Maryland Mechanic’s Lien Loophole: Court Rules that Contract Price is Not The Ceiling on Lien Claims

Recently, in an unreported opinion, the Court of Special Appeals addressed head-on and closed a long standing “loophole” occasionally used by slick lawyers defending mechanic’s lien cases. Known as the “contract price as a ceiling to the lien claim” rule, this misguided legal argument tries to convince a perhaps unwitting trial judge that there is a binding Maryland rule that a subcontractor cannot achieve a mechanic’s lien in an amount greater than the contract price, even if it performed changed, extra or additional work.

This “rule” was first discussed in a 1970 Court of Appeals case, where a property owner was trying to pay less than the contract price, not the case of a contractor (or subcontractor) seeking to be paid more than the original contract price on account of legitimate additional work, i.e., performed but unsigned change orders.  In that case, Diener v. Cubbage, the court held that the owner was liable for the contract price “because there was no evidence whatsoever that it was unreasonable.”  See Diener v. Cubbage, 259 Md. 555, 561–62, 270 A.2d 471, 475 (1970).  Then, in what is called dicta,[1] the court added this seemingly innocuous statement:  “However, if it is any consolation to the appellants [i.e., the owner] the contract price is a ceiling upon the lien claim.”

The “rule” seemed to gain traction in 2001, when the Court of Special Appeals held in a ground-breaking case that individual employees of a subcontractor company could file and obtain mechanic’s liens for their unpaid wages, but that they were limited to the contract value, not their own hourly wage.  In that case, at a unit price of $17 per sprinkler head, the contract value was less than the actual wages due the individual employees.  Using the “rule” of Diener, the appeals court held that the employees who installed the sprinkler heads were not entitled to any more than the bargained for price of $17 per sprinkler head.  See Judd Fire Prot., Inc. v. Davidson, 138 Md. App. 654, 669, 773 A.2d 573, 582-83 (2001).

Without a doubt, the rule ensures that unscrupulous contractors, subcontractors and suppliers do not seek to obtain more than the original benefit of the bargain made through a contract.  For example, if the contract price was not a ceiling on a mechanic’s lien claim, subcontractors may be tempted to enter into contracts at a loss in order to underbid their competitors for the work, but then simply file mechanic’s liens to obtain the true objective value of the labor and materials furnished, irrespective of the lower contract value.  This would effectively destroy the rule of contracts in the construction industry, and is rightly prohibited.[2]

But arguing that the Diener case established an unrelenting rule that a subcontract price forever fixes the value of a mechanic’s lien, notwithstanding additional, changed or different work performed, is absurd.

Any such “rule” would cut against the very purpose of the Lien Law, which is to protect subcontractors and suppliers from being cheated out of payment for labor and materials furnished to real property.  Indeed, Maryland’s highest court, the Court of Appeals, recognized in 1999 that “the need for a liberal construction is particularly important with respect to subcontractors who, though benefitting the owner and enhancing the value of the owner’s property by the provision of their labor or materials, have no direct contractual relationship with the owner and therefore cannot otherwise subject the owner’s property or assets to the payment of their claims.” See Winkler Constr. Co. v. Jerome, 355 Md. 231, 246, 734 A.2d 212 (1999).

Rather, the better interpretation of the “contract price is a ceiling to the lien claim” rule is when there are no changes – or claims of changes – to the contract work, whether in scope, duration, or other manner affecting the reasonable value of the cost of labor and materials furnished thereunder.  This was the case in Diener, in Judd Fire Protection, and likely in every other mechanic’s lien case in the country where the contract price was construed as a ceiling on the lien claim. 

But, because there was no Maryland case that made this clear, lawyers defending owners would argue this “rule” to the trial judge, and would sometimes get away with it.  Until February 2, 2021, when the Court of Special Appeals decisively held to the contrary.

In the case of Camp Springs Allentown, LLC v. Kingdom Work Construction Co., LLC, No. 2000, SEPT. TERM,2019, 2021 WL 351982, at *9–10 (Md. Ct. Spec. App. Feb. 2, 2021), the three-judge panel unanimously put this misuse of the Diener “rule” to rest.  The Court stated as follows (emphasis supplied):

“Diener does not stand for the proposition that a subcontractor can only seek a mechanics’ lien strictly for the amount due under the contract…..interpreting Diener to hold that a subcontractor cannot recover the value of labor and materials improving an owner’s property for work done to the owner’s property but outside the contract, such as a change order, would be manifestly unfair and antithetical to the purposes of the statute.”

Rather, the Court ruled that “the mechanics’ lien statute is an exercise of the court’s equitable powers to aid a subcontractor in recovering the value of his labor to improve the owner’s property…..consistent with Diener, the contract can be used as a measure to determine damages [,but] Diener does not stand for the proposition that a subcontractor can only seek a mechanics’ lien strictly for the amount due under the contract.” 

In other words, the general contractor or the owner cannot thumb their noses behind unsigned change orders anymore under the non-existent “Diener rule.”  Kudos to the Maryland Court of Special Appeals for (finally) setting the record straight!

[1] Expressions in a court opinion that are beyond the facts at hand and are therefore not part of the ruling.  While dicta is not supposed to be binding on lower courts, it will often be viewed as persuasive.

[2] For the same reason, the economic loss doctrine proscribes contractors from recovering in tort for what is in actuality contract damages.