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

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.

The 3-G court found none of these reasons to be persuasive, and upheld the lower court’s finding that the lien foreclosure cause of action in the complaint should be dismissed. The payments made by the owner to the general contractor were timely, and the other allegations were insufficient to demonstrate bad faith. Nonetheless, the First Department’s citing of the Glens Falls and Lawrence decisions indicates that they found that these two cases, both issued more than one hundred years ago, were still good law.

Both 3-G, Glens Falls, and Lawrence all cited to Lien Law § 7 which states that any payment made by an owner to a contractor prior to the time when payment was due and “for the purposed of avoiding the provisions of this article” shall be of no effect as against a lien. Thus, even though a payment might have been made before it was due, if it was not done to defeat Lien Law rights (in other words, in bad faith), a lienor would still have to recognize that payment when seeking to establish a lien fund as of the date of the filing of the lien. The Plaintiff in 3-G could not meet the burden of showing bad faith by the owner, and accordingly its lien claim was dismissed. In any event, the 3-G opinion underscores that establishing a lien fund is not simply a numerical computation at the time of the filing, but other factors may be consider by a court in reaching that determination.