be seen.

If you have any questions on the subject of this article or would like more information, you may contact the author or another Snell & Wilmer attorney at 602.382.6000.

Leon F. Mead II

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