Private Liens, Public Liens, And The Lien Law’s Confusing Gap In Coverage

Contractors accustomed to filing mechanic’s liens to secure their claims for payment may be surprised when they find themselves working on a project where they have no lien rights, despite the broad scope and intent of the Lien Law. In a recent decision, Justice Charles Ramos of the Commercial Division, New York County, was presented with a plaintiff trying desperately to avoid a gap in Lien Law protection. In Metro Woodworking Inc. v Hunter Roberts Construction Group, LLC, NYLJ 1202718867273 (Sup. Ct. N.Y. Co., Feb. 9, 2015), the court determined that the contractor’s private mechanic’s lien was improper, but suggested that if the lien had been filed as a public lien it would have been valid. The facts and Lien Law suggest, however, that even if the contractor had filed a public lien, it would not have been valid.

The New York Lien Law provides contractors with an easy method to secure their claims. Simply by filing a form with the county clerk and serving it on the owner, a contractor working on a privately owned project is able to establish a private mechanic’s lien, pursuant to Lien Law § 10, which attaches to the property. If a project is owned by the state or a public corporation, whose land is not susceptible to liens, the contractor can file a public lien under Lien Law § 12 with the public entity controlling the project, which will attach to the public funds for the project.

But what does a contractor do when the project is on public land, but is being built by a private developer? In Metro Woodworking, the plaintiff, a millwork subcontractor of Hunter Roberts Construction Group, was faced with that quandary. The project, a hotel and retail complex, was being built by a private developer—Goldman Sachs—on property owned by a public corporation, the Battery Park City Authority (“BPCA”). (The BPCA is actually a “public benefit corporation”, which is a category included in “public corporation” as defined in Lien Law §2(6).) One key fact: funding for the project came from Goldman Sachs, which had signed a sublease, not from the public owner, PBCA.

The plaintiff subcontractor in Metro Woodworking, seeking to secure its claim for unpaid work, filed a private mechanic’s lien, but the court vacated it, holding that “[b]ecause BPCA is a public entity, filing a private lien against it pertaining to its real property is not permitted.” (*2) The court found that even though the lien only named the ownership interests of the private leaseholder, who was the owner of the project, and not the public owner of the property, it was still invalid. This conclusion was firmly based on Paedergat Boat and Racquet Club, Inc. v. Zarrelli, 57 N.Y.2d 966 (1982), in which the New York Court of Appeals held that a private lien cannot be filed against a privately held leasehold interest if the underlying property is publicly owned. (The Lien Law has since been modified to create a narrow exception to this rule, discussed below.)

The subcontractor then tried a novel approach—asking the court to amend the lien from a private lien to a public lien. In its decision the court rejected this argument as well, noting that Lien Law §12-a only permits amendment of liens that are valid in the first place. Because the initial lien was an improper private lien against public property, it did not meet this requirement.

The court went on to state its belief that the Metro Woodworking plaintiff “should have filed a Notice of lien against the public improvement,” because the work performed constituted “public improvements according to the Lien Law §2(7) definition.” (*5) The court explains its assertion by suggesting a distinction between public improvements and public property, stating that “[a] mechanic’s lien against a public improvement is a security held against the improvements of the property, and not against the property itself.” (*5) However, this language is not supported with any citations.

While Metro Woodworking’s work may have constituted a public improvement under the Lien Law, that fact alone does not automatically entitle a lienor to file a public lien. A lien against a public project does not attach to the improvements or work performed by a contractor, but to funds held by a public entity for the project, which appear to have been absent in this case. Lien Law Section 5 explains that a contractor performing work “for the construction or demolition of a public improvement . . . shall have a lien . . . upon the moneys of the state or of such corporation applicable to the construction or demolition of such improvement . . .” (Emphasis added.)

It appears that plaintiff in Metro Woodworking could not have filed a public lien because the funds for the improvement were not held by the public corporation that owned the land (the BPCA), but by the private developer who had leased the property to construct the project. (This situation is not uncommon.) Thus, although the court may not have recognized it, the plaintiff in Metro Woodworking likely fell within a gap in Lien Law coverage, and could not have properly filed either a private or a public mechanic’s lien.

Does a contractor on such projects have any other non-contractual remedies, if a mechanic’s lien is not available? Yes—a payment bond claim. Section 5 of the Lien Law requires that where “no public fund has been established for the financing of a public improvement,” a payment bond, which guarantees prompt payment to contractors, must be provided for projects above $250,000. Other statutes require payment bonds on public projects as well, but this provision specifically applies to projects where there are no publicly held funds to which a public lien could attach, and therefore no lien rights—which confirms that the Lien Law envisions such circumstances arising. It is possible that such a payment bond was posted for the Metro Woodworking project.

Asserting a payment bond claim does not provide the instant and highly visible security that a mechanic’s lien does, but it ensures that a deep financial pocket is waiting in the event that an owner or contractor is unable to pay for work performed. Of course, an unpaid contractor can always start an action directly against the entity that hired it, alleging breach of contract, unjust enrichment and account stated.

Potential lienors on public projects should be wary of Lien Law §2(7), which appears to provide an exception that would allow a subcontractor such as plaintiff in Metro Woodworking to file a private mechanic’s lien against a publicly owned project. However, it is a narrow exception that applies only to projects owned by an “industrial development agency”, an entity that, while it is a type of public benefit corporation (which in turn falls under the Lien Law’s definition of “public corporation”), does not encompass all public benefit corporations, as courts have confirmed.  This exception would not apply to Metro Woodworking, because the BPCA is not an industrial development agency.