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  As a pair of recent unpublished New Jersey Appellate Division decisions illustrate, the proper exercise of those rights can make a significant difference in attempting to obtain payment.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.

Join us on November 10, at the NJ office of Cole Schotz or online by webinar, for an in-depth update on New Jersey Construction Lien Law.

Hear the latest on:

  • Construction Liens on Commercial Projects
  • Construction Liens on Residential Projects
  • Proposed Construction Lien Law Revision
  • Priority of Construction Liens and Mortgage
  • Construction and Permanent Financing
  • Title Insurance Issues Relating to Construction Liens

This seminar will be presented live at the NJ offices of Cole Schotz at Court Plaza North, 25 Main Street, Hackensack, NJ, and by live webinar.

Last week (on Monday, June 21, 2010), the New Jersey Assembly unanimously passed the long-awaited revisions to the New Jersey Construction Lien Law (N.J.S.A. 2A:44A-1, et seq.) (the “Lien Law”). Next up is the parallel Senate bill which, after its introduction in early May 2010, was referred to the Senate Commerce Committee, where it is expected to remain for review until the Fall. The proposed Lien Law revisions, based almost entirely on the March 2009 final report of the New Jersey Law Revision Commission, seek to fill the gaps in, and improve on the practical application of, the original 1993 Lien Law. Some of the proposed amendments are a codification of decisions of federal and state courts, including the New Jersey Supreme Court, which have sought to interpret the Lien Law since its enactment.

The proposed Lien Law revisions are comprehensive. Among the more critical Lien Law amendments contained in the new legislation are:

1. an increase in the time within which a potential lien claimant may assert a construction lien claim relating to a residential construction contract from 90 days to 120 days from the claimant’s last date of work. The current 90-day period has, in practice, been problematic for prospective lien claimants, who must also file and serve a Notice of Unpaid Balance and Right to File Lien (“NUB”) and a demand for arbitration — and then obtain an award in arbitration – before they may file lien claims. The extra 30 days provides additional breathing room for the lien claimant to fulfill all of the statutory prerequisites, particularly the arbitration proceeding. Note, however, that the proposed amendment sets a deadline for filing a NUB at 60 days from the claimant’s last date of work and a 10-day deadline thereafter to serve the required demand for arbitration on all parties against whom the lien is asserted. If those deadlines are not met, the extra 30 days to file the lien means nothing, as the lien claimant will be barred from filing its lien;

2. the addition of statutory definitions of “residential construction,” “residential unit,” “real property development,” “community association,” and “dwelling,” and the amendment of the statutory definitions of “residential construction contract” and “residential purchase agreement,” which, together, seek to better reflect the types of construction subject to the residential rules of the Lien Law. For example, settling a contentious issue under the existing Lien Law, the revisions provide that, in general, large-scale residential condominium, coop and townhouse development projects, including, without limitation, mixed-use projects and the common elements of such projects, would be subject to the Lien Law’s residential filing requirements. Projects designed to contain rental units or non-residential units, however, would not be subject to the Lien Law’s residential filing requirements;

3. the clarification of a number of other statutory definitions, as well as the addition of other new definitions, including, without limitation, new definitions of “lien claim” (and the term “value” within the “lien claim” definition), which allow for the inclusion of retainage in the amount of a lien claim, and incorporating within the definition of “contract” the requirement that the lien claimant’s contract be a writing signed by the party in direct privity with the lien claimant and evidencing the consideration to be paid and a description of the improvement subject to the lien;

4. a substantially more thorough description and calculation of the “lien fund” – that is, the amount of money available for distribution among valid lien claimants performing work under any particular line of contracting – and an explanation of how that lien fund is to be distributed among multiple lien claimants at different contracting levels. In fact, the term “lien fund” is not defined or otherwise used in the current Lien Law, so the proposed revisions provide the basic definition of the term. Most of these proposed revisions are a reflection of court decisions interpreting the Lien Law and formulating the concept of the “lien fund.” Among other things, the proposed revisions would make clear for the first time under the Lien Law that the lien fund is not to be reduced by: (i) payments not made according to written contract provisions; (ii) payments made but not yet earned by the time the first lien is filed; (iii) liquidated damages; (iv) collusive payments; (v) the use of retainage to pay a replacement contractor after the filing of the lien claim; or (vi) setoffs or backcharges not agreed to in writing by the claimant or adjudicated in an arbitration;

5. a clarification that the date on which the County Clerk has marked the lien claim as received (rather than when the Clerk has actually indexed the lien claim – which is not within the control of the lien claimant) is to be used to determine whether a lien claim has been timely filed;

6. a much-needed expansion of the existing deficient statutory forms and/or procedures for filing, amending or discharging a lien claim or NUB, and prosecuting a suit to enforce a lien claim; and

7. clarification: (a) of when lien claims may be filed against the owner of real property for tenant improvements (See this article); (b) that work performed on common elements of a real estate development may be filed against “community associations” such as condominium or homeowners’ associations; and (c) that a mortgage takes priority over a lien claim, even when recorded after the filing of that lien claim, where the funds are used for the purchase of and/or improvements to the subject property.

We will likely have to wait until the Fall at the earliest before these proposed revisions, and possibly others the Senate Commerce Committee recommends, are presented for vote in the Senate. In light of the Assembly’s unanimous vote, it is probable that the bill, in its present or slightly modified form, will pass and be sent to the Governor for his review and signature (or improbable veto). The proposed amendments to the Lien Law have been well thought out and debated and are long overdue.

Under current law a tenant’s contractor cannot file a construction lien against the landlord’s property for amounts unpaid by the tenant unless the landlord provided written authorization of the specific construction contract between the contractor and the tenant. Even where the lease specifically provided for the work in question and the landlord was notified of the commencement of the work as required by the lease, current law prohibits a tenant’s contractor from filing a construction lien against the landlord’s property.

This will all change if a proposed revision to the New Jersey Construction Lien Law is enacted this spring. According to the proposed revision to the law, a tenant’s contractor will be able to file a lien against the landlord’s property for amounts unpaid by the tenant if the landlord has paid or agreed in writing to pay for the majority of the tenant improvement or if the lease provides the property is subject to a lien for the improvement. Accordingly, landlords should review current leases and keep this proposed change in mind for future leases in order to minimize the chances of unwittingly exposing the property to construction liens filed by contractors who have not been paid by the tenant for improvements to the property. 

If and when the revision to the law is enacted, in appropriate circumstances a landlord may wish to consider requiring all tenant improvement work be done by the landlord instead of reimbursing the tenant for the tenant’s cost to perform the work. This alternative will allow the landlord to control the work and pay contractors directly.  Another possibility to consider is for a landlord to provide the tenant with a rent concession, not tied to tenant improvements, while simultaneously providing in the lease all tenant improvements shall be done by the tenant at its sole cost and expense.  This latter approach, however, is not foolproof.  A court may interpret the latter provision as the substantial equivalent of a landlord paying for the improvements, thereby subjecting it to a potential lien against its interest in the property.

Watch this blog for updates on the proposed revisions to the Construction Lien Law.