October 2020

The Nevada Court of Appeals recently clarified the effect that a surety bond has on a validly recorded mechanic’s lien.  In Ascent Construction, Inc. v. Sonoma Springs Ltd. P’ship, 460 P.3d 481 (Nev. 2020), the Appellate Court found that NRS 108.2275 allows a district court to reduce the amount of a lien upon motion, even if the moving party has recorded a surety bond on the property in response to the lien.  Ultimately, the Appellate Court found that a surety bond does not wipe out a mechanic’s lien, rather, “some of the lienholder’s rights and duties [are] transferred to another entity through the bond.”  The lien may still be challenged by the holder of the surety bond, and the lienholder may take legal action based on the lien.

 

            Background

 

In connection with a dispute arising from a June 2015 construction contract for work performed, Ascent recorded an amended notice of lien in the amount of $634,618.55 against a property owned by Sonoma Springs Limited Partnership.  Ascent alleged that Sonoma had paid a substantial amount of the $4.5 million contract price, but it failed to tender full payment for additional work due to “additional or changed work, materials and equipment.”  In response to the notice of lien, Sonoma took two steps:

 

(1) Sonoma filed an application to have the lien expunged or, in the alternative, reduced pursuant to NRS 108.2275[1], claiming that Ascent’s lien was frivolous or excessive.

(2) Sonoma obtained a surety bond under NRS 108.2415[2], which released the lien from the property and transferred it to the bond.

 

            After a hearing was held on the Sonoma’s Motion, the district court concluded that Ascent’s lien was, in fact, excessive because it included additional fees for work that was already a part of the scope of their original contract with Sonoma and included charges that had been reduced by prior change orders.  As a result, Ascent’s lien was reduced to $231,850.86.

 

            Appeal

 

            Ascent appealed the decision by the district court claiming that the district court lacked authority to reduce its lien under NRS 108.2275 after Sonoma recorded a surety bond.[3]  Ascent contended that its lien could not be reduced after a surety bond for the full amount of the lien had been recorded.  Ascent’s position was that the surety bond released the lien from the property, and therefore, Sonoma could no longer utilize NRS 108.2275 to have the lien removed or reduced because the statute only applied to liens on real property.  Essentially, Ascent argued that the surety bond wiped out the lien on the property, and as such, could not be expunged. Ascent also opined that the surety bond for the full amount of the lien was an acknowledgment that the amount of the lien was correct.

 

In response the Appellate Court pointed out that after a hearing on a motion to expunge or reduce a lien, the district court must make one of three determinations: “(1) that the notice of lien is frivolous and made without reasonable cause, (2) that the lien amount is excessive, or (3) that the notice of lien is not frivolous or excessive and made with reasonable cause.’[4]  If the district court determines that the lien is frivolous and made without reasonable cause, it must make an order releasing the lien.  NRS 108.2275(6)(a).  If the district court finds that the lien is excessive, it has discretion to reduce the notice of lien to an appropriate amount.  NRS 108.2275(6)(b).  Any proceedings carried out under the statute ‘do not affect any other rights and remedies otherwise available to the parties.’ NRS 108.2275(7).  Alternatively, ‘[u]nder NRS 108.2413, a lien claimant’s lien rights or notice of lien may be released upon the posting of a surety bond in the manner provided in NRS 108.2415 to 108.2425, inclusive.’[5]” Ascent Constr., 2020 Nev. App. Unpub. LEXIS 236, *3, 460 P.3d 481.

 

Focusing on NRS 108.2275(7), the Appellate Court found that NRS 108.2415 and 108.2275 should be read harmoniously, and the recording of a surety bond could not exclude a party from simultaneously moving to have the lien expunged.  The remedies available in both statutes could be exercised at the same time.  The Court acknowledged that a lien must initially encumber real property in order for a property owner to move for its exoneration or reduction, but the act of obtaining a surety bond does not wipe the lien totally from existence. 

 

Rather, the lien still exists but some of the lienholder’s rights and duties have now been transferred to another entity through the bond.  Moreover, because the surety bond amount is determined by the lien amount, a property owner obligated to pay the bond fees is not barred from further challenging the lien amount simply because it sought to bond the property first. To say that a subsequent surety bond precludes any inquiry into the validity of a lien would mean that the lien was not just released, but also ceases to exist, and we decline to follow that construction.  NRS 108.2415 merely releases the lien from the real property and converts the lien holder’s interest in the real property into an interest in the surety bond. 

 

Ascent Constr., 2020 Nev. App. Unpub. LEXIS 236, *6, 460 P.3d 481. 

 

Therefore, the district court would still be permitted to reduce or release a lien that is attached to a surety bond.

 

            Takeaways for Lienholders

 

            The decision in Ascent Constr., provides clarity for a lienholder as to how a lien should be treated after a surety bond has been recorded.  If a lienholder records a valid lien on property pursuant to NRS 108 and a property owner or higher-tiered contractor records a proper surety bond, the lien attaches to that bond.  However, that does not extinguish the lien from the property, it simply bars the lienholder from foreclosing on the property as part of a legal action to collect any amount the lienholder is owed.  The purpose of the bond is to remove an owner’s risk of losing their property in a foreclosure action.  The lien itself can still be challenged by the owner pursuant to NRS 105.2275 and it can be used by the lienholder to maintain a lawsuit for payment.  Importantly, if a surety bond has been recorded to cover a lien, the lienholder has no obligation to release the lien and should not release the lien from the property until after they have been paid in full.

 

            While Ascent Constr. did not reach the Nevada Supreme Court, its reasoning is certainly persuasive and should prove useful for any owner who has recorded a surety bond but still finds it necessary to challenge the lien covered by the bond.  Likewise, the lienholder who finds themselves in a dispute with a property owner who has recorded a surety bond can confidently maintain their lien recorded against the property until the lien has been satisfied.

[1] NRS 108.2275(1): “The debtor of the lien claimant or a party in interest in the property subject to the notice of lien who believes the notice of lien is frivolous and was made without reasonable cause, or that the amount of the notice of lien is excessive, may apply by motion to the district court for the county where the property or some part thereof is located for an order directing the lien claimant to appear before the court to show cause why the relief requested should not be granted.”

[2] NRS 108.2415(1): “To obtain the release of a lien for which a notice of lien has been recorded against the property, the principal and a surety must execute a surety bond in an amount equal to 1.5 times the lienable amount in the notice of lien.”

[3] Ascent argued 5 points on appeal: “(1) the district court lacked authority to reduce its lien under NRS 108.2275 after Sonoma filed a surety bond; (2) the district court erred by finding that the Agreement’s mediation provisions barred Ascent from challenging the decision to deny additional fees; (3) the district erred by improperly interpreting the Agreement’s scope of work provisions; (4) the district court’s decision that Sonoma did not waive the drawings/specifications and written change order requirement was not supported by substantial evidence; and (5) the district court did not reduce Ascent’s lien by the proper amount.”  However, only the first point will be addressed herein.

[4] Quoting J.D. Constr., Inc. v. IBEX Int’l Grp., 126 Nev. 366, 372, 240 P.3d 1033, 1038 (citing NRS 108.2275(6)(a)-(c)).

[5] Quoting Simmons Self-Storage Partners, LLC v. Rib Roof, Inc., 130 Nev. 540, 551, 331 P.3d 850, 857 (2014).

For more information contact:

Daniel M. Hansen

dhansen@gibbsgiden.com

(310) 734-3326

Daniel Hansen is an associate based in our Las Vegas office. He practices in the areas of business law, contracts, construction, real estate, shareholder litigation, personal injury and has experience with natural resources, tax, insurance and probate.

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