Lien Releases: A Cautionary Tale For Subcontractors In Maryland

*This article first appeared in the October 2016 issue of Maryland Construction Network‘s Networked & Connected newsletter. 

A recent decision from the United States District Court for the District of Maryland demonstrates the perils that a subcontractor can face if it executes lien releases without excluding claims that it has, or anticipates having, on a project. As the recent decision below demonstrates, subcontractors must be extremely careful not to waive their claims or else they risk the possibility of losing significant sums of money.

In United States v. Hartford Accident & Indemnity Co., Case No. JKB-14-2148 (D. Md. March 3, 2016), the federal court, applying Maryland law, found that Chasney and Company, Inc. (“Chasney”) waived its claim to a total of $460,570.10 because it executed partial lien releases without excluding its delay claims. The project at issue was with the United States of America, through the United States Army Corps of Engineers (“the Government”), for the construction of an Army Reserve Center in Baltimore, MD (the “Project”).

The general contractor, James W. Ancel, Inc. (“JWA”), hired Chasney as a subcontractor in August of 2010 to perform HVAC and plumbing services for the Project in exchange for $1.5 million. Pursuant to the Miller Act, JWA entered into a payment bond, with Hartford Accident & Indemnity Co. (“Hartford”) acting as surety. Under JWA’s contract with Chasney, Chasney waived liability against JWA for delays caused by the Government or other subcontractors or suppliers. Instead, Chasney was limited to reimbursement for delay damages recovered from the Government and was given the right, at Chasney’s expense, to pursue delay claims against the Government through exercising the provisions of JWA’s prime contract with the Government.

Between 2010 and continuing through November of 2013, Chasney executed a series of twenty-four instruments titled, “Subcontractor’s Partial Release, Waiver of Lien and Affidavit” (“Partial Release”). By signing each Partial Release, “in consideration of the payments previously made and payment for the period covered by the current payment due,” Chasney agreed to:

waive[] and release[] all . . . liens . . . and claims and demands against [JWA] and/or its sureties . . . in any manner arising out of [Chasney’s] work, labor, services, equipment or materials . . . performed or furnished . . . in connection with the project, through the period covered by the current payment and all previous payments.

Each time Chasney signed the Partial Release, Chasney affirmed that it was “aware of no claims nor any circumstances that could give rise to any future claims” against JWA, Hartford, or others involved on the Project. Although each form included a space for Chasney to list claim exceptions, no such exceptions appeared on a single form.

Throughout the Project, Chasney and JWA dealt with numerous design defects and other deficiencies attributable to the Government. These defects resulted in extended delays and unexpected costs. JWA submitted two dozen claims to the Government, which ultimately ripened into appeals before the Armed Services Board of Contract Appeals. While the appeals were pending, the Government and JWA entered into settlement negotiations. Chasney learned of these settlement negotiations and, through JWA, submitted a $380,687.65 delay claim for further transmission to the Government. Chasney’s delay claim ultimately was forwarded to the Government on August 8, 2013, but the Government dismissed the claim and stated that it lacked merit.

In September of 2013, JWA and the Government reached a global settlement that resolved all outstanding disputes, and the Government agreed to pay JWA a sum of $3.3 million. Neither JWA nor the Government assigned any particular value to individual elements in reaching the settlement amount. In exchange for the payment, JWA released the Government from all claims.

In April of 2014, Chasney demanded that JWA reimburse Chasney for their delay claim out of the settlement proceeds. JWA denied Chasney’s demand and rejected the assertion that JWA’s delay claim had been paid out as part of the settlement agreement with the Government. Subsequently, Chasney filed suit, naming Hartford as the defendant and claiming against the payment bond. JWA intervened in the action.

As the surety, Hartford stood in the shoes of its principal, JWA, and availed itself of the contractual defenses of release and waiver against Chasney. Ultimately, the court concluded that Chasney’s execution of a partial release, without exception, in October of 2013, after having submitted its delay claim through JWA to the Government in August of 2013 resulted in Chasney relinquishing its delay claim.

For a subcontractor, there are several lessons to be learned from this case. The first lesson is that the courts will hold the subcontractor to the language contained in the lien release. Subcontractors should not expect the court to look outside of the four corners of the lien release, absent some glaring ambiguity in the release language.

Secondly, a subcontractor must constantly evaluate whether it has, or anticipates having, a claim on a project. The court’s opinion made clear that even though the claim may not have fully ripened, it was sufficient that the subcontractor had sufficient facts to know of the existence of its claim. As a subcontractor, you have to have systems in place that are constantly and accurately informing you about the project and whether any issues have arisen that would require you to exclude certain claims from a lien release.

Finally, to the extent that a subcontractor has a claim on a project, the subcontractor must exclude the claim from the lien release by identifying the claim and striking out the appropriate language in the lien release. The best practice is to have legal counsel make the appropriate amendments to the lien release language so that there is no question that the claim is being preserved properly.