Construction Law Update: Iowa Supreme Court Confirms Impact on Mechanic's Lien Rights

04.29.2020

Last year, the Iowa Court of Appeals issued a decision in Standard Water Control Systems, Inc. v. Jones, 2019 WL 478498 (Iowa Ct. App. 2019) that significantly impacted mechanic’s lien rights for contractors who perform work on residential construction projects. The Iowa Supreme Court reviewed that case, and on February 7, 2020, it issued a decision in Standard Water Control Systems, Inc. v. Jones, 938 N.W.2d 651 (Iowa 2020) in which it agreed with the Court of Appeals. Standard Water contracted with the Joneses to perform work on the Joneses’ home. A dispute arose that resulted in Standard Water filing a mechanic’s lien against the home, and the dispute ended up in trial. The trial court issued a decision in favor of Standard Water and awarded it $4,900.00 on its lien claim for work performed on the home. However, a main dispute revolved around attorney fees, and it was a long-running dispute the Supreme Court described as follows: “Long-running litigation, like a species in the order lepidoptera, often goes through a metamorphosis. The difference is that the final stage of a legal metamorphosis is not a butterfly. Rather, as here, it is frequently a battle over attorney fees.”

Under Iowa Code Section 572.32(1) of Iowa’s mechanic’s lien statute, a court may award attorney fees to a prevailing plaintiff. Invoking that provision, the trial court awarded Standard Water about $58,000.00 in attorney fees and costs on its lien claim. This resulted in Standard Water’s total lien judgment being about $62,900.00 plus interest; only $4,900.00 of that amount was for work performed with the rest being for attorney fees, costs, and interest. The Joneses raised as a defense their homestead rights under Iowa Code Chapter 561. They argued that Iowa Code Section 561.21(3) does not allow a home to be sold to satisfy the attorney fees, costs, and interest portion of a mechanic's lien judgment, and that a home may only be sold to satisfy the portion of a mechanic's lien judgment for work done on the home. On the attorney fee issue, the Supreme Court agreed with the Joneses that “homestead rights generally prevail over a mechanic’s lien for attorney fees,” meaning that “the homestead exemption prohibits efforts to recover attorney fees in mechanic’s lien foreclosure actions.” However, as to costs and interest, the Supreme Court held that “they can be included in a mechanic’s lien against a homestead.”

Despite being victorious on the main attorney-fee dispute, the Supreme Court nevertheless concluded that Standard Water’s lien could include attorney fees because the Joneses had waived the homestead defense in the case. The Supreme Court concluded that the Joneses “needed to raise their homestead exemption before the district court entered a foreclosure decree recognizing that the contractor had a mechanic’s lien for both the unpaid principal amount and attorney fees ‘senior and superior to any right, title or interest owned or claimed by’ the homeowners—not later when the decree was being executed.” The Court explained that “the Joneses could have raised their homestead exemption before the entry of the [decrees granting judgment against the home],” and that raising the homestead defense for the first time at the sheriff’s sale was an impermissible “collateral attack on the previously entered foreclosure decrees.”

This is a significant decision adverse to contractors who perform work on “homesteads.” The impact of the decision means that contractors can only use the sale of a residential home to recover the portion of a lien representing work performed on the home plus costs and interest. The sale of the home cannot be used to recover any attorney fees. However, in order to benefit from this limitation, a homeowner must raise the homestead defense in court prior to entry of the lien foreclosure decree lest the homeowner waive the defense thereby entitling the contractor to recover attorney fees on its lien. Contractors, homeowners, and their attorneys who work on and are involved in disputes over homesteads should be aware of this new decision.

Contact attorney Steve Marso at 515-288-6041 for more information about this or other construction matters.

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