In Sustainable 9, LLC v. Coleman, the Minnesota Supreme Court held that a homeowner may use damages caused by a contractor’s negligent construction as a recoupment defense against the contractor’s mechanic’s lien when both claims arise from the same construction project. Because the homeowner’s negligence damages exceeded the amount of the contractor’s mechanic’s lien, the court held that recoupment eliminated the lien and, consequently, the award of attorney fees and costs.

In 2019, Jacqueline Coleman hired Sustainable 9, LLC (“Sustainable 9”) to construct a new home. Near the end of construction, Coleman identified construction defects and withheld payments. Sustainable 9 filed a mechanic’s lien and brought an action to foreclose the lien. Coleman counterclaimed for breach of contract and negligence. The jury awarded Sustainable 9 $94,951.89 but also awarded Coleman $278,622 in damages related to the defects.

Following the verdict, Coleman argued the doctrine of recoupment eliminated Sustainable 9’s mechanic’s lien because her negligence damages exceeded the amount of the lien. The district court rejected the recoupment defense, finding Sustainable 9 had a valid lien for $94,951.89 but the amount was offset by the negligence award. Because the offset did not invalidate the lien, the Court awarded Sustainable 9 $46,000 in attorney fees and $16,500 in costs. The Minnesota Court of Appeals affirmed.

The Minnesota Supreme Court reversed and explained recoupment is a “purely defensive” doctrine that allows a defendant to reduce or avoid a plaintiff’s recovery when the competing claims arise from the same transaction. Recoupment differs from a setoff because it operates as a defense to the plaintiff’s claim itself rather than as a separate claim for affirmative recovery. The court also explained recoupment is not limited to breach-of-contract claims and may be based on negligence when the claims arise from the same transaction.

The distinction between recoupment and setoff was significant. The district court offset the damages after recognizing Sustainable 9’s lien. The Supreme Court explained recoupment instead operates as an affirmative defense to the lien claim itself. Because Coleman’s negligence award exceeded Sustainable 9’s mechanic’s lien, recoupment eliminated the lien and therefore also the fee claim.

For contractors, architects, and engineers, Sustainable 9 illustrates the potential effect of construction-defect claims on mechanic’s lien rights under Minnesota law. Architects are often asked to approve pay requests for contractors and address the issue of defective construction as a defense to the amount. Where a contractor’s mechanic’s lien claim and an owner’s negligence claim arise from the same construction project, negligence damages may be asserted through recoupment against the lien. If those damages exceed the lien amount, the lien may be eliminated entirely, along with the ability to recover attorney fees and costs.