WASHINGTON COURT OF APPEALS WEIGHS IN ON LIEN RELEASE BONDS

Date: January 17th, 2017

Division III of the Washington Court of Appeals recently clarified a significant grey area in the construction lien statute in Inland Empire Dry Wall Supply Co. v. Western Surety Co.. Specifically, the Court weighed in on who a lien claimant must sue in a foreclosure action against a surety who provided a lien release bond.

In Inland Empire Dry Wall Supply Co., Inland entered into a contract with Eastern Washington Drywall & Paint (“Eastern”) to supply certain drywall materials for a construction project. Eastern was a subcontractor to Fowler General Construction (“Fowler”), the general contractor on the project. Inland supplied $124,653 in drywall materials to Eastern. Fowler paid Eastern in full for these materials, but Eastern failed to pass the funds downstream to Inland. As a result, Inland filed a lien against the project. To free up the underlying property from Inland’s lien, Fowler obtained a release of lien bond from Western Surety Company (“Western”).

Inland subsequently filed a lien foreclosure lawsuit in Spokane County Superior Court. Inland elected to only name one party as a Defendant in the lawsuit – Western Surety Company. Western filed a summary judgment motion seeking dismissal of Inland’s lawsuit claiming Inland failed to name a necessary and indispensable party in the lawsuit – Fowler, the bond principal. As a result of this failure, Western argued that Inland had failed to perfect its right to foreclose the lien against the lien release bond within the 8 month period allotted by the construction lien statute. The trial court granted Western’s motion and dismissed Inland’s lien claim against Western. Inland appealed the trial court’s decision to Division III of the Washington Court of Appeals.

On appeal, the Court wrestled with the issue of who a lien claimant must sue in a foreclosure action against a surety that issued a lien release bond. Acknowledging that the statutory procedure for obtaining relief against a lien release bond is unclear and a source of considerable confusion in Washington, the Court pointed to Division II’s decision in CalPortland Co. v. LevelOne Concrete, LLC (2014) as an important judicial attempt to provide guidance to lien claimants on these issues. The Court examined the reasoning of the CalPortland decision and ultimately agreed with the CalPortland Court that a lien claimant does not need to sue the owner of the real property in a foreclosure action against a lien release bond. However, the Court emphasized that the CalPortland decision did not address the narrow issue presented by Inland’s appeal – whether Inland was required to name both the surety (Western) and the bond principal (Fowler).

To resolve this narrow legal issue, the Court scrutinized the plain language of the construction lien statute in an effort to understand the intent of the legislature. Ultimately, the Court emphasized that “the omission of any reference to the bond principal is significant and indicates the legislature’s intent that a bond principal need not be included.” The Court stressed that this interpretation makes sense because it is consistent with black-letter surety law which does not require a claimant to sue both the surety and bond principal to recover on a bond claim.

Thus, based on the plain language of the construction lien statute and basic principles of surety law, the Court ruled that lien claimants are not required to name the property owner or the bond principal in a lien foreclosure lawsuit when a release of lien bond has been furnished. The only necessary party is the surety that issued the lien release bond.

As a practical matter, while the Inland decision provides important guidance to lien claimants seeking to foreclose against a lien release bond, prudent contractors should recognize that neither the Inland nor CalPortland decisions are binding law in all Washington Counties. Further, the Inland decision was not unanimous. Judge Fearing’s lengthy and well-reasoned dissent in Inland foreshadows how reasonable legal minds may continue to disagree on how to interpret and apply the lien release bond provisions in the construction lien statue. Absent a decision by the Washington Supreme Court or legislative action, significant uncertainty will remain regarding the procedures for foreclosure against a surety issuing a lien release bond. In light of this lingering uncertainty and the significant adverse consequences for failing to comply with the lien statute, contractors should take care when pursuing a claim against a lien release bond.

Brian Guthrie is a lawyer in Ashbaugh Beal’s Construction Law Group. If you have a question regarding the Inland decision or any other construction law issue, please contact him at bguthrie@ashbaughbeal.com.