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The Mechanics Lien Waiver and Payment via Credit Card

By Diane Dennis

Summary: An unconditional lien waiver along with a disputed credit card payment spells disaster for contractor


Something I have been concerned about is providing a waiver and release upon final payment when the payment is made utilizing a credit card.

When a check clears the bank, it’s more or less final. However, with a credit card payment, the cardholder can decide to dispute the charge for some time after the fact and the monies received for that final payment transaction are reversed until the dust settles.

If the release signed is unconditional on final payment then the contractor has no rights and no money and very likely is beyond the time requirements for filing liens.

The language in the conditional release doesn’t quite spill over to incorporate a credit card dilemma either.

We have used a form that I drafted if there was cause to be concerned and we accepted the final payment via credit card, but doubting it would protect us in any way.

Is there a form for conditional and unconditional releases or some method that addresses the credit card payment problem in any way?

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This question illustrates a problem with unconditional releases.

Unconditional releases are "unconditional" and cannot be withdrawn or revoked. If a check bounces, the lien rights are still released if an unconditional release was provided before the check was deposited.

Likewise, a contested credit card charge might result in the charge being overturned or at least held back for a period of time.

Another example of the problem with unconditional release relates to bankruptcy.

Under bankruptcy laws, when a person or company files for bankruptcy, all payments made by the party for a period of time (I believe it's 90 days?) prior to the bankruptcy petition may be recovered by the bankruptcy trustee for the purpose of determining whether any of these payments were "preferential payments" that should be included in the bankruptcy estate and distributed to the party's creditors in the bankruptcy action as if the amounts were in the party's bank account at the time the party filed the bankruptcy petition.

For this reason, an argument can be made that an unconditional release should not be provided until after the bankruptcy window has passed. Is this practical? No.

Will the withholding of an unconditional release do anything but lead to a fight with the owner? No, it's going to create problems.

Is there a solution? Not that I am aware of if the contract requires that an unconditional release be provided after payment is received. If the contract does not require that an unconditional release be provided, there may not be a legal obligation to provide one. But again the withholding of a release is likely to cause problems due to the expectation of the owner that an unconditional release will be provided.

As for a conditional release, the claimant should be protected if a credit card payment is canceled.

A conditional release only has the effect of releasing lien rights if it can be shown that payment was made for the amount stated on the conditional release.

An argument could be made by an owner that because payment was made and then withdrawn (via bankruptcy, a canceled check, or a disputed credit card charge), that the fact that payment was initially made effectively causes lien rights to be released.

I would expect that the California Supreme Court would rule in favor of the claimant if a case came before it involving a conditional release, the delivery of a check or credit card payment, then an event effectively taking the payment back--the Supreme Court would rule that the claimant has not released its lien rights.

The claimant likely also has a fraud cause of action as the result of the shenanigans of the payor.

Again, these examples illustrate a problem with unconditional releases and a potential problem with conditional releases. The most important thing for a claimant to do is to make sure that a check clears before an unconditional release is provided.

If an owner or general contractor demands an unconditional release in exchange for a check, this is inappropriate for the reasons discussed above.

Once a check has cleared, most claimants will provide an unconditional release despite the bankruptcy possibility. Over 99% of the time, when the check clears, there are no problems.

Again, it's important to understand whether there is an obligation under the contract to provide an unconditional release.

It's also appropriate to analyze the practical ramifications (i.e., upsetting the owner and general contractor) if an unconditional release is not provided despite the justification for not doing so that is illustrated above.

I counsel my construction industry clients to give me a call when a situation like this arises. Whether my role is merely to offer information and advice similar to that described above or to communicate on behalf of my client with the other parties, it is important for the client to be well-informed before an event like this occurs so that everything possible can be done to protect the client's rights.

In some cases there may not be any perfect solution, but on a case-by-case basis the client will be informed as to the legal and practical factors, and that will lead to an educated decision that's based upon the law and upon practical issues related to the likely ramifications of withholding an unconditional release on any of the grounds mentioned above.

Thank you to Dave Barnier for the above information. :) Mr. Barnier is a practicing litigation attorney in San Diego CA and can be reached at 619.682.4842.

The information in this article is based upon California law current at the time of writing and is provided for general information, only. The information provided illustrates laws and legal principals in general. Any information or analysis presented in this article is intended solely to educate the reader on general issues. A comprehensive review of facts, documents, and applicable laws is always required before any attorney can competently provide any legal advice regarding any particular situation. In short: Please do not rely on any part of this article when analyzing any specific situation affecting you or your business.

Article Series: Mechanic's Lien Waivers/Releases

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