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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.

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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.

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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.

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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).

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When the New York Prompt Payment Act (“PPA”) was first enacted (effective 1/14/2003), many

believed that it would have a major impact on the payment process in the construction industry. That

has not been the case. United States District Court Judge Jack Weinstein recognized the limited reach of

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Last September, 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 (4th Dep’t 2016). In Peaches, the Fourth Department enforced a mechanic’s lien filed by a contractor who was hired by a tenant and had no direct relationship with the landlord/owner. However, if this same mechanic’s lien had been filed against real property governed by any other New York Appellate Department, the mechanic’s lien would have very likely been discharged.

Lien Law Section 3 states 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 for the principal and interest, of the value, or the agreed price, of such labor ….”

The First, Second and Third Departments have determined that in order for a mechanic’s lien to come within Lien Law Section 3, the owner must be an affirmative factor in procuring the improvement, or else, having possession and control of the premises, assent to the improvement in the expectation that he will reap the benefit of it. See Paul Mock, Inc. v. 118 East 25th Street Realty Co., 87 A.D.2d 756, 448 N.Y.S.2d 693 (1st Dep’t 1982); Interior Bldg. Services, Inc. v. Broadway 1384 LLC, 73 A.D.3d 529, 900 N.Y.S.2d 311 (1st Dep’t 2010); Matell Contracting Co., Inc. v. Fleetwood Park Development, LLC, 111 A.D.3d 681, 974 N.Y.S.2d 573 (2d Dep’t 2013); Drapaniotis v. 36-08 33rd Street Corp., 48 A.D. 3d 736, 853 N.Y.S.2d 356 (2d Dep’t 2008; Sager v. Renwick Park & Traffic Assn., 172 A.D. 359, 159 N.Y.S. 4 (3d Dep’t 1916).

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According to the New York Lien Law, a mechanic’s lienor who is a subcontractor may only recover on its lien claim if it can establish there is a Lien Fund. That means the lienor must establish that funds were due and owing from the owner to the contractor in an amount at least equal to the amount of the lien. If the lienor in either a private or public setting cannot establish the validity of a Lien Fund, then the lien is subject to dismissal.

The Lien Fund concept is designed to protect an owner against an unfair “double liability.” In other words, if the owner has paid its contractor in full, an owner and its property should not be liable to pay a subcontractor simply because the contractor is the reason for, and source of, the non-payment. To that extent, a subcontractor’s mechanic’s or public improvement lien is derivative of the contractor’s claim against the owner. The Lien Fund concept also applies to a sub-subcontractor lien, so the sub-subcontractor must establish a contractor-subcontractor Lien Fund.

Generally, in order for the lienor to recover, it must establish that the Lien Fund existed on the date of the filing of the mechanic’s lien. If it can, then assuming the lienor can meet all the other requirements of proving the validity of its lien, it will be entitled to a recovery. In Specrite Design LLC v. Elli N.Y. Design Corp. (S.D.N.Y. 14 Civ. 6154) (July 26, 2017), Judge Edgardo Ramos addressed whether this general rule applies when the lienor was retained by a contractor that had been defaulted by the owner. Judge Ramos found that the general rule does not apply in these circumstances. Under the specific facts presented in Specrite, the lienor would not be able to foreclose on its lien even though the contractor was purportedly owed monies on the date of the filing of the subcontractor’s mechanic’s lien.

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A recent case from Supreme Court, New York County, brings clarity to a conflict that can arise when a building that shares a party wall is demolished and the site is redeveloped without relying on the party wall.

In 145 W. 21st Realty LLC v. First West 21st Street LLC, 653241/12, NYLJ 1202792788020 (Sup. Ct. N.Y. Co. July 26, 2017), Justice Kelly O’Neill Levy had to decide whether a new building that extends above the party wall that it had formerly shared with the adjoining building, could also be built over part of the party wall, thus preventing neighbor from ever being able to exercise its right to extend the party wall up in the future. The court followed earlier cases that favor modern construction practices, and allowed the cantilever of the new structure over the old, holding that the obligations to a party-wall neighbor do not extend to the space above the party wall.

A party wall is a single wall constructed along a property line that is used by the two adjoining buildings to provide structural support for their beams.  Typically, one half of the party wall sits on each owner’s property.  Each owner owns the half of the party wall on its property, and has an easement on the other half of the wall.  Brooks v. Curtis, 50 N.Y. 639, 642-3 (1873).

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For those in the construction industry, mechanics’ liens are sure to be a familiar occurrence. And, for those who have ever had a project of theirs liened, they will be aware of the tenacity of these legal devices. Mechanics’ liens are frustrating clouds on title and even though the party against whom the lien is filed rarely agrees with the amount purportedly owed, the liens themselves are difficult to remove One omnipresent option, is a claim for willful exaggeration of the lien. Section 39 of the Lien Law allows for vacataur of the lien if it has been “willfully exaggerated.” The ever-present question, however, is just what “willfully exaggerated” means.

The Courts have recently reiterated the standard for claims of willful exaggeration of mechanic’s liens. Hint: it’s still very high. In Blair v. Ferris, the Appellate Division of the Third Department once again dismissed a cause of action for willful exaggeration regarding a clearly inflated mechanic’s lien. 2017 WL 1712790.

As before, the Court made a point to state that if no exaggeration was intended, the inaccuracy simply does not matter. Willfulness truly is key. Essentially, this means that, unless it can be shown that the filer, at the time of the filing, had the intention to exaggerate the lien, a claim of willful exaggeration will fail. Considering that mechanic’s liens are meant to protect those who provide materials and/or labor against nonpayment, Courts appear to continue to take the view that there should be a heavy burden on the allegedly nonpaying party to rid itself of the lien. Allegedly wronged contractors and materialmen should not be deterred from filing liens because of the threat of a claim of willful exaggeration.

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General Business Law § 771 provides a host of requirements for home improvement contracts, chief among them being that such contracts must be in writing and signed by all parties. Additionally, the contract must contain the name, address, telephone number, and license number of the contractor, the dates that the work is to begin and to end, a description of the work to be performed, a list of the materials to be provided by the owner, the agreed-upon compensation due to the contractor, and a schedule of any progress payments.  The contract must also provide a series of notices to the owner advising that claims for payment may be enforced against the property by lien, that the contractor is required to deposit all payments received prior to completion in accordance with Lien Law § 71-a (4) or the contractor may post a bond, contract of indemnity, or irrevocable letter of credit, and that the owner may cancel the home improvement until midnight of the third business day after the day on which the owner signs the contract.

Despite the strict requirements of General Business Law § 771, it is not uncommon that parties engage in such home improvement projects on the basis of a hand-shake deal. While it is always advisable to put any such agreements in writing, including any changes to the work along the way, a contractor who improves a home absent a written contract is not without remedy should a dispute arise.

Courts have held that the absence of a written contract prevents recovery on a breach of contract cause of action but does not prevent a remedy on a theory of quantum meruit.  Johnson v. Robertson, 131 A.D.3d 670, 672, 15 N.Y.S.3d 457 (2d Dep’t 2015); see also Home Construction Corp. v. Beaury, No. 2014-06600, 2017 WL 1240146, at *2 (2d Dep’t Apr. 5, 2017) (“Although a contractor cannot enforce a contract that fails to comply with General Business Law § 771, a contractor may seek to recover based on the equitable theory of quantum meruit…”).

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