A new decision from the Supreme Court of Virginia involving mechanic's liens may take some by surprise. Practitioners for years have believed that a general contractor is a "necessary party" to a subcontractor's suit to enforce a subcontractor's mechanic's lien. Earlier this month, in a 4-3 decision (Synchronized Construction Services, Inc. v. Prav Lodging, LLC), the Supreme Court of Virginia ruled that a general contractor was not a necessary party to its subcontractor's lien enforcement suit, where the subcontractor's lien had been bonded and released at the request of the owner of the property and the construction lender.
In general terms, a "necessary party" to a lawsuit is one who has an interest in the subject matter of the suit which is likely to be defeated or diminished if that party is not included in the suit. In a suit to enforce a mechanic's lien, leaving out a necessary party can result in the permanent dismissal of the suit and loss of the lien.
In Synchronized Construction, a subcontractor filed suit to enforce its lien, naming the owner of the property, a construction lender, the general contractor and other subcontractor lien claimants as parties defendant. After suit was filed, the owner and lender requested that the court release the lien of record and accept in its place a bond (a process familiarly known as "bonding off" a mechanic's lien). The lower court agreed with the request, the bond was filed and the lien was released.
Subsequently, the lender moved to dismiss the mechanic's lien claim on the basis that the general contractor was a necessary party to the lien enforcement action but the subcontractor bringing the suit had failed to serve the suit on the general contractor within the required one year period. Without the general contractor's presence, argued the lender, the lien claim had to be dismissed. The lower court agreed with the lender that the general contractor was a necessary party and that the subcontractor's failure to serve the general contractor required that the lien enforcement claim be dismissed.
On appeal, the Supreme Court noted that a necessary party to a mechanic's lien action is any party who has a property interest in the real estate which is the subject of the lien. Typical examples are the owner of the liened property, a beneficiary of a deed of trust and a trustee under a deed of trust recorded against the property. However, once the lien is released and substituted with a bond due to the bonding-off process, the necessary party analysis changes. Wrote the court: "If no bond has been posted the inquiry turns upon which parties have a real property interest in the real estate subject to the mechanic's lien, but when a bond is posted the inquiry focuses upon which parties have a pecuniary interest in the bond itself ½." Thus, in a bond enforcement action the principal and the surety on the bond are necessary parties, but because the lien is released, the owner of the real estate, and the trustee and the beneficiary under a deed of trust are no longer necessary parties. Neither, said the Supreme Court in Synchronized Construction, is the general contractor. In this case, the general contractor was not a principal on the bond and had no ability to be awarded a judgment to be paid from the bond. In other words, the general contractor did not have a "pecuniary interest" in the bond. Therefore, ruled the court, its presence in the case was no longer necessary.
The dissent reiterated the long-standing view that general contractors are central to mechanic's lien claims and are necessary parties. Because of the unusual factual posture of this case and the fear that omitting a party could be fatal, it is likely that despite this new ruling from Virginia's high court, most lien enforcement suits, whether or not involving lien bonds, will continue to name the general contractor as party defendant.