Construction Liens

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Published cases examining the New Jersey Construction Lien Law (“CLL”) tend to be few and far between, but recently the Appellate Division issued a decision to be published, helping to further illuminate, albeit on a fairly narrow issue, the scope of the CLL.  In NRG REMA LLC v. Creative Environmental Solutions Corp., Docket Nos. A-5432-15T3, A-0567-16T3 (N.J. Super. App. Div. April 25, 2018), the court analyzed the novel issue of whether, under the CLL, the salvage value of scrap recovered by a demolition contractor may be included in the “lien fund” available for distribution among lien-filing subcontractors and suppliers within that contractor’s chain of contracting.

In NRG REMA, the owner entered into a contract directly with a demolition contractor, pursuant to which the contractor actually agreed to pay the owner $250,000 for the right to demolish a power station but also for title to and the right to sell the resulting scrap metals and equipment (which it estimated at the time would net it millions of dollars).  While the CLL explicitly allows liens to be filed for demolition work, it does not specifically contemplate this type of payment arrangement in determining the “lien fund” – which, at the top contracting tier, is typically based on the simple calculation of the amount owed under the written contract from owner to contractor for the work performed through the date of the lien filing.  Thus, subject to certain limited exceptions, the more paid to the contractor prior to the lien filing, the less the lien fund available for distribution.

While the CLL’s lien fund provision and its lien claim form speak only in monetary terms, other relevant CLL provisions, incorporate the term “contract” whose definition refers to “price or other consideration to be paid” the contractor.  In this case, because the contract specifically required the transfer of title to the salvage materials to the contractor and “it was an essential component of the price [the owner] agreed to pay,” the court deemed such transfer non-monetary “consideration to be paid” to the contractor, and, therefore, part of the “contract price” paid by the owner to the contractor.

Following a lengthy analysis and a balancing of the interests between owner and lien claimant, the court ultimately concluded that, in this case, the lien fund calculation should be based on a contract amount that includes the value of the scrap obtained by the contractor pursuant to its contract, but reduced by the contractor’s cash payment to the owner made prior to the lien’s filing (note: where a contractor was paid for the demolition work and also received title to the salvage, the payment to the contractor would be added to the salvage value to calculate the total contract price).  The court further held that because the owner had transferred title to the scrap at the outset of contract performance, rather than incrementally, the value of the transferred scrap did not reduce the lien fund at that top tier at the time of such transfer, as the CLL provides that the lien fund is not reduced where the owner makes payment of unearned amounts to a contractor prior to a subcontractor’s lien filing.

The court, however, remanded the case back to the trial court for the difficult task of determining, for each lien claimant, both of which resided on the third-tier, the amount of the lien fund that was available at the time each such lien was filed based on the percentage of completion of the work at that time.  The court also made clear that it was solely dealing with the facts before it, and it identified a number of issues along the way, which if the facts were different may require a different analysis or outcome, and which the court made clear, it was not determining in its decision.  Thus, while instructive and useful when dealing with a project on which a contractor obtains salvage rights, the decision is fairly narrow and limited to the facts of that case.   

After the court’s extensive analysis on the lien fund issue, and an apparent victory for the lien claimants, the court found that one of those lien claimants, however, committed a critical technical error in the execution of its lien which precluded its enforcement.  The court reiterated and strictly applied the CLL’s express requirement that a signatory of a lien claim must be an authorized corporate officer pursuant to the company’s bylaws or as designated by board resolution.  The court found that one of the subject liens had been executed by an employee who was informally titled the company’s “financial director”, and had not been properly authorized to execute a lien on behalf of the company.  This case, therefore, serves as an additional warning that any company seeking to file a CLL lien must strictly adhere to its express provisions, lest it risk forfeiture of its lien claim and a potential damages claim based on an improper filing.

Update:  The property owner has appealed the Appellate Division’s decision to the New Jersey Supreme Court, so we will monitor whether the Supreme Court decides to hear the case, and if so, what decision it renders.

So, you properly file your construction lien claim within the time allowed by the New Jersey Construction Lien Law (“CLL”), and then timely send out a copy of the lien by certified and ordinary mail to the address of the condominium building where you performed your work.  All set, right?  Not so fast, according to a New Jersey appellate panel.

In the newly-issued, unpublished decision, Santander Condominium Assoc., Inc. v. AA Construction 1 Corp., Docket No. A-0525-15T3 (N.J. App. Div., October 13, 2017), the Appellate Division upheld a trial court’s decision ordering the discharge of a subcontractor’s construction lien claim upon the application of the condominium association (the “Association”) against whose property the lien was filed, and awarding attorneys’ fees and court costs to the Association.  While the subcontractor apparently followed the letter of the law in filing its construction lien claim, its fatal flaw lay in its defective service of the lien claim.

The subcontractor, which had performed façade repair work for the contractor of the Association, filed its construction lien claim after the contractor failed to pay the subcontractor for its work.  The subcontractor then sent the lien for service by certified and ordinary mail to the street address of the condominium property.  The CLL allows for simultaneous certified and ordinary mail service, but it must be made “to the last known business or residence of the owner or community association….”  The physical condominium street address was not the business address of the Association, which, like all corporations, had an easily discoverable registered agent address filed with the State.  Service, therefore, was defective.

While service is supposed to be made within 10 days of the lien filing, it may be made later and still be enforceable as long the owner/association is not materially prejudiced by the late service. Disbursement of funds by the owner/association in the interim, however, is, on its face, deemed material prejudice under the CLL.  In the Santander case, after the lien was filed, the Association paid the contractor in full on its contract, and, because the lien was deemed to never have been properly served, the CLL’s clear and unambiguous language required that the lien be deemed unenforceable, as there was no longer a lien fund against which the subcontractor’s lien could attach.

The court noted that, even if service had been made to the Association’s proper business address, the certified mailing of the lien had been returned unclaimed and the subcontractor had failed to present any evidence relating to the status of the ordinary mail.  Though not discussed in the decision, had the service address been proper, the subcontractor should, at the very least, have proffered evidence that the ordinary mail was never returned as undelivered by the postal service and, therefore, should be presumed to have been delivered to that address.

The court also affirmed the trial court’s award of attorneys’ fees to the Association under the CLL (N.J.S.A. 2A:44A-30(c)) because the Association filed its application to discharge a lien that the court deemed to have been filed “without factual basis”.

That last determination, however, is questionable at best, as the lien at issue appears to have been filed with a factual basis, but was deemed unenforceable solely due to a failure of proper service and the Association’s subsequent payment in full to the contractor.  Improper service should not be equated with a lack of a factual basis supporting the lien.  In fact, under a different section of the CLL (N.J.S.A. 2A:44A-15), which provides the bases for a determination of the forfeiture of lien rights based on an improper lien filing, the CLL defines “without basis” for purposes of that section as “frivolous, false, unsupported by a contract, or made with malice or bad faith or for any improper purpose.”   The failure to properly serve an otherwise factually supported lien does not appear to be accounted for in the language of the CLL as a basis for the award of attorneys’ fees.

In any event, the Santander  case does serve to illustrate the critical importance of properly and timely serving a construction lien claim.  When filing a lien against a condominium association or any other corporate real property owner, a claimant must do a corporate search with the State to ensure it has the proper business address for that entity.  Of course, there may be other ways to determine the proper last known business address of the owner/association, for example, through recent correspondence or documentation from that corporation, but the corporation’s registered agent address, as filed with the State, should always be deemed a valid address for service of a lien.  Without proper service, the lien will remain unenforceable, and to the extent the owner makes payment to its contractor prior to proper service, the lien fund available to a subcontractor or supplier is at risk of complete depletion.   If there is any question regarding the validity or service of a construction lien claim, it is always a good idea to consult an attorney well versed in the requirements of the CLL.

So you’ve managed to successfully file a construction lien claim in New Jersey.  Well, don’t then kick back and relax for too long, because if you fail to take action to enforce that lien claim within the limited time required by statute, the lien will be rendered unenforceable.  Under the New Jersey Construction Lien Law (“CLL”), a lien claimant must file a lawsuit seeking to enforce its lien within one year of the date of its last provision of work, services, material, or equipment.  This is a strict statutory deadline, which cannot be extended based on equitable circumstances.  It is important to note that the deadline is not one year from the date of the filing of the lien claim itself.  It is also important to ensure that the work, services, material or equipment, on which you are basing your last date of provision, was actually required to be provided by your contract, as the following case illustrates.

In the recent unpublished decision, WJV Materials, LLC v. Erin Contracting, Inc. (Docket No. A-2453-14T1, August 12, 2016), the New Jersey Appellate Division affirmed the trial court’s dismissal with prejudice of the claim in a supplier’s complaint seeking to enforce its construction lien claim.  The supplier had filed its complaint on May 2, 2014, which was more than one year after it provided its last delivery of materials on April 3, 2013.   The supplier attempted to argue that its actual last date of work was May 16, 2013, the date its quality control expert visited the site to review and approve the subcontractor’s work product.  The court rejected that argument, as the supplier had been hired solely to provide concrete to the subcontractor at the worksite, which it last did on April 3, and not to unilaterally inspect the work performed with the materials by the subcontractor.  There was no evidence in the record that the subcontractor contracted with the supplier to provide any such inspection services.  Note that this same issue may arise in connection with your initial filing of a construction lien claim, which, on a commercial project, must be filed within 90 days of your last provision of contracted-for work, services, material or equipment.

Many times after filing and serving a construction lien, the property owner or contractor for whom you worked will seek to immediately resolve your lien claim – or will file its own action to discharge the lien if it believes you filed a defective lien.  Often, however, a claimant will file a lien and no immediate action is taken by any party (or the lien is bonded, which still requires you to take timely enforcement action).   Filing a timely and valid construction lien claim is difficult enough.  Once you do so, it is critical that you not fall asleep at the switch and that you file your enforcement action within the time required by the CLL – that is, within one year of the last date of work, services or materials provided pursuant to your contract.

The right to file a mechanic’s lien is established by state statute, allowing those providing work, services, materials or equipment to a construction project with additional valuable security in the event of non-payment of amounts due under a contract for such work, services, materials or equipment.  As a pair of recent unpublished New Jersey Appellate Division decisions illustrate, the proper exercise of those rights can make a significant difference in attempting to obtain payment.

The Construction Lien Law (“CLL”), N.J.S.A. 2A:44A-1, et seq. sets forth the requirements for qualifying for and filing a lien claim against a private commercial or a residential property in New Jersey.   The Municipal Mechanics’ Lien Law (“MMLL”), N.J.S.A. 2A:44-125, et seq. sets forth the requirements for qualifying for and filing a lien against the funds of a project contracted by a New Jersey public agency (though not projects contracted by the State of New Jersey).  In the two recent cases discussed below, a subcontractor on a public project succeeded in obtaining a remedy after filing a lien under the MMLL, while a subcontractor on a private project deprived itself of a potential remedy by failing to file a lien under the CLL.

In Vincent Pools, Inc. v. APS Contractors, Inc. (Docket Nos. A-2670-13T3, A-2688-13T3, Decided March 18, 2016), a subcontractor, Vincent Pools, Inc. (“VP”), was retained by a general contractor, APS Contractors, Inc. (“APS”), to install the plaster work for two swimming pools that were part of a larger municipal pool complex project that Jersey City had contracted with APS to construct.  Upon the completion of VP’s work, a dispute arose over the quality of that work.   Jersey City demanded that the pools be re-plastered, while APS offered, instead, to acid wash the pool.   Jersey City terminated APS’s contract and claimed that it had paid APS in full for the work completed on the pools prior to the termination, though it admittedly did not pay APS for certain outstanding change order work.  APS, in turn, withheld $162,468.92 from VP.  VP then filed a municipal mechanics’ lien claiming a lien on the project funds due and owing from Jersey City to APS, and filed suit seeking, among other things, the enforcement of its lien against Jersey City.  At trial, a jury rendered a verdict in favor of VP on its lien claim in the amount of $150,498.92, as well as substantially more in favor of ABS in connection with ABS’s contract claims against Jersey City.

On appeal, as it related to the verdict in favor of VP on its lien claim, Jersey City argued that it would be double paying if it paid VP any funds on account of VP’s lien, because it had already paid APS in full from the funds appropriated for the pool project.  The Appellate Division recognized that a lien filed under the MMLL is limited to the amount owed by the public agency to the general contractor at the time of the filing of the lien or what thereafter becomes due under the prime contract.  A public agency, therefore, cannot be liable for more than the amount of the public contract if it pays the general contractor pursuant to the contract terms and withholds amounts sufficient to cover any liens filed.  The court determined that the MMLL refers to the full amount of the public contract as the amount to which a lien may attach, and not just the amount that may be allocated to a specific portion of the contract.  Thus, although Jersey City claimed to have paid APS in full for the particular work performed by VP, because Jersey City still owed money to APS on the contract as a whole, plus change orders, VP’s lien attached to those funds.   In fact, to ensure Jersey City was not double paying for VP’s work, the trial court reduced APS’s award to offset amounts previously paid to APS for Jersey City’s prior payment on account of VP’s work, which had not yet been paid to VP.   The Appellate Division further noted that because the MMLL, and New Jersey’s Bond Act and Trust Fund Act are to be read cumulatively, VP’s ability to recover under any one of those acts does not preclude recovery under any of the others.  Thus, the Appellate Division affirmed the verdict in favor of VP on its lien claim.

The unpaid subcontractor in Exterior Walls Systems, LLC v. 3D Contracting of Central Jersey, Inc. (Docket No. A-0383-14T4, Decided February 18, 2016), was not so fortunate.   There, Exterior Wall Systems, LLC (“EWS”) subcontracted with 3D Contracting of Central Jersey, Inc. (“3D”) on a private construction project for JSN Deli Corp. (“JSN”).  EWS claimed that 3D failed to pay it in full for its work. EWS brought suit against 3D, ultimately obtaining a default judgment against it in the amount of $48,000.  As the Appellate Division aptly noted, “[i]mportantly, EWS did not file a lien, pursuant to the provisions of the [CLL] for its work done.”  That is critical, because instead of having a lien on JSN’s interest in the real property on which EWS’s work was performed, and perhaps having had JSN withhold payment to 3D to satisfy EWS’s lien, EWS was left with a potentially uncollectable judgment against 3D.

EWS attempted to levy on any and all of 3D’s assets, to the extent there were any, including any amounts claimed due by 3D from JSN under 3D’s contract with JSN.  JSN, however, had earlier won a dismissal of a lawsuit 3D had filed against it for amounts allegedly due under that contract, based on the statute of limitations.  EWS, thereafter, filed a motion seeking an order compelling JSN to turn over to EWS funds allegedly owed by JSN to 3D, which the trial court denied.    EWS appealed, and the Appellate Division determined as a matter of law that, based on the facts before it, there was no “debt” from JSN to 3D that would be subject to EWS’s execution or garnishment under the relevant New Jersey statutes.  The Appellate Division, therefore, affirmed the trial court’s denial of EWS’s turnover motion, leaving EWS without a remedy against the owner and, instead, attempting to collect the debt directly from 3D, which may or may not have assets sufficient to satisfy EWS’s judgment.

While, in the above cases, VP still may have been able to recover from APS even if it had not filed a lien, and EWS still may not have been able to recover on its claim even if it had filed a lien, there is no question that the filing of a valid lien claim provides subcontractors and others contributing to a public or private project in New Jersey with substantial valuable additional protections and rights when attempting to collect a debt.  All potential beneficiaries of the CLL and the MMLL should understand when and whether they are entitled to assert a lien claim under these laws, and the deadlines and any other conditions precedent to filing a lien, so that their rights under these laws are not inadvertently lost, waived or otherwise diminished.

In L&W Supply Corp. v. Joe DeSilva, et al., (Docket No. A-2960-10T2, December 19, 2012) (“L&W Supply”), a decision recently approved for publication, the Appellate Division provides guidance to material suppliers seeking to file construction lien claims.  The court held that, in certain circumstances, a material supplier must make further inquiry and attempt to determine the source of payments it has received from a particular contractor, so that it can allocate those payments to the correct project.  A supplier that fails to fulfill this duty may forfeit its rights under the Construction Lien Law, N.J.S.A. 2A:444-1 to 38 (the “Lien Law”).

In L&W Supply, L&W Supply Corporation (“L&W”), a supplier of drywall, studs and related materials, sold building materials on credit to a now-bankrupt subcontractor, Detail Contractors, Inc. (“Detail”), in connection with the construction of an assisted living facility in Wall Township (the “Project”).  Detail was one of several entities owned and operated by defendant Joe DeSilva.  DeSilva had open accounts with L&W for building projects other than the Project. 

Detail owed L&W $231,794.34 for materials supplied and delivered to the Project. L&W received payments totaling $217,000 from DeSilva and allocated $103,959.45 to the Project and the remaining $113,040.55 to other DeSilva project accounts.  This left a balance due and owing, by L&W’s calculations, of $127,834.89 for materials L&W delivered to the Project.  L&W then filed a construction lien for $127,834.89 against the Project and, subsequently, filed a complaint against Detail, DeSilva, the project owner, the general contractor and a bonding company seeking to enforce its lien claim.

The trial court granted summary judgment against the general contractor, the owner and the bonding company (collectively, the “Defendants”) for the full amount of L&W’s lien claim.  Defendants appealed.

In analyzing a material supplier’s duty to allocate the payments, the Appellate Division noted that the Supreme Court previously held in Craft v. Stevenson Lumber Yard, Inc., 179 N.J. 56, 63  (2004) that a materials supplier that seeks to file a construction lien has a duty to apply payments correctly against several open accounts of a materials purchaser, such as a subcontractor, if the supplier has “reason to know” that the payments came from a particular construction project.  The focus of the Appellate Division in L&W Supply was the obligation of the materials supplier “to ascertain the source of . . . payments and to apply them accordingly.”

In Craft, the Supreme Court held that a lien claimant has a “statutory duty to allocate [the materials purchaser’s] payments to the accounts from which they were derived.”  Here, Defendants contended that L&W was owed only $12,143.05 relating to the Project, far less than the $127,834.89 reflected in L&W’s lien claim.  Defendants claimed that L&W improperly applied the payments to other, non-Project accounts of DeSilva, thereby improperly increasing the size of the lien fund on the Project.  The Appellate Division found that the trial court did not adequately consider whether a dispute existed regarding the accuracy of L&W’s accounting and allocation of the payment funds.

The primary legal issue involved the lengths to which a supplier must go to fulfill its duty to allocate payments accurately.  Prior to Craft, the general rule was that a creditor may apply payments from a debtor in any manner it chose when payments were not specifically designated by the payor to be applied to a particular project.  After Craft, a supplier became obligated to inquire about the source of a contractor’s payments to the supplier.  A failure to do so may warrant a finding that the supplier should have known the source of the payment.  The supplier’s failure to take affirmative action to ascertain the source of funds does not affect the supplier’s right to collect all balances due, but rather only affects its right to encumber the real property of a project owner under the Lien Law.

The court held that “when the purchaser of materials has not provided specific, reliable instructions as to the allocation of its payment, or when the circumstances are such that a reasonable supplier would suspect the purchaser has not used an owner’s funds to pay for materials supplied for that owner, then the supplier must make further inquiry and attempt to ascertain the source of the payment funds so that it can allocate them to the correct accounts.  A supplier that fails to fulfill this duty sacrifices its right under the Construction Lien Law.”

Although L&W’s witnesses stated in a conclusory manner that the funds were properly allocated, L&W did not provide calculations or other details to show how those witnesses arrived at their conclusions.  The Appellate Division found that Defendants should have the opportunity to prove at a trial that L&W failed to make any inquiry about the source of funds, or that it had reason to suspect that L&W was not properly allocating DeSilva’s payments.

The lesson here is that to protect its construction lien claim rights, a supplier must take affirmative steps, and be prepared to substantiate those efforts at trial, to determine the project that was the source of the funds that the supplier received from a contractor purchasing on an open account.  The failure to take steps to determine the proper allocation of payments, to arbitrarily allocate payments or to not inquire as to a questionable allocation from the material purchaser, may result in a forfeiture of the supplier’s lien rights.