Articles Posted in Mechanic’s Liens

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 (4th 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.

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 (4th 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.

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.

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.”

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.

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.

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).

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.

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.

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…”).