New York Commercial and Construction Lawyer Blog

December 26, 2018

Joint Venture Status Denied By Court

Construction companies, especially those engaged in large public works or private development projects, sometimes form joint ventures to pool their resources and perform work on jobs that might be beyond their individual financial capabilities or technical expertise. Typically, the joint venture is formed for an individual project. As a result, the formation of the joint venture is often not addressed with the same degree of formality and care as when a corporate entity is formed on a more permanent basis. Recently, in Slabakis v. Schik, 164 A.D.3d 454, 84 N.Y.S.3d 45 (1 st Dep’t 2018), the First Department addressed the requirements of forming a joint venture in the context of a dispute as to whether a proper joint venture had been formed.

The plaintiff in Slabakis alleged there was an oral joint venture agreement, and sued the defendant, its purported joint venture partner, for breach of contract, breach of fiduciary duty and related wrongs. Defendant moved to dismiss, alleging that the complaint did not adequately allege the existence of a joint venture agreement. The trial level court denied the motion, holding that there was an issue of fact as to the viability of the complaint.

On appeal, the First Department reversed and dismissed the complaint, holding that the pleading was defective in two material respects. First, the Slabakis complaint failed to contain a mutual promise that profits and losses would be shared to some degree. Instead, it indicated that all of the losses would be solely borne by the defendant. This was “fatal” to plaintiff’s claim that a joint venture was created.

November 29, 2018

The Court of Appeals Upholds the Fourth Department’s Lien Law Section 3 Consent Decision

By Megan Gardner

On November 20, 2018, in Angelo A. Ferrara v. Peaches Café LLC, et al., 2018 WL 6047993 (N.Y. Nov. 20, 2018), the New York Court of Appeals upheld the Fourth Department’s decision in Ferrera v. Peaches Café LLC, 138 A.D.3d 1391, 30 N.Y.S.3d 765 (4^th Dep’t 2016). As I discussed in my prior posts, “The Divide in Interpretations of Lien Law Section 3’s Consent Requirement Continues” and “Varying Interpretations of Lien Law Section 3’s Consent Requirement,” New York Courts have been at odds in their determinations of the consent requirement contained in Lien Law Section 3. Judge Wilson of the New York Court of Appeals clarified these distinctions in his recent decision.

The key facts in the underlying case are summarized as follows: Defendant Peaches Café LLC (“Tenant”) entered into a lease agreement (the “Lease”) with Defendant-Appellant COR Ridge Road Company, LLC, (“Landlord”), who also owned the subject premises. The Lease affirmatively required the Tenant to undertake the construction of various improvements at the premises. Specifically, the Lease detailed certain requirements for the electrical work. Nonparty Quinlan Ferrara Electric, Inc. (who assigned its claims to Plaintiff-Respondent Angelo A. Ferrara) (“Contractor”) contracted with Tenant to perform a portion of the electrical build-out work at the premises. Despite satisfactorily completing its work, Contractor was never paid the balance for its work performed. Accordingly, Contractor filed a mechanic’s lien against the premises and commenced a lien foreclosure action.

In the lien foreclosure action, the trial court granted Landlord’s motion to dismiss the complaint as against Landlord, because, according to Landlord, “it did not have any direct dealings with [Contractor] and did not explicitly consent to the specific electrical work performed by [Contractor.]” Peaches, 30 N.Y.S.3d at 767. The Fourth Department reversed the trial court, finding that that Landlord/owner’s consent for the electrical work was derived from the terms of the Lease, which obligated Tenant to install electrical upgrades on the premises. Thus, the Landlord/owner was obligated to pay for the reasonable value of Contractor’s services. Id at 768. Landlord appealed.

November 16, 2018

The Divide in Interpretations of Lien Law Section 3’s Consent Requirement Continues

By Megan Gardner

As I previously noted in my post titled “Varying Interpretations of Lien Law Section 3’s Consent Requirement,” last year the New York Court of Appeals granted a motion for leave to appeal the Fourth Department’s decision in Ferrera v. Peaches Café LLC, 138 A.D.3d 1391, 30 N.Y.S.3d 765 (4^th Dep’t 2016). The appeal was argued during the week of October 16, 2018, but the Court of Appeals has not yet issued a decision.

Lien Law Section 3 provides that a contractor “who performs labor or furnishes materials for the improvement of real property with the consent or at the request of the owner thereof … shall have a lien … upon the real property improved.” In the underlying Peaches case, the Fourth Department compared First, Second and Third Department decisions concerning Lien Law Section 3’s consent requirement, all of which found, at various times, “that a lien under Lien Law Section 3 is valid only when the property owner directly authorizes the contractor to undertake the relevant improvements.” Peaches, 30 N.Y.S.3d at 768 (emphasis added). The Fourth Department, however, concluded that “consent” should be broadly interpreted because the decisions of its sister departments could not be “squared” with Jones v. Menke, 168 N.Y. 61 (1901) or McNulty Bros. v. Offerman et al., 221 N.Y. 98 (1917), two Court of Appeals cases which have not been “overturned or disavowed.” Id. at 767-8.

In both Jones and McNulty, the Court of Appeals found, generally, that contractual obligations requiring a tenant to make certain improvements to the premises satisfied the consent requirement of Lien Law Section 3. Id. at 676. As a result, the lien claims in those cases were permitted against the underlying owner’s property. Id. Accordingly, in Peaches, the Fourth Department determined that the owner’s consent could be implied by the terms of the subject lease, even though the owner did not provide direct consent to the contractor.

October 25, 2018

Lienor Unable To Establish Lien Fund Based Upon Owner’s Alleged “Bad Faith” Payment

By Daniel E. Katz

Enforcing mechanic’s lien rights raises several issues which are distinct from the ability to simply file a mechanic’s lien. For example, a subcontractor must generally show that a “lien fund” existed between the owner and contractor at the time it filed its lien in order to successfully foreclose. Peri Formwork Systems, Inc. v. Lumbermens Mutual Casualty Co., 65 A.D.3d 533, 884 N.Y.S.2d 129 (2d Dep’t 2009); See also Van Clief v. Van Vechten 130 N.Y. 571 (1892). Some courts have recognized an exception when the general contractor issues back charges to a subcontractor after termination. See Spectrite Design LLC v. Elli N.Y. Design Corp., (16 Civ. 6154, N.Y.L.J. 120279380599) (S.D.N.Y., Decided July 26, 2017). Other courts have recognized that if payments are made by the owner in bad faith, and before they were otherwise due, a lienor’s ability to foreclose its mechanic’s lien should not be prejudiced. See Glens Falls Portland Tenant Co. v. Schenectady County Coal Co., 163 A.D. 757, 759-763, 149 N.Y.S. 189 (3d Dep’t 1914); Lawrence v. Dawson, 34 A.D. 211, 212-215, 54 N.Y.S. 647 (2d Dep’t 1898). The bad faith exception to the lien fund rule was recently addressed by the First Department in 3-G Services Limited v. SAPV/Atlas 845 WEA Associates NF, L.L.C., 162 A.D.3d 487, 79 N.Y.S.3d 24 (1st Dep’t 2018).

In 3-G, the owner moved to dismiss plaintiff subcontractor’s lien foreclosure claim by submitting proof that the owner had paid the contractor in full at the time the plaintiff’s lien was filed. Owner had terminated the contractor for convenience prior to the filing of the subcontrator’s lien, and issued final payment to the contractor at that time.

Plaintiff raised several grounds in attempt to show owner’s bad faith. It alleged that owner knew that the general contractor owed monies to the subcontractor when it terminated the general contractor for convenience, that the owner made an advance payment to the general contractor to avoid the Lien Law, and that owner opted to terminate general contractor for convenience when it could have terminated it for cause.

September 27, 2018

Right To File A Mechanic’s Lien For Pre-Construction Services Is Upheld

By Daniel E. Katz

Not all work performed at or related to a construction project can form the basis of a mechanic’s lien. Rather, one can only lien for work performed or materials furnished on a privately owned project for the “improvement of real property” as set forth in Lien Law § 3. Generally speaking, only work which contributes to a “permanent improvement” of the property in question is lienable (Lien Law § 2(4)). Sometimes, however, work is performed even before any activities actually commence on a construction site, and the issue arises whether that work is lienable in any circumstances. That matter was recently addressed by Justice Terry J. Ruderman of the Westchester Supreme Court in Matter of Old Post Road Associates, LLC, 60 Misc. 3d 391, 77 N.Y.S.3d 283 (Sup. Ct. Westchester Co. 2018).

In Old Post Road, LRC Construction LLC (“LRC”) performed pre-construction management services for a planned project in Rye, New York. Among other things, LRC updated the budget for the project and attended meetings to discuss phasing in connection with a site plan approval application. LRC was eventually terminated and filed a mechanic’s lien for $250,000. Thereafter, Old Post Road Associates LLC (“Owner”) commenced a special proceeding to summarily discharge the mechanic’s lien pursuant to Lien Law § 19 because the work in question was allegedly not lienable.

Pursuant to Lien Law § 19, a lien may only be dismissed if “it appears from the face” of the lien that it is invalid. Owner here alleged it met this standard in its special proceeding because LRC’s lien merely alleged it performed “pre-construction management services.”

August 30, 2018

Implied Contractual Indemnification Claim Sustained

By Daniel E. Katz

Parties to contracts and courts continue to grapple with the distinctions between and among contribution, contractual indemnification and common law indemnification in a commercial/construction setting. A good example is the recent case of Matzinger v. MAC II (S.D.N.Y. 17 Civ. 4813, July 17, 2018).

Plaintiffs, the Matzingers, were the owners of a residential apartment in New York City. They retained Defendant MAC II, an interior design firm, to manage and oversee the renovation of their apartment. MAC II did not perform any actual construction work. Instead, through a series of purchase orders, it hired Fanuka to act as the general contractor. MAC II also hired TecDsign to install various audio-visual equipment. After the Matzingers moved into their apartment, they discovered various construction defects and incomplete work.

Accordingly, in 2017, the Matzingers sued MAC II, Fanuka and TecDsign for breaches of contract and related claims. Fanuka and TecDsign successfully moved to have the contract claims dismissed because they had no privity with Matzinger. After other claims were dismissed, The Matzingers’ only remaining claim was breach of contract against MAC II.

July 27, 2018

Owners Are Possibly Not “Necessary Parties” When a Mechanic’s Lien Has Been Discharged

By Daniel J. Swayze

For years the First Department has found itself at odds with the Second and Third Departments concerning who is a necessary party to enforce a mechanic’s lien against real property after a bond has been filed and the lien discharged as of record. As explained in M. Gold & Son, Inc. v. A.J. Eckert Inc., the Second and Third Departments have held that once a bond is posted, it effectively substitutes for a mechanic’s lien, that lien is discharged and thus there is no longer a requirement that the owner be a party to the action. See 246 A.D.2d 746 (3d Dep’t 1998).

Traditionally, however, the First Department has maintained that, in spite of an undertaking being posted, the owner of the real property remains a necessary party. A recent case in the Supreme Court, New York County, might be a further step in a change towards uniformity in the departments.

Doma Inc. v. 885 Park Ave. Corp. (New York County Index No. 159775/2016) concerns a contractor’s disagreement with an individual who had hired the contractor to renovate her home. As is often the case in such actions, the contractor claimed that it was owed a certain unpaid sum and, in an effort to collect, filed a mechanic’s lien against the premises.

July 12, 2018

“Permanent Improvement” Under The Lien Law Does Not Include Vibration Monitoring

By Steven Cramer

The meaning of “permanent improvement” under the Lien Law was at the heart of the decision in Matter of 134-136 West Houston, LLC v New York City Land Surveyor P.C., 58 Misc.3d 1228 (A), 2018 WL 1279175 (Table), 2018 N.Y. Slip Op. 50304(U)(Sup. Ct. N.Y. Co. 2018), in which the court grappled with the issue of whether vibration monitoring services provided by a surveyor to a building owner could provide the basis for a mechanic’s lien. The building’s owner sought to discharge the lien on the grounds that the work was not covered by the Lien Law.

The Supreme Court (Justice Carmen Victoria St. George) concluded that neither the installation and monitoring work, nor the rental value of the monitors themselves, were covered by the Lien Law, primarily because the monitors did not produce a permanent improvement of the property.

The lienor in Matter of 134-136 West Houston filed its lien after it was not paid for placing vibration monitors on the owner’s building and on that of a neighbor, and remotely monitoring the equipment during the owner’s construction work.

June 21, 2018

The Subcontractor’s Uphill Dig

By Robert J. Howard

Subcontractors face significant challenges when they are confronted with a general contractor which fails or refuses to pay for a contract balance or extra work. For any one of innumerable reasons, general contractors can be undercapitalized such that even a victory at trial can produce a hollow result when the execution of a judgment is returned unsatisfied. A Subcontractor’s right to file a mechanic’s lien is the Subcontractor’s primary protection under these circumstances. However, where a mechanic’s lien foreclosure action is not viable, either because there is no lien fund or there is some defect in the lien, a Subcontractor is left with limited recourse against the project owner.

For example, in the recent case of Palma Realty Assoc., LTD v. BLDG Oceanside, LLC, 59 Misc.3d 1206(A) (Sup. Ct. N.Y. Co. 2018), the Supreme Court, New York County, dismissed a subcontractor’s breach of contract and quantum meruit claims against the project owner. The plaintiff, Palma Realty Associates, sued the project owner, BLDG Oceanside, LLC, and the contractor with whom it was in privity, Master Development, Inc., for breach of contract, quantum meruit, account stated and to foreclose a mechanic’s lien. For reasons undisclosed by the Court’s opinion, Palma discontinued its causes of action to foreclose upon its Mechanic’s Lien and for an account stated. The Court granted Palma’s motion to dismiss the remaining causes of action for breach of contract and quantum meruit insofar as asserted against it, and severed and continued the breach of contract and quantum meruit claims as asserted against Master.

The Palma Court dismissed the breach of contract cause of action under the well-settled and well-known rule that a subcontractor generally cannot maintain a breach of contract action against the project owner because there is no privity of contract between them, citing such authorities as Eastern States Electrical Contractors v. William L. Crow Construction Co., 53 A.D.2d 522 (1 st Dept. 1989) and Braun Equip. v. Meli Borelli Assoc., 220 A.D.2d 312 (1 st Dept. 1995). See also Perma Pave Contracting Corp. v. Paerdegat Boat and Racquet Club, Inc., 156 A.D.2d 550 (2d Dept. 1989).