When can firms 'lien' on the government?

August 11, 2010

It is generally understood that contractors and design professionals may not place mechanic's liens against government property. But this concept takes on different shades of meaning in different circumstances. Interestingly, there may be exceptions to the general rule that government property is not lienable.

For example, liens against government real estate or funds are possible: (1) when the government strays too far from performing traditional governmental functions; (2) when sovereign immunity is waived by Congress; or (3) when the legislature specifically permits liens against public funds.

Governmental function

Generally, liens against government property are prohibited because of the concept of sovereign immunity. Thus, there can be no mechanic's liens against projects such as schools, firehouses and courthouses. The sovereign immunity doctrine, however, will not protect the government when it is not carrying out normal governmental functions.

For example, a Minnesota case has held that land controlled by a municipality for future economic development by private entities is not exempt from that state mechanic's lien law. As a result, an engineering firm was allowed to maintain a lien for its design services on undeveloped City of Eden Prairie land.

The land was being held for future development as part of a commercial enterprise. When the developer went bankrupt, the engineering firm placed a lien for its design services against the real estate. The fact that no construction work was ever performed did not defeat the engineer's lien under Minnesota law. This is an interesting twist; many states will only permit liens when real estate has actually been improved.

The Minnesota Court of Appeals ruled that as this land was not being held for use as a "quintessentially public facility," the engineer's lien was valid. [Comstock & Davis Inc. vs. City of Eden Prairie, 557 N.W.2d 213]

The court examined the public policy behind the exemption from mechanic's liens and reasoned that permitting the engineer's lien to attach to property that was being held for commercial development would have no effect on the city's ability to administer municipal governmental affairs.

Lien on a post office

At the federal level, when Congress established the U.S. Postal Service, it declared that the agency was an independent establishment of the United States with the power "to sue and be sued." This declaration was tantamount to a waiver of sovereign immunity. Thus, when an unpaid subcontractor who performed work on an Indiana post office had its bond claim challenged, it filed a mechanic's lien against the post office. On appeal, the bond claim was validated, and thus it was unnecessary for the court to determine the validity of the mechanic's lien. However, the U.S. Court of Appeals acknowledged that the subcontractor's lien against the post office would "likely" be effective. While this case is not sufficient authority to declare liens against post offices valid, it certainly opens the door to that possibility. [S&G Excavating Inc. vs. The Seaboard Surety Co., 236 F.3d 883] In another case involving the postal service, an unpaid subcontractor was entitled to assert an equitable lien against undisbursed contract proceeds, as opposed to a mechanic's lien against the real estate. The U.S. Court of Appeals for the 10th Circuit ruled that an unpaid subcontractor had an equitable lien against funds held by the government that would trump the government's claim to the fund for liquidated damages. The court specifically rejected older authority that would deny the subcontractor's equitable lien against retainage because in the older cases the government had not waived sovereign immunity for the postal service. [Kennedy Electric Co. Inc. vs. U.S. Postal Service, 508 F.2d 954]

Money vs. real estate

Finally, some states, notably Illinois, permit contractors to assert mechanic's liens against money held by the government, while not permitting liens to be filed against the real estate. [770 ILCS 60/23]. In these situations, the state cannot be forced to pay twice. But if an unpaid subcontractor places a lien against the funds before they are totally disbursed, the funds will be frozen pending judicial resolution.

         
 

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