This summer the Colorado Court of Appeals affirmed an interesting district court order concerning the court’s jurisdiction over a mechanic’s lien in a case ordered to arbitration. See Sure-Shock Electric, Inc. v. Diamond Lofts Venture, LLC, 2011 WL 2474513 (Colo. App. 2011). In that case, the defendant owned real property on which it constructed the Diamond Lofts. Sure-Shock was the electrical subcontractor for the construction project. Diamond Lofts Venture, LLC (“DLV”) allegedly did not pay Sure-Shock as required thereby prompting Sure-Shock to record a mechanic’s lien on the property and file a complaint for breach of contract, unjust enrichment, and foreclosure of the lien. Id. at *1.
DLV moved to stay the proceedings and compel arbitration pursuant to the contract between the parties. According to the contract between the parties, they agreed to arbitrate “[a]ny claim arising out of or related to the subcontract.” Id. at *1. The district court granted DLV’s motion and both parties participated in the arbitration. The arbiter found for Sure-Shock on its breach of contract and unjust enrichment claims, but did not mention foreclosure of the lien. The arbiter did, however, make detailed findings of fact concerning the filing of the lien, which included the amount of the lien and the date it was recorded. Id. The arbiter awarded Sure-Shock the principal amount claimed in the lien plus interest at the statutory rate of twelve percent from the date the lien was recorded, or October 17, 2007.
Sure-Shock then moved to confirm the arbiter’s award in the district court. The district court granted the motion thereby confirming the award as to the amount of Sure-Shock’s mechanic’s lien, and ordered Sure-Shock able to participate in the foreclosure of the lien. Id. DLV appealed this ruling. In its appeal, DLV argued that the parties’ agreement to arbitration divested the district court of jurisdiction to determine the “validity, amount and enforceability” of the lien. Additionally, DLV argued that, because Sure-Shock did not affirmatively raise an argument that the lien was procedurally valid in the arbitration, it was now barred from seeking a decree of foreclosure in the district court by the doctrines of claim preclusion and waiver. Id.
The Colorado Court of Appeals disagreed. The Court of Appeals explained that the arbiter, by determining the amount of debt owed by DLV to Sure-Shock on the underlying breach of contract and unjust enrichment claims, “necessarily decided the amount of any mechanic’s lien.” Id. The Court of Appeals also pointed out that the arbitration award noted the filing of the lien, the amount listed on the lien statement, the date the lien was filed, and awarded interest from that date. As such, the Court of Appeals “read the arbitrator’s award to conclude that Sure-Shock had established the right to a lien or claim under the mechanic’s lien statute.” Id. at *2.
The remaining issue concerned the procedural validity of Sure-Shock’s mechanic’s lien entitling it to a decree of foreclosure. The Court of Appeals believed Sure-Shock’s assertion in this regard was correct. That is, “submission of a facially proper notice of intent to file a lien and lien statement, time stamped by the county recorder’s office, satisfies a mechanic’s lien claimant’s initial burden of proving the lien’s procedural validity.” Id. Sure-Shock had attached its notice of intent to file a lien statement to its complaint, along with affidavits of service, and its statement of lien. While DLV moved to compel arbitration, DLV did not challenge the procedural validity of Sure-Shock’s lien.
The issue, as framed by the Court of Appeals, was whether the procedural validity of the mechanic’s lien may be decided by the court as part of the foreclosure proceedings, or whether Sure-Shock or DLV was required to raise it in the arbitration pursuant to their contract requiring all clams and disputes be submitted to arbitration. Id. The court noted that this question was one of first impression in Colorado while acknowledging Colorado law that allows only a court to issue a decree of foreclosure. Id.; see C.R.S. § 38-22-114.
The Court of Appeals concluded that the issue of procedural validity of a mechanic’s lien may be properly determined by the court. “Given that only a court is vested with the authority to foreclose a mechanic’s lien, it may concurrently determine any procedural validity issues connected with that foreclosure even when the underlying contract includes a broad arbitration clause, at least where, as here, neither party raised the issue in arbitration.” Id. at *3. According to the Court of Appeals, the procedural validity of a lien securing a debt arising from a breach of contract may be decided by the court even if the contract requires all disputes to be submitted to binding arbitration.
For additional information regarding Colorado construction litigation, please contact David M. McLain at (303) 987-9813 or by e-mail at mclain@hhmrlaw.com.
