Bonds To Discharge Mechanic's And Materialmen's Liens
By: James C. Busch
For many years in the State of Georgia, the only options available in a lien dispute were (1) to make payment to the claimant, or (2) litigate the disputed claim. In many cases, neither of these options were a very attractive resolution of the dispute. In 1953, the Georgia legislature created the ability to discharge a lien by filing a bond. The Official Code of Georgia Annotated (O.C.G.A.) 44-14-364(a) allows either the owner or the contractor employed to improve the property to file a bond before or after foreclosure proceedings are instituted and thereby discharging the realty from the lien.
A lien release bond must be filed with the clerk of the Superior Court in the county in which the liened property is located. In addition, O.C.G.A. 44-14-364(a) requires that the bond and affidavit must be recorded in the same manner as other real property deeds. The amount of the bonds to discharge liens differ from commercial to residential property. For commercial projects, the bond amount must be double the amount claimed on the lien. For residential projects, the bond amount must be equal to the sum claimed under the lien.
O.C.G.A. 44-14-364(a) goes on to state that a bond must be conditioned to pay the holder of the lien the sum that may be found to be due the holder upon the trial of any action that may be filed by the lien holder to recover the amount of his claim within 12 months from the date the claim became due. These bonds may be in the form of cash or real property, but real property provided as security to release a bond must be approved by the clerk of the court before it will act to release the lien in question.
The party recording a bond discharging a lien has several defenses to any effort to collect on the bond. First, an action to foreclose on a bond will not serve to allow payment of the bond. The actions which will allow payment of the bond are suits for the underlying claim, i.e. supplier sues contractor on open account, and actions against the bonding company itself for failure to make payment.
There is conflicting case law on whether the requirements to perfect a lien are still requirements once a bond has been filed. Burgess v. Travelers Indemnity Company, 185 Ga. App. 82, 363 S.E.2d 308 (1987) held that the defenses relating to the merits of a claim may be asserted both proceedings, but technical defenses regarding perfection of lien rights are not relevant in a suit on a release bond. In this case, the contractor was not able to benefit from what would have been a clear defense in a lien foreclosure action, the failure to record a notice of suit.
However, in Stonepecker v. Shepherd Construction Company, Inc., 188 Ga. App. 513, 373 S.E.2d 295 (1988), the Georgia Court of Appeals held that the filing of a release bond does not absolve a lien claimant’s responsibility and requirement to commence an action for recovery of the alleged debt within twelve months of the time the debt became due.
A general rule in the State of Georgia is that a supplier cannot prevail on a lien unless it can establish that the materials supplied improved the value of the property by becoming part of the finished structure. This general rule could also provide a defense to a claim on a bonded project. However, it is important to note that Georgia courts have also held that delivery of materials to a job site created a presumption that the materials were indeed used in the project. Sanford v. Hodges Builders Supply, Inc., 166 Ga. App. 86, 303 S.E.2d 280 (1983).
From a typical suppliers standpoint, the recording of a bond releasing a lien is good. Suppliers should typically be happy because the vast majority of bonds releasing liens are cash bonds paid into the court. Now, if a suppliers underlying collection suit against the contract is winnable, there is an immediate source of funds for payment. In addition, given the often significant amount of money that must be paid into the court to bond around a lien, the general contractor may be more inclined to negotiate in good faith with the supplier to resolve their dispute. Finally, on commercial projects, the general contractors are often required to release or bond around liens within a short time period or be in violation of their contract with the property owner. This commercial position can also improve a supplier’s leverage with a general contract who must bond around the lien or settle the dispute relatively quickly.
By understanding who your customers are on certain projects, the type of project itself and taking all the steps necessary to protect your lien rights when a property owner or general contractor bond around a lien can turn a negative into a positive. The positive results from increased leverage in negotiations and the certainty that funds for payment will be available upon completion of the case.
Mr. Busch is an attorney specializing in commercial and construction litigation for Busch, Reed, Jones & Leeper, P.C. in Marietta, Georgia